Setting up the cap table when incorporating leads to a series of difficult and impactful decisions. Here is an email from a new founder and my response (as always, adjusted to anonymize):
Hi Steve,
I was wondering if you would be willing to answer a share issuing question via email. I incorporated a Delaware C-corp and looking into issuing shares. My plan is to issue 80% of shares, vesting immediately, and leave 20% to the option pool. Could you share what you see and recommend to startup founders in general (vesting over time vs immediately and what the breakdown of founder shares vs option pool tend to be)?
Hey there:
Great to hear from you. This is one of my favorite topics mainly because there is so much confusing information out there. There is no one right answer, but here are some guidelines to consider:
Founder grants - I think you are on the right track with the founder getting about 80% of the authorized shares. If the parties are settled as to the number of founders, my normal approach is to authorize 12M but only grant 10M to the founders out of the gate. I keep the remaining 2M for use in a pool or to early stage grants later.
Pool - While I keep 2M available for a potential pool, I don’t normally create a pool of 2M. In most cases, you won’t need that many shares in the pool prior to a financing. More importantly, the shares included in the pool are counted for the purpose of determining pre-money value in the financing, so extra shares just means a lower per share value. I usually add 500K or 1M to the pool depending on the current plans to issue shares pre-financing and then add to the pool as needed at the financing. It is really easy to add more shares to the pool later if needed either for the team or as part of a round.
Vesting - I always recommend founder vesting when there is more than one founder. The goal here is to protect against a founder leaving. The value of including vesting is a little less clear with a single founder. However, if you plan to raise capital within 24 months, adding vesting now is a good idea to try to set a baseline. Basically, you want to propose your own terms rather than having the investor demand something you don’t like. Generally, if it is close to market, most investors will agree to it. With that in mind, here is what I normally recommend:
3-4 year monthly vesting starting from incorporation (or earlier if significant things happened before startup). Investors will generally want to see close to 3 years of vesting by the time you close the round, so the range is built to deal with that.
Full acceleration on sale - this is where you can sometimes get pushback. However, I strongly believe that founders should vest in full on a sale, but that is a much longer conversation (which I am happy to have if interested).
So, in summary, here is what I would suggest assuming my 12M authorized (adjust your math based on what is authorized):
Founders - 10M vesting over 3-4 years with full acceleration. Be sure you sign and file your 83(b) election within 30 days of grant!! This is a big mistake founders make.
Pool - 500K-1M but leaning towards the former unless you have specific grants in mind.
I would then keep the 1-1.5M authorized but not reserved/issued just in case you need to add founders or increase the pool before you raise money.
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