What is an option pool?


Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


An option pool is used by start-up companies to attract and incentives talentet people. The option pool consists of a percentages of the company’s shares which is reserved for key employees. Sometimes an option pool is referred to as an employee, incentive or warrant pool.

Find out how actually pays for the option pool here.

An option pool is a typical term in a term sheet. The pool normally makes up 10 to 20% of the shares in a start-up company. The function of the option pool is to provide incentives in the form af equity to future employees and others.


Michael Pilegaard Hansen, assistant attorney

Edison law


What is an option pool?

Earn-out for founders


Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


Earn-out for founders is a term which can be put into action if you are considering selling your company.  

Earn-out covers a set of different terms.

They all work as conditions for you to receive the full purchase price.

Earn-out for founders can be of extreme importance.  

The joy of selling can easily be destroyed from three years of moving back and forward in a huge organization working for people who don’t care about you.

In this blog post I will describe the main issues that you should know about earn-out.   

#1: Understand acquirer’s context

There is a good chance that buyer will be a large corporation.

If that is the case, you shouldn’t count on anyone having a plan for you as an individual person. Or your co-founders. Or your team.

The decision to acquire your start-up is often taken by a high ranking person within acquirer’s company.

This person has told the M&A department to get the deal done.

There is often a disconnect between the M&A department, the upper strategic management and the department where you are going to work.

Perhaps they have not really been told what to use your start-up for.   

Additionally, there can be a poor internal connection between acquirer’s different departments.

Therefore, you should take responsibility of the negotiations.  

Don’t assume there will be a plan for you or your team.

Or a plan at all.

#2: Typical elements in earn-out

Typical elements in an earn-out clause can include:

  • Founders shall stay and work for acquirer in a period after the acquisition, e.g. one to three years
  • The final purchase price is dependent on a certain revenue after the acquisition
  • The final purchase price is dependent on a certain profit after the acquisition
  • The final purchase price is dependent on growth or performance on other parametres after the acquisition, e.g. related to user behaviour or product development

The deal will typically be a combination of up-front payment and additional payment which is dependent on the terms of the earn-out.

How is the split between those two?

It’s up for negotiation.

The up-front payment will typically amount to 60-80% while the remaining 20-40% is reserved to the earn-out.

Particularly, founders’ risk appetite and will to stay are elements that can change that distribution.

If you are willing to bet on future growth you will have a better opportunity of negotiating a larger potential purchase price.

#3: Negotiate your role early

Most acquirer’s are clever.

They will postpone the negotiation regarding your future role to the very last.

At this point you are so invested in the process that you will say yes to anything. Many founders will regret this.

But your role is extremely important. Important for your mental well-being in the next few years.

To important to postpone to the very last.

If you, like many other founders, appreciate creative freedom, exciting challenges and the opportunity to create great results.

You should negotiate your own role as soon as possible.  

#4: Make demands on your role

There is a good chance that the department where you are going to work didn’t had anything to do with the acquisition.

Ergo: They are much less excited about the acquisition of your start-up than you are.

Therefore, it is important to make demands on your role.

And your team’s role.

The demands should be included in the judicial terms of the acquisition.

It is not enough just to have talked about it.

The demands could be:

  • That you should operate as an independent company, potentially, as a subsidiary company to the acquirer.
  • What you and your co-founders’ tasks should be.
  • That you won’t be assigned different tasks against your will.
  • Specific conditions of employment, such as salary, equity and benefits.
  • That you and your team should remain one unit internally after the acquisition.

#5: Who is in control?     

Ask yourself who is in control if you e.g. are negotiating earn-out based on revenue or surplus.

Is it one of acquirer’s people?

If so, this person will be able to impact whether or not you will achieve the goals that have been set for the earn-out.

Acquirer can influence the revenue by investing. This can affect the revenue significantly.

Acquirer can decide to invest less in sale and product development in order to possibly lower the surplus.

Leaver scenarios are also important.

Basically, acquirer should not be able to fire you and thereby preclude you from the earn-out payment.

