Today, Step 3 will get you close to completion of your stock option plan. To understand this you need to grasp how to structure the capital of a world-class venture backed startup.
- Common stock goes to employees and preferred stock to investors. The price per share of the common stock starts on day one equal to one tenth the price of the preferred stock. That gap will close year by year as the day for IPO approaches. For more details on what is going on here, see Chapter 9 of High Tech Start Up.
- Form a simple legal corporation not a partnership. LLCs and S corporations and others get you into blind alleys and will eventually trigger intellectual property, tax and stock option messes that are terribly hard to repair.
- Get an experienced lawyer to set up your capital structure. Mistakes are costly.
COST PER SHARE
- Start pricing each round of preferred stock. As noted in Step 1, you need a plan for each round of stock sold to investors, year by year. Calculate the price per share of preferred. This is what is used to determine the value of your company.
- Price the common shares. Gradually close the gap between preferred shares up to the day of IPO. This will be the strike price, the cost per share to the employee when they exercise the stock option (buy shares).
BOTTOM LINE: That was not too difficult for you, I am sure. Examine what you have created in your spreadsheet or QuickUp model. A good model will save you days of frustrating work. Your work so far should make good sense to you (and your lawyer). By now your efforts will have create everything you need for your stock option pool, except the total number of shares. That we will work on in tomorrow's blog (meanwhile, give it a go, a guess) and get ready for Step 4, Test the market.