Option Pool Sizing: How Much Equity to Reserve for Employees (2025 Guide)

What is an Option Pool?

An option pool (also called ESOP, Employee Stock Option Pool, or equity reserve) is a reserve of shares set aside for employee stock options.

How Option Pools Work

At incorporation:

  1. Company authorizes 20,000,000 shares (typical)
  2. Founders receive 10,000,000 shares (issued common stock)
  3. Board reserves 2,000,000 shares for option pool (15% of 13,000,000 fully diluted)
  4. Remaining 8,000,000 shares stay unissued (available for future financing)

As company hires:

  • Employee 1 gets grant of 100,000 options (moved from "ungranted pool" to "granted options")
  • Employee exercises options → Becomes issued common stock
  • Ungranted pool shrinks with each new grant

Who Gets Stock Options?

From the option pool:

  • ✅ Employees (software engineers, designers, product managers, sales, marketing)
  • ✅ Advisors (paid with equity instead of cash, typically 0.1-1% depending on contribution)
  • ✅ Contractors (sometimes, if critical to business)
  • ✅ Board members (independent directors get 0.5-1% per year)

NOT from the option pool:

  • ❌ Founders (get founder common stock, not options)
  • ❌ Investors (get preferred stock in funding rounds)
  • ❌ Co-founders (get founder common stock, even if hired post-incorporation)

Ungranted vs Granted vs Exercised

Status Description Cap Table Treatment Voting Rights
Ungranted pool Reserved shares not yet granted to anyone Included in fully diluted share count No voting rights
Granted options Options granted to employees (subject to vesting) Included in fully diluted share count No voting rights (until exercised)
Exercised options Employee paid exercise price, now owns common stock Issued common stock Yes (1 vote per share)

Why Option Pool Size Matters

For Founders

Too small (5-8%):

  • ❌ Can't recruit senior talent (VP Engineering expects 0.5-1%, but pool is depleted)
  • ❌ Must refresh pool within 6-12 months (dilutes founders again)
  • ❌ Signals to investors that founders don't understand hiring needs

Too large (25-30%):

  • ❌ Excessive dilution to founders (unnecessary at incorporation)
  • ❌ Unused shares sit in pool (should've been founder equity)
  • ❌ Hard to explain to investors ("Why is 20% of pool ungranted after 2 years?")

Just right (10-20%, depending on stage):

  • ✅ Enough equity for 12-18 months of hiring
  • ✅ Attracts senior talent (can offer competitive grants)
  • ✅ Shows investors you've planned your hiring roadmap

For Investors

Investors care about option pool size because:

  1. Hiring de-risks the business (need great team to execute)
  2. Pool size affects their ownership % (pre-money pool dilutes founders, not investors)
  3. Insufficient pool = future dilution (if pool too small, must refresh later → dilutes everyone)

What investors expect:

  • Seed: 10-15% pool (enough for first 10-15 hires)
  • Series A: 15-20% pool (enough for 18-24 months of hiring)
  • Series B+: 10-15% refresh (top off existing pool)

For Employees

Employees care because:

  • Option grant competitiveness ("Is 0.1% a good offer for Senior Engineer?")
  • Pool depletion risk ("If pool is 90% granted, will I get diluted at refresh?")

Standard Option Pool Sizes by Stage

Pre-Seed / Incorporation

Typical size: 10-15% of fully diluted shares

Rationale:

  • Hiring first 5-10 employees (mostly engineers)
  • Grants are small (0.1-0.5% per employee, early stage = lower FMV)
  • Pool should last 12-18 months

Hiring plan example (10% pool):

Role # Hires Equity per Hire Total Equity
Senior Engineer 2 0.5% 1.0%
Engineer 3 0.25% 0.75%
Designer 1 0.3% 0.3%
First Sales Hire 1 0.5% 0.5%
Reserve — — 7.45%
Total 7 — 10%

Bottom line: 10% pool = 7 hires + 7.45% reserve for future hires.

Seed Stage

Typical size: 15-20% of fully diluted shares

Rationale:

  • Hiring 10-20 employees (engineering + first GTM hires)
  • Recruiting senior talent (VP Engineering, Head of Sales = 0.5-1% each)
  • Pool should last 12-24 months (until Series A)

Hiring plan example (15% pool):

Role # Hires Equity per Hire Total Equity
VP Engineering 1 1.0% 1.0%
Senior Engineer 3 0.4% 1.2%
Engineer 5 0.2% 1.0%
Head of Sales 1 0.75% 0.75%
Sales Rep 2 0.15% 0.3%
Designer 2 0.25% 0.5%
Marketing 1 0.3% 0.3%
Reserve — — 9.95%
Total 15 — 15%

Bottom line: 15% pool = 15 hires + 10% reserve.

