V5: CEO First - Employee led SPVs

• Overview

  • I released V4 of the Employee led SPV framework earlier this year. It has a ~100% success rate in persuading CEOs to offer allocations to employees. Summary of V4:

    • I contact individual employees at a startup (Series A - C stage)

    • The employee and I discuss the process over a call.

    • I provide employee with an intro email to forward to their CEO.

    • CEO, employee, and I connect over a call where I answer CEO's questions.

    • Employee and I gauge investor demand and confirm allocation size with CEO

    • Employee and I form SPV and close investment into the company

• With a ~100% success rate at getting allocations, why change the process?

  • Finding the 1-2 employees per company who are willing to connect me with their CEO requires a lot of reach out.

  • There is often a multi week lag between when I speak with an employee and when we get a call scheduled with the CEO.

  • CEOs want to offer upside through carry to more and sometimes all of their employees.

  • Employee led SPVs will have the strongest impact at the seed stage. This is when founders are first negotiating the size of the options pool with investors.

• V5 changes

  • Reach out to CEOs instead of employees

  • Target seed stage companies instead of Series A-C companies

• New strategy

  • Contact CEO at pre Series A startup which has

    • Top tier seed fund or notable angel backing

    • Ideally not yet implemented a stock option plan

      • Founders incur the dilution that comes from an option pool due to the options pool shuffle. Investors experience concentration of equity from unallocated options cancelled at exit. A smaller options pool means less dilution for all parties.

  • I'm not 100% sure on what the CEO led path will look like but it could take the following forms:

    • CEO informs some, but not all, employees that they can lead SPVs.

    • CEO informs all employees that they can lead SPVs. CEO confirms allocation on case by case basis

    • CEO allows a single SPV per priced or bridge round. All employees who source capital for that SPV get an equal share of carry. This is not proportional to how much they've sourced.

    • CEO allows a single SPV per round. All employees earn an equal share of carry regardless of taking part in fundraising

  • Benefits

    • CEOs can justify reducing the size of a new options pool from 10% to 8%. This dramatically increases founder and early employee ownership.

      • Try this simulator to see the difference between a 10% options pool (standard size) and an 8% options pool.

      • The board tops up the option pool to a target size at every institution led priced round. Cumulative dilution increases at each round because of this top up. Employee led SPVs offset the top up. SPVs become easier for employees to raise as the company matures.

      • Alternatively, CEOs can implement a standard options pool and treat employee led SPVs as a sort of bonus pool since employees who lead SPVs effectively get equity upside equivalent to 20% of what they raise (assuming standard carry of 20%).

    • Public testimonials from CEOs are easier to get than public testimonials from employees.

    • I only have to contact the CEO at each company instead of potentially every employee.

    • If the CEO officially approves of employee led SPVs, more employees are likely to take part.