 


Michael Pilegaard Hansen, assistant attorney

Edison law

Earn-out for founders

Optioner og warrants

Michael Pilegaard Hansen, advokatfuldmægtig

Mph@edisonlaw.dk | Linkedin


Hvad er forskellen på optioner og warrants?

1. En option er retten til at få eller købe en allerede eksisterende aktie i et selskab.

2. En warrant er en tegningsoption, der giver en ret, men ikke en pligt, til på et senere tidspunkt og til en fastsat kurs at tegne nye aktier i et selskab. Virksomheder anvender ofte warrants som led i incitamentsordninger med medarbejdere.

I start-up virksomheder er det ofte uden betydning for modtageren, om han får optioner eller warrants.

For ejerne af start-up virksomheden er det derimod af stor betydning om der uddeles optioner eller warrants. Særligt hvis virksomheden skal rejse penge fra investorer.

Ved tildeling af optioner, bliver alene de eksisterende ejere i virksomheden udvandet, når optionerne bliver udnyttet.

Ved tildeling af warrants, bliver samtlige ejere herunder også nye investorer udvandet, når warrants bliver udnyttet.

Ved udnyttelse af warrants forøges selskabets samlede antal aktier. Idet der skal udstedes nye aktier.

Selskabets samlede antal aktier ændres ikke ved udnyttelse af optioner. Idet der sker en omfordeling af allerede udstedte aktier.


Edison Law Advokater

Optioner og warrants

Incitamentspulje


Michael Pilegaard Hansen, advokatfuldmægtig

Mph@edisonlaw.dk | Linkedin


En incitamentspulje, også kendt som medarbejder pool, bliver anvendt af start-ups til at tiltrække og incentivere talentfulde medarbejdere. Incitamentspuljen består af en procentdel af selskabets aktier, som er reserveret til medarbejdere og andre samarbejdspartnere.

En incitamentspulje er et typisk vilkår i et term sheet ved investeringsrunder. Puljen udgør normalt 10 til 20% af selskabskapitalen.


Edison Law Advokater 

Incitamentspulje

Raising Capital for start-ups


Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


When raising capital to a start-up company it is important to decide which lawyer to choose.

A founder can choose between:
(1) investor’s lawyer, or
(2) the founder’s own lawyer

Read more about why not to choose investor’s lawyer here.

When a start-up company is raising money from an investor there are some important terms to be aware of.  Terms relating to control of the company end economic terms are the most important.


Michael Pilegaard Hansen, assistant attorney

Edison law

Raising Capital for start-ups

How To Legally Operate Commercial Drones In Denmark


Written by Kristian Holte, dealmaker & technology lawyer

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drone [noun]

An unmanned aircraft or ship guided by remote control or onboard computers

Merriam-Webster


Amazon is developing a drone-based delivery system named Amazon Prime Air. I find this very interesting … and difficult. As with all things with great potential.

One of the challenges is regulatory.

As witnessed by Amazon’s letter to the US Aviation Administration, Amazon would like for US rules to treat commercial drone operations better.

But what about Danish rules? How does the legal climate for commercial drone operations look in Denmark?

BASIC RULES

The Danish Transport and Construction Agency has issued some basic rules for drone operations.

For a drone weighing up to 7 kg some of the more interestering rules are:

  • It is not allowed to fly higher than 100 m
  • It is not allowed to fly over densely populated areas
  • It is not allowed to fly nearer than 150 m of urban housing and large roads
  • It is not allowed to fly nearer than 5 km of public airports

For drones weighing from 7 to 25 kg additional rules apply, for instance:

  • Operations have to take place from an authorized airfield
  • Liability insurance must be taken out

Now, as you can see, these rules apply serious constraints on the commercial operations of drones.

This is why the Transport and Construction Agency has issued additional rules for such operations.

RULES FOR COMMERCIAL DRONES

According to these rules, the Transport and Construction Agency can issue a permit for commercial drone operations.

With such a permit, the Agency can cut companies some slack from the pressure of the basic rules. For this to happen, the Agency has to find that the company will implement adequate safety and control measures.