Series A

Typical size: 15-20% of fully diluted shares (post-financing)

Rationale:

  • Hiring 20-40 employees (scale engineering, build out GTM)
  • Recruiting executives (CRO, CFO, VP Product = 0.5-1.5% each)
  • Pool should last 18-24 months (until Series B)

Series A pool is typically refreshed:

  • Pre-seed pool was 10% → After seed round, only 3% remains ungranted
  • Investor requires 15-20% pool at Series A → Must add 12-17% to pool (dilutes founders + existing shareholders)

Hiring plan example (18% pool at Series A):

Role # Hires Equity per Hire Total Equity
CRO (Chief Revenue Officer) 1 1.0% 1.0%
VP Product 1 0.75% 0.75%
VP Engineering 1 0.75% 0.75%
Senior Engineers 8 0.2% 1.6%
Engineers 15 0.1% 1.5%
Sales Reps 8 0.1% 0.8%
Marketing 3 0.15% 0.45%
Customer Success 4 0.1% 0.4%
Operations/Finance 2 0.15% 0.3%
Reserve — — 10.45%
Total 43 — 18%

Bottom line: 18% pool at Series A = 40+ hires over 18-24 months.

Series B and Beyond

Typical size: 10-15% refresh (top off existing pool)

Rationale:

  • Existing pool is partially depleted (5-10% remains ungranted)
  • Need additional equity for next phase of hiring (50-100+ employees)
  • Smaller refresh than Series A (company has more shares outstanding, so 10% is larger in absolute terms)

Example:

  • After Series A: 18% option pool (10% ungranted, 8% granted to employees)
  • 18 months later (Series B term sheet): 5% remains ungranted (3% granted, 2% exercised)
  • Investor requires 15% ungranted pool at Series B close → Add 10% to pool (refresh)

How to Calculate Your Option Pool Size

Step 1: Build 12-18 Month Hiring Plan

List every role you plan to hire, expected equity grant per role.

Example (Seed stage startup, 18-month plan):

Role Month Hired # Hires Equity per Hire Total Equity
Senior Engineer Month 1 1 0.5% 0.5%
Engineer Month 2 2 0.25% 0.5%
Designer Month 3 1 0.3% 0.3%
Engineer Month 6 2 0.25% 0.5%
Head of Sales Month 8 1 0.75% 0.75%
Sales Rep Month 10 1 0.2% 0.2%
Engineer Month 12 2 0.25% 0.5%
Marketing Month 14 1 0.3% 0.3%
Engineer Month 16 2 0.25% 0.5%
Sales Rep Month 18 1 0.2% 0.2%
Total 18 months 14 hires — 4.25%

Buffer: Add 25-50% buffer for:

  • Unplanned hires (found great candidate, can't pass up)
  • Higher-than-expected grants (market competitive offers)
  • Advisor grants (2-3 advisors × 0.25% = 0.75%)
Option Pool Size = Planned Grants + Buffer
                 = 4.25% + 50% buffer
                 = 4.25% × 1.5
                 = 6.4%

Round up to 10% (provides comfortable cushion).

Step 2: Benchmark Against Stage

Compare your calculated pool size to industry standards:

Stage Your Calculation Industry Standard Decision
Pre-seed 6.4% 10-15% Use 10% (meet standard)
Seed 12% 15-20% Use 15% (meet investor expectations)
Series A 18% 15-20% Use 18% (justified by hiring plan)

If your calculation is below standard:

  • Revisit hiring plan (are you hiring enough people?)
  • Or, use standard size (investors will expect it)

If your calculation is above standard:

  • Revisit equity grants (are you offering too much per hire?)
  • Or, justify with detailed hiring plan (show investors you need larger pool)

Step 3: Account for Investor Requirements

Investors will specify option pool size in term sheet:

"Company shall have an employee stock option pool equal to 15% of the Company's fully diluted capitalization as of immediately following the Series A financing (the "Option Pool"), which Option Pool shall include all stock options outstanding as of the Series A financing and all shares reserved for issuance pursuant to outstanding stock options."

