The Steps from Founder Agreement to an Incorporated Company
Converting founder commitments into an incorporated entity demands binding vesting terms, clear intellectual property assignments, and precise statutory filings.
Stock Option Pool
Meaning
Shares of common stock reserved by a company’s board for future distribution to employees, directors, and consultants incentivize performance. Allocating a stock option pool is a common practice before raising venture capital, ensuring that shares are available to attract talent. This reserve is created by board and shareholder approval.
Equity Reserve
The pool is expressed as a percentage of the company’s fully diluted share capital, often ranging between ten and twenty percent. These shares are held in reserve and are not considered outstanding until options are actually granted and exercised.
Dilution Effect
Creating the pool before a funding round dilutes the existing founders and early investors rather than the incoming venture capital firm. This setup is a central point of negotiation in term sheets, as a larger pool reduces the pre-money valuation share price. Founders must balance the need to attract future employees against the immediate reduction of their own ownership stakes.
It requires careful planning of the hiring roadmap for the next eighteen months.
Incentive Structure
Options from the pool are granted to employees with specific vesting schedules, usually over four years with a one-year cliff. This structure encourages long-term commitment to the company’s growth.