As a rule of thumb, the Agency only considers granting a permit if the following conditions are met:

  • Each drone must be operated within the pilot’s visual line of sight (not using cameras)
  • Each flight must be aborted if another aircraft is entering the airspace
  • Each flight must be carried out in accordance with an approved operations manual

If the flight is not carried out within the pilot’s visual line of sight, the Agency can only issue a permit if the flight takes place in specially dedicated airspace. This condition seems, for instance, to impede an army of long-distance automated delivery drones.

If the Agency grants a permit, this does not mean that a company can operate its drones without restrictions.

Generally, a company can expect to have to comply with at least the following rules:

  • A pilot must be designated to each drone flight
  • A drone is not allowed to fly higher than 100 m
  • A safety area with a radius of minimum 15 m and maximum 50 m must be maintained during the entire flight
  • A drone may not fly between sunset and sunrise
  • The operator must take out insurance
  • Each drone must be individually marked

BUSINESS MODELS INVOLVING DRONES

In light of the optimism which currently surrounds commercial drones, the regulation imposes severe restrictions.

According to some the rules are not business friendly.

True, as the rules currently look, they might hinder a number of business models like the ones of Amazon Prime Air. But others, like drone photography in various forms, are already possible.

However, I do believe there is some wriggle room within current rules for serious providers.

But, if the drone industry gathers serious momentum, it seems likely that the rules will be changed. Fundamentally.


Written by Kristian Holte, dealmaker & technology lawyer

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How To Legally Operate Commercial Drones In Denmark

What is a no-shop clause?


Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


When a founder is raising capital to his start-up company, investor will often include a no-shop clause in the term sheet. The purpose is to restrict the founder from negotiating with other parties. A no-shop clause is generally only in effect for a limited period of time, until the parties know, if the can agree on the main terms of the investment. The clause is also sometimes referred to as “exclusivity”.

Should you – as a founder – accept a no-shop clause and what are the consequences of breaching the no-shop clause. Find out here.


Michael Pilegaard Hansen, assistant attorney

Edison Law


What is a no-shop clause?

What is a stock option?


Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


A stock option is a right for a person to become a shareholder in a company, if certain terms are met.

A common term is that the person must remain employed for a certain period of time. Another common term is that certain milestones must be fulfilled.

Stock options are often used by start-up companies who cannot pay market salary for skilled employees. In this case, the company can make itself more attractive by adding stock options to the employee’s pay.

Read more about the advantages, economic consequences, and how to structure start-up stock options here.


Michael Pilegaard Hansen, assistant attorney

Edison Law


What is a stock option?

Legal check-list for start-up companies


Written by Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


Incorporate an ApS or IvS from the beginning. Create a register of shareholders to ensure control of ownership of shares and enter into a shareholders’ agreement. Learn more about the key issues to be aware of when entering into a shareholders’ agreement here.

Create a vesting plan in relation to founders, employees and directors who receive shares. Vesting protects your start-up company from shareholders who leaves the company at an early stage.

Use incentive compensation in the form of bonuses, options or warrants to attract the right people to your start-up company.

Transfer intellectual property to your start-up company, which was created before the company’s incorporation and insert intellectual property clauses in employment, co-operation and consultant agreements that make your company the owner of the intellectual property.


Written by Michael Pilegaard Hansen, assistant attorney

Edison Law


Legal check-list for start-up companies

What is a non-compete clause?


Written by Michael Pilegaard Hansen, assistant attorney

Mph@edisonlaw.dk | Linkedin


A non-compete clause for the founder means that the founder cannot start a competing business for a period of time, if the founder leaves the start-up company. Under Danish law non-compete clauses are generally valid.

A non-compete clause for the investor means that investor is not allowed to invest in competitors.

Founders often sign a non-compete clause, whereas investors often don’t. Read more about the reasons behind this, and learn the tools to negotiate investor’s non-compete clause here.


Written by Michael Pilegaard Hansen, assistant attorney

Edison Law

What is a non-compete clause?