This means:

  • If 5% of options are already granted (to early employees)
  • And investor requires 15% pool post-financing
  • You need 15% ungranted + 5% granted = 20% total pool
  • Or, replenish ungranted pool to 15% (10% refresh if 5% remains ungranted)

Step 4: Calculate Dilution Impact

Use formula from Cap Table Basics:

To create X% option pool (pre-money to founders):

Option Pool Shares = X% / (1 - X%) × Existing Shares

Example: Create 15% option pool

Founders have 10,000,000 shares (100% of company).

Pool Shares = 15% / (1 - 15%) × 10,000,000
            = 0.15 / 0.85 × 10,000,000
            = 1,764,706 shares

New fully diluted: 10,000,000 + 1,764,706 = 11,764,706 shares

Founder ownership (post-pool):

10,000,000 / 11,764,706 = 85%

Each founder diluted from 50% to 42.5% (7.5% dilution).

Pre-Money vs Post-Money Option Pools

Pre-Money Option Pool (Standard)

Definition: Option pool is created or expanded before the new investment.

Who gets diluted: Founders and existing shareholders (NOT the new investor).

Example:

Before Series A:

  • Founders: 10,000,000 shares (100%)

Investor term sheet:

  • Investment: $5,000,000
  • Post-money valuation: $25,000,000
  • Investor ownership: 20% post-money
  • Option pool: 15% post-money (pre-money to founders)

Step 1: Create option pool (pre-money)

To end up with 15% pool post-financing:

Founders + Pool = 80% of post-money (investor gets 20%)

We want: Pool = 15%, Founders = 65%

Founders / (Founders + Pool) = 65% / 80% = 81.25%

10,000,000 / (10,000,000 + Pool) = 0.8125
10,000,000 = 0.8125 × (10,000,000 + Pool)
1,875,000 = 0.8125 × Pool
Pool = 2,307,692 shares

After creating pool (before investment):

  • Founders: 10,000,000 shares (81.25%)
  • Option pool: 2,307,692 shares (18.75%)
  • Total: 12,307,692 shares

Step 2: Issue Series A shares (investor gets 20% post-money)

Investor Shares / (12,307,692 + Investor Shares) = 20%
Investor Shares = 3,076,923 shares

Post-Series A:

  • Founders: 10,000,000 / 15,384,615 = 65% ✓
  • Option pool: 2,307,692 / 15,384,615 = 15% ✓
  • Investor: 3,076,923 / 15,384,615 = 20% ✓

Founder dilution: 100% → 65% (35% total dilution from pool + investment)

Post-Money Option Pool (Rare)

Definition: Option pool is created or expanded after the new investment.

Who gets diluted: Founders, existing shareholders, AND new investor (everyone diluted proportionally).

Same example (post-money pool):

Before Series A:

  • Founders: 10,000,000 shares (100%)

Investor term sheet (founder-friendly version):

  • Investment: $5,000,000
  • Post-money valuation: $25,000,000
  • Investor ownership: 20% post-money
  • Option pool: 15% post-money (post-money, dilutes everyone)

Step 1: Issue Series A shares first

Investor Shares / (10,000,000 + Investor Shares) = 20%
Investor Shares = 2,500,000 shares

After investment (before pool):

  • Founders: 10,000,000 shares (80%)
  • Investor: 2,500,000 shares (20%)
  • Total: 12,500,000 shares

Step 2: Create 15% option pool (post-money)

Pool / (12,500,000 + Pool) = 15%
Pool = 2,205,882 shares

Final:

  • Founders: 10,000,000 / 14,705,882 = 68%
  • Investor: 2,500,000 / 14,705,882 = 17%
  • Option pool: 2,205,882 / 14,705,882 = 15%

Founder dilution: 100% → 68% (32% total dilution, 3% less than pre-money pool)

Why Pre-Money Pool is Standard

Investor perspective:

  • Pre-money pool ensures investor gets full 20% (not diluted by pool)
  • Founders bear cost of hiring (diluted by pool before investment)
  • "We're paying $5M for 20% of a company with a full option pool (ready to hire)"

Founder perspective:

  • Pre-money pool dilutes founders more (65% vs 68% in example above)
  • Unfair: "Why should we get diluted by the option pool, but investor doesn't?"

Market standard: 95%+ of term sheets specify pre-money option pool.

Negotiation tip: If investor insists on large pool (20%+), push for post-money pool or smaller size.

The Option Pool Shuffle

What is the Option Pool Shuffle?

The "option pool shuffle" is when investors use option pool size to reduce effective valuation.

Example:

Term sheet says:

  • Pre-money valuation: $20,000,000
  • Investment: $5,000,000
  • Post-money valuation: $25,000,000
  • Option pool: 20% post-money (pre-money to founders)

What founders think:

  • "Great! $20M pre-money valuation."
  • Investment: $5M
  • We're giving up: $5M / $25M = 20% to investor

What actually happens:

Step 1: Create 20% option pool (pre-money)

Founders start with 10,000,000 shares (100%).

To create 20% pool post-financing:

Founders + Pool = 80% (investor gets 20%)
Pool = 20%
Founders = 60%

Founders / (Founders + Pool) = 60% / 80% = 75%

10,000,000 / (10,000,000 + Pool) = 0.75
Pool = 3,333,333 shares

After pool creation:

  • Founders: 10,000,000 shares (75%)
  • Option pool: 3,333,333 shares (25%)
  • Pre-money fully diluted: 13,333,333 shares

Step 2: Issue Series A shares

Investor Shares / (13,333,333 + Investor Shares) = 20%
Investor Shares = 3,333,333 shares

Price per share:

Price = $5,000,000 / 3,333,333 = $1.50 per share

Pre-money valuation (actual):

Pre-money = 13,333,333 shares × $1.50 = $20,000,000

Wait, that's the same! No, look at what founders own:

Post-financing:

  • Founders: 10,000,000 / 16,666,666 = 60%
  • Option pool: 3,333,333 / 16,666,666 = 20%
  • Investor: 3,333,333 / 16,666,666 = 20%

Effective pre-money valuation to founders:

Founders own 60% post-money = $25M × 60% = $15M

But investor said "$20M pre-money valuation"!

The shuffle:

  • Stated pre-money: $20M (13.33M shares × $1.50)
  • Effective founder valuation: $15M (60% of $25M post-money)

The 20% option pool "costs" founders $5M in valuation ($20M - $15M = $5M).

How to Avoid the Option Pool Shuffle

Strategy 1: Negotiate Smaller Pool

Founder: "20% option pool is too large. Our hiring plan shows we need 12% over 18 months. Let's do 15%."

Recalculate with 15% pool:

  • Founders: 65% post-money
  • Option pool: 15%
  • Investor: 20%

Effective founder valuation: 65% of $25M = $16.25M (vs $15M with 20% pool)

Founders gain $1.25M in valuation by negotiating pool from 20% → 15%.

Strategy 2: Request Post-Money Pool

Founder: "We'll accept 20% pool if it's post-money (dilutes everyone, not just founders)."

With 20% post-money pool:

  • Founders: 64% post-money (80% × 80% = 64%, investor gets 16%, pool is 20%)
  • Effective founder valuation: 64% of $25M = $16M (vs $15M with pre-money pool)

Founders gain $1M by switching to post-money pool.

Strategy 3: Justify Your Hiring Plan

Provide detailed hiring plan to investors:

"Our 18-month hiring plan requires 12% equity:

  • 8 engineers × 0.25% = 2%
  • 1 VP Engineering × 1% = 1%
  • 5 sales reps × 0.2% = 1%
  • 3 other roles × 0.3% = 0.9%
  • Total: 4.9% planned, 12% with buffer

A 20% pool would leave 15% ungranted (excessive dilution to founders)."

Result: Investor accepts 12-15% pool (saves founders 5-8% dilution).

Building Your Hiring Plan

Step 1: List Roles and Timeline

Role Level Month Hired Equity Grant Notes
Senior Engineer IC4 Month 1 0.5% First technical hire post-seed
Engineer IC3 Month 2 0.25% Second eng hire
Engineer IC3 Month 3 0.25% Third eng hire
Designer IC3 Month 4 0.3% First design hire
VP Engineering Manager Month 6 1.0% Lead engineering team (5-10 engineers)
... ... ... ... ...

Step 2: Benchmark Equity Grants

Use market data for typical equity grants by role and stage:

Pre-Seed / Seed (Fully Diluted)

Role Equity Range Typical Grant
VP Engineering 0.75-1.5% 1.0%
VP Product 0.5-1.0% 0.75%
Head of Sales 0.5-1.0% 0.75%
Senior Engineer (IC4) 0.3-0.6% 0.4%
Engineer (IC3) 0.15-0.35% 0.25%
Designer 0.2-0.4% 0.3%
Sales Rep 0.1-0.3% 0.2%
Marketing 0.2-0.4% 0.3%

Series A (Fully Diluted)

Role Equity Range Typical Grant
C-Suite (CRO, CFO, CMO) 0.5-1.5% 1.0%
VP Engineering 0.4-1.0% 0.75%
VP Product 0.4-0.8% 0.6%
Director 0.2-0.5% 0.3%
Senior Engineer (IC4) 0.15-0.3% 0.2%
Engineer (IC3) 0.05-0.15% 0.1%
Sales Rep 0.05-0.15% 0.1%

