You asked for it, so here it comes: A series of blogs on how to prepare a good plan for granting stock options to employees. If you get confused, try purchasing the QuickUp Model and follow the instructions.
Step 1: Lay the foundation
Step 2: Classify employees
Step 3: Price the stock option per employee
Step 4: Calculate wealth per employee
Step 5: Test the market
Step 1: Lay the Foundation
(A) Forecast all the rounds of venture capital you will need up to the day you go IPO.
You will need several rounds of financing, typically three in three years. It can be several more. Life science requires at least twice that number of rounds. The first two financing events are the Seed Round and Round A. The third is Round B. The naming is confusing, I agree. Just be clear and understand what each round is intended to accomplish. Each round needs the following information:
- Pre-company valuation in millions of dollars
- Cash to be raised this round
- Pre-company number of shares. This includes stock options.
- Ignore for now the difference between common and preferred shares.
With this information you can calculate the number of shares to sell the investors.
Now you have the total number of shares of the company: founders, employees and investors.
(B) Forecast all the employees you need up to the day you go IPO. Use as much detail as you can. Work from CEO to VP to Director to Manager to Employee.
(C) Do your first estimate of how many shares you will need for your stock option grants. This becomes your stock option pool. For now, ignore the cost of the stock per option per share.
(D) Add the stock option pool shares to your total shares of the company. This includes founders, stock options and investors and together equals the total shares.
BOTTOM LINE: This is the first step to building a quality stock option plan. It is worth doing well. Attracting outstanding people in a very competitive market for top talent calls for the best stock option plan you can create. It will be central to your unfair advantage. Tomorrow I'll show you what to do for Step 2. Don't give up yet, you CAN do this!