Should I compensate my key employees with additional stock options as part of a funding round?

orig. post on Quora We're going into a $10m Series B funding round. The company was slow going in the first few years, but has recently taken off with steady monthly growth. During those early years we had multiple pre-seed and seed rounds that diluted many of the founders and key employees down to low levels. In addition, much of their equity has already vested. In future rounds this will get diluted even further.

How should I think about retaining these key employees? Additional stock options? How would a new VC perceive this?

Dan Walter's Answer

This is a tough question to answer definitively without know far more information.  On the surface it seems like giving more equity (stock options? performance units?) makes sense and I believe that if correctly communicate to your investors they would agree.  But, it also depends on what the current equity levels are.  It may be that the current level of dilution puts them in line with current industry norms.

I would worry about the lack vesting first.  Without future vesting you have very little retention power.  Staying or leaving often becomes a matter of emotion in cases like this.  Putting some more of the company on the line with equity that has a future vesting period may be a way to keep people focused on the longer-term prize that comes with success.

These decisions can hinge on who your investors are, how much they have made or lost on your company, how much they have also been diluted by additional investments and more.  I would talk to them early in the process.  You may find that they would jump at the chance to give more..  In this case time-based equity, usually in the form of stock options, is a likely solution.  You may also find that they believe the only way to give more to the staff, is for the staff to give more to them. This may lead to a program that is more focused on hitting performance goals linked to metrics the company knows drive its success (or to an exit/liquidity event.)

I have worked with companies that have fallen within a wide range of these situations.  Its sounds like your path to success has not been a straight-line.  It is unlikely your solution will be incredibly basic.

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