Why grants are smaller at Series A:

  • More shares outstanding (fully diluted share count is higher)
  • Lower FMV per share (409A valuation isn't $10/share like at IPO)
  • Standard: Grants get smaller (in %) as company grows

Step 3: Sum Total Equity Needed

Example (18-month hiring plan, Series A):

Role Category # Hires Avg Equity Total Equity
Executives 2 1.0% 2.0%
VPs 3 0.7% 2.1%
Directors 5 0.3% 1.5%
Senior ICs 10 0.2% 2.0%
ICs 25 0.1% 2.5%
Total Planned 45 — 10.1%

Add buffer (25-50%):

Total Pool = Planned + Buffer
           = 10.1% + 50%
           = 15.15%

Round to 15% option pool.

Step 4: Validate Against Investor Expectations

If investor expects 18% pool and your calculation is 15%:

Option A: Negotiate down

  • "Our hiring plan shows 15% is sufficient for 18 months. 18% would leave 8% ungranted (excessive)."

Option B: Expand hiring plan

  • Add 3-5 more roles (maybe you should hire more aggressively?)

Option C: Accept 18%

  • Use extra 3% for advisor grants, independent directors, unplanned hires

Option Pool Refresh

What is an Option Pool Refresh?

Option pool refresh = Increasing option pool size (adding more shares to the pool).

When it happens:

  • At each funding round (Series A, B, C, etc.)
  • Pool is partially or fully depleted (most shares granted to employees)
  • Investor requires larger pool for next phase of hiring

Example:

After Seed round:

  • Option pool: 15% (2,000,000 shares)
  • Granted to employees: 8% (1,000,000 shares)
  • Ungranted: 7% (1,000,000 shares)

18 months later (Series A term sheet):

  • Pool is now 10% of fully diluted (SAFEs converted, diluted pool)
  • Granted: 6% (800,000 shares)
  • Ungranted: 4% (200,000 shares) ← Not enough for next 18 months

Series A investor requires 15% ungranted pool:

  • Must add 11% to pool (15% target - 4% remaining = 11% refresh)

Pre-Money vs Post-Money Refresh

Pre-money refresh (standard):

  • Pool is refreshed before investment
  • Dilutes existing shareholders (founders, employees, prior investors)
  • Does NOT dilute new investor

Post-money refresh (rare):

  • Pool is refreshed after investment
  • Dilutes everyone proportionally (including new investor)

Most term sheets specify pre-money refresh.

How Much to Refresh

Rule of thumb: Refresh to 15-20% ungranted pool (post-financing).

Why 15-20%?

  • Enough for 18-24 months of hiring (until next round)
  • Avoid mid-cycle refresh (painful, dilutes everyone)

Example:

Before Series B:

  • Option pool: 18% total (10% granted, 8% ungranted)
  • Series B investor requires 15% ungranted

Refresh needed:

Refresh = 15% target - 8% remaining = 7%

Add 7% to pool (increases fully diluted share count by 7%).

Option Pool Dilution Impact

Founder Dilution from Option Pool

At incorporation:

  • 2 founders, 10M shares each (50% each)
  • Create 15% option pool

Dilution calculation:

Pool Shares = 15% / (1 - 15%) × 10,000,000 = 1,764,706 shares
Fully Diluted = 10,000,000 + 1,764,706 = 11,764,706 shares

Founder A ownership:

5,000,000 / 11,764,706 = 42.5%

Founder A dilution: 50% → 42.5% (7.5% dilution)

Dilution Across Multiple Rounds

Stage Option Pool Size Founder A Ownership Founder A Dilution
Incorporation 0% 50.0% —
+15% pool 15% 42.5% 7.5%
Seed ($2M @ $10M post) 13% (diluted) 34.0% 8.5%
+5% pool refresh 18% 32.3% 1.7%
Series A ($8M @ $32M post) 16% (diluted) 25.8% 6.5%
+4% pool refresh 20% 24.8% 1.0%
Series B ($20M @ $100M post) 18% (diluted) 19.8% 5.0%

Total founder dilution: 50% → 19.8% (30.2% dilution over 3 rounds)

Breakdown:

  • Option pool creation/refresh: ~10% total dilution (7.5% + 1.7% + 1.0%)
  • Investor equity rounds: ~20% dilution (8.5% + 6.5% + 5.0%)

Negotiating Option Pool Size with Investors

What Investors Care About

1. Hiring roadmap is realistic

  • Can you attract VP Engineering with 0.75% offer?
  • Have you budgeted for 18 months of hires?

2. Pool size matches hiring plan

  • If you're hiring 30 people, 10% pool isn't enough
  • If you're hiring 10 people, 20% pool is excessive

3. Pool won't need mid-cycle refresh

  • Mid-cycle refresh dilutes investors (they want to avoid this)
  • Prefer larger pool upfront (pre-money to founders)

Negotiation Tactics

Tactic 1: Provide Detailed Hiring Plan

Don't say: "We think 15% is enough."

Say: "We've modeled 18 months of hiring (see attached spreadsheet):

  • 12 engineers × 0.25% = 3%
  • 1 VP Eng × 1% = 1%
  • 6 sales reps × 0.2% = 1.2%
  • 5 other roles × 0.3% = 1.5%
  • Total: 6.7% planned, 10% with 50% buffer
  • We're comfortable with 12% pool (10% + 2% advisor reserve)"

Result: Investor accepts 12-15% (vs 18-20% initial ask).

Tactic 2: Negotiate Post-Money Pool

Investor asks for 20% pre-money pool.

You counter: "20% pre-money pool dilutes founders excessively (to 60%). We'll accept 20% if it's post-money (dilutes everyone proportionally)."

Math:

  • 20% pre-money: Founders end up with 60%
  • 20% post-money: Founders end up with 64% (4% better)

Result: Investor accepts 18% pre-money (compromise) or 20% post-money.

Tactic 3: Defer Pool Refresh

Investor wants 18% ungranted pool at Series A.

You counter: "Our hiring plan shows 12% for next 18 months. Let's do 12% now, and refresh +6% at Series B term sheet (when we've proven we need it)."

Why this works:

  • Defers dilution (only refresh if company is successful enough to raise Series B)
  • Reduces risk (if hiring is slower than planned, founders don't get over-diluted)

Result: Investor accepts 12-15% now + commitment to refresh at Series B.

Common Option Pool Mistakes

Mistake 1: Not Creating Option Pool at Incorporation

What happens:

  • Founders issue all 10,000,000 shares to themselves (no option pool)
  • 6 months later, hire first employee (promise 0.5% = 50,000 shares)
  • Oops: No shares reserved in option pool
  • Must increase authorized shares (file amended certificate, $500-$1K legal fees)

Fix:

  • Reserve option pool at incorporation (even if just 5-10%)
  • Increase authorized shares to 2x issued shares (e.g., authorize 20M, issue 10M to founders, reserve 2M for pool)

Mistake 2: Creating Pool That's Too Small

What happens:

  • Create 5% option pool at incorporation
  • Hire 3 employees (grant 4% of company)
  • Only 1% remains (can't hire VP Engineering, who expects 0.75-1%)
  • Must refresh pool (dilutes founders again)

Fix:

  • Size pool for 12-18 months of hiring
  • Standard: 10-15% at incorporation, 15-20% at Series A

Mistake 3: Creating Pool That's Too Large

What happens:

  • Create 25% option pool at incorporation (founders are generous)
  • After 2 years, only 10% granted (15% sitting unused)
  • Problem: Founders diluted themselves by 15% for no reason (should've been founder equity)

Fix:

  • Size pool based on hiring plan (don't over-allocate)
  • Better to refresh pool at Series A (dilutes everyone) than to create 25% pool upfront (only dilutes founders)

Mistake 4: Accepting Investor's Pool Size Without Negotiation

What happens:

  • Investor term sheet: "20% option pool (pre-money)"
  • Founders accept without question (assume it's standard)
  • Problem: Founders diluted to 60% instead of 65% (if negotiated to 15%)

Fix:

  • Always provide hiring plan to justify smaller pool
  • Negotiate pre-money vs post-money (post-money is 3-5% better for founders)
  • Push back on pool size >18% (rarely justified)

Mistake 5: Not Tracking Option Pool Depletion

What happens:

  • Create 15% pool at Seed
  • Grant options to 20 employees over 18 months (don't track closely)
  • Series A investor asks: "How much pool remains?"
  • Founders: "Uh... maybe 5%?"
  • Investor: "Looks like 2% remains (you granted 13%). We'll need to refresh 15%."

