What To Do If Your Lead Investor Asks For ESOP

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What To Do If Your Lead Investor Asks For ESOP

As valuations continue to rise, early stage VCs are getting more “creative” with their deal structuring. In particular, I’ve seen a rise in requests for ESOP shares to be allocated to lead investors for their “value added services.”

It’s common to give ESOP to advisors for their value add, so why not investors?

What To Do If Your Lead Investor Asks For ESOP

Misalignment

A lead investor is usually aligned with their co-investors to negotiate with founders for a pre-money valuation at a level they deem fair. But when a lead investor asks for ESOP shares in addition to what they purchase, they are setting a higher PPS for others joining their round, without actually having to pay it themselves.

To illustrate: Let’s say a company has a pre-money valuation of $8 million, and is raising $2 million. The lead investor puts in $800,000 for 8 percent of the post-money…

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