Fix:

  • Track option pool in cap table software (Carta, Pulley, etc.)
  • Update cap table after every grant
  • Know exactly how much pool remains at all times

Mistake 6: Granting Equity Outside the Option Pool

What happens:

  • Advisor asks for equity (0.5%)
  • Founder issues shares directly (not from option pool)
  • Problem: Dilutes option pool percentage (now 14% instead of 15%)
  • At Series A, must refresh more to get back to 15%

Fix:

  • All employee/advisor equity comes from option pool
  • Only founders and investors get shares outside the pool
  • If issuing shares outside pool (e.g., co-founder joins post-incorporation), adjust pool size accordingly

Mistake 7: Confusing "Ungranted Pool" with "Total Pool"

What happens:

  • Investor term sheet: "15% option pool post-financing"
  • Founders think: "We already have 10% granted to employees, so we need 15% total (add 5%)"
  • Wrong! Investor means 15% ungranted + existing grants

Fix:

  • Clarify with investor: "15% total or 15% ungranted?"
  • Most term sheets mean 15% ungranted (available for future hires)
  • Total pool = Ungranted + Granted

Option Pool Math Examples

Example 1: Creating 15% Pool at Incorporation

Founders: 10,000,000 shares (2 founders, 5M each)

Board approves: 15% option pool

Calculate pool shares:

Pool % = 15% (target)
Pool Shares = 15% / (1 - 15%) × 10,000,000
            = 0.15 / 0.85 × 10,000,000
            = 1,764,706 shares

New cap table:

  • Founder A: 5,000,000 shares (42.5%)
  • Founder B: 5,000,000 shares (42.5%)
  • Option pool: 1,764,706 shares (15%)
  • Total: 11,764,706 shares

Example 2: Option Pool Refresh at Series A

Before Series A:

  • Founders: 10,000,000 shares (79%)
  • Granted options: 1,200,000 shares (9.5%)
  • Ungranted pool: 564,706 shares (4.5%)
  • SAFEs (converted): 900,000 shares (7%)
  • Total: 12,664,706 shares

Series A term sheet:

  • Investment: $8M at $32M post-money (25% to investor)
  • Option pool: 15% ungranted (post-financing)

Step 1: Calculate pool refresh needed

Currently 4.5% ungranted → Need 15% ungranted

Refresh = 15% - 4.5% = 10.5%

Step 2: Add 10.5% to pool (pre-money)

Refresh Shares = 10.5% / (1 - 10.5%) × 12,664,706
               = 0.105 / 0.895 × 12,664,706
               = 1,484,971 shares

After refresh (before investment):

  • Founders: 10,000,000 shares (70.6%)
  • Granted options: 1,200,000 shares (8.5%)
  • Ungranted pool: 2,049,677 shares (14.5%)
  • SAFEs (converted): 900,000 shares (6.4%)
  • Pre-money total: 14,149,677 shares

Step 3: Issue Series A shares (25% post-money)

Investor Shares / (14,149,677 + Investor Shares) = 25%
Investor Shares = 4,716,559 shares

Post-Series A:

  • Founders: 10,000,000 / 18,866,236 = 53%
  • Granted options: 1,200,000 / 18,866,236 = 6.4%
  • Ungranted pool: 2,049,677 / 18,866,236 = 10.9% (not 15%?)

Wait, let me recalculate. The 15% should be of the post-money shares.

Actually, I need to recalculate properly. Let me redo this.

Target state post-financing:

  • Investor: 25%
  • Ungranted pool: 15%
  • Everyone else: 60% (founders + granted options + SAFEs)

Pre-money shares: 12,664,706 (existing) + Refresh

We want ungranted pool to be 15% post-money.

Currently we have 564,706 ungranted + 1,200,000 granted.

Let's say we add X shares to ungranted pool.

Post-money shares = 12,664,706 + X + Investor Shares

We want:

  • (564,706 + X) / (12,664,706 + X + Investor Shares) = 15%
  • Investor Shares / (12,664,706 + X + Investor Shares) = 25%

From second equation:

Investor Shares = 0.25 × (12,664,706 + X + Investor Shares)
0.75 × Investor Shares = 0.25 × (12,664,706 + X)
Investor Shares = (1/3) × (12,664,706 + X)

From first equation:

564,706 + X = 0.15 × (12,664,706 + X + Investor Shares)

Substitute Investor Shares:

564,706 + X = 0.15 × (12,664,706 + X + (1/3) × (12,664,706 + X))
564,706 + X = 0.15 × ((4/3) × (12,664,706 + X))
564,706 + X = 0.20 × (12,664,706 + X)
564,706 + X = 2,532,941 + 0.20X
0.80X = 1,968,235
X = 2,460,294 shares (refresh needed)

After refresh:

  • Ungranted pool: 564,706 + 2,460,294 = 3,025,000 shares

Post-money shares:

= 12,664,706 + 2,460,294 + Investor Shares
= 15,125,000 + (1/3) × 15,125,000
= 15,125,000 + 5,041,667
= 20,166,667 shares

Final ownership:

  • Ungranted pool: 3,025,000 / 20,166,667 = 15% ✓
  • Investor: 5,041,667 / 20,166,667 = 25% ✓
  • Founders: 10,000,000 / 20,166,667 = 49.6%

Example 3: Comparing Pre-Money vs Post-Money Pool

Scenario: $5M investment at $20M post-money (25% to investor), 15% option pool

Pre-Money Pool (Standard)

Target:

  • Investor: 25%
  • Pool: 15%
  • Founders: 60%

Founders start with 10M shares.

Founders + Pool = 75% of post-money
Founders = 60%, Pool = 15%

Founders / (Founders + Pool) = 60% / 75% = 80%

10,000,000 / (10,000,000 + Pool) = 0.80
Pool = 2,500,000 shares

Pre-money: 12,500,000 shares
Investor shares: 12,500,000 × (25% / 75%) = 4,166,667 shares
Post-money: 16,666,667 shares

Result:

  • Founders: 60%
  • Pool: 15%
  • Investor: 25%

Post-Money Pool (Founder-Friendly)

Target:

  • Investor: 25%
  • Pool: 15%
  • Founders: 60%

BUT pool is created post-money (dilutes everyone).

First, issue investor shares:
Investor Shares / (10,000,000 + Investor Shares) = 25%
Investor Shares = 3,333,333 shares

After investment: 13,333,333 shares
- Founders: 75%
- Investor: 25%

Then create 15% pool:
Pool / (13,333,333 + Pool) = 15%
Pool = 2,352,941 shares

Post-money: 15,686,274 shares

Result:

  • Founders: 10,000,000 / 15,686,274 = 63.8%
  • Investor: 3,333,333 / 15,686,274 = 21.3%
  • Pool: 2,352,941 / 15,686,274 = 15%

Founders gain 3.8% by negotiating post-money pool!

FAQ

How big should my option pool be?

Standard sizes by stage:

  • Pre-seed / Incorporation: 10-15%
  • Seed: 15-20%
  • Series A: 15-20% (ungranted post-financing)
  • Series B+: 10-15% refresh

Base your pool on 12-18 month hiring plan (not just industry standard).

What's the difference between pre-money and post-money option pools?

Pre-money pool (standard):

  • Created before investor puts money in
  • Dilutes founders (not investors)
  • 95%+ of term sheets use pre-money pool

Post-money pool (rare):

  • Created after investor puts money in
  • Dilutes founders and investors proportionally
  • 3-5% less dilution to founders

What is the option pool shuffle?

The option pool shuffle is when investors use large option pool size to reduce effective valuation to founders.

Example:

  • Term sheet: $20M pre-money, 20% option pool (pre-money)
  • Actual: Founders valued at $15M (60% of $25M post-money)
  • Shuffle: $20M stated valuation, but $15M effective (20% pool "costs" $5M)

Fix: Negotiate smaller pool or post-money pool.

Should I create an option pool at incorporation?

Yes. Reserve 10-15% option pool at incorporation, even if you won't grant any options for 6-12 months.

Why:

  • Avoids need to amend certificate later (costs $500-$1K)
  • Shows investors you've planned hiring roadmap
  • Ensures you have equity available for first hires

How do I calculate how much option pool I need?

Step 1: Build 12-18 month hiring plan (list every role, equity grant)

Step 2: Sum total equity needed (e.g., 6.5%)

Step 3: Add 25-50% buffer (e.g., 6.5% × 1.5 = 9.75%)

Step 4: Round up to standard size (10%, 15%, 20%)

Step 5: Validate with investor (if fundraising)

What happens when the option pool runs out?

You must refresh the pool (add more shares).

Timing:

  • Typically at next funding round (Series A, B, C)
  • Or, mid-cycle refresh (dilutes everyone proportionally)

Standard: Investors require 15-20% ungranted pool at each funding round.

Can I negotiate option pool size with investors?

Yes! Option pool size is negotiable.

How to negotiate:

  1. Provide detailed hiring plan (justify smaller pool)
  2. Request post-money pool (3-5% less dilution to founders)
  3. Defer pool refresh (add at Series B instead of Series A)

Most founders don't negotiate (accept investor's 18-20% ask), but you can save 5-10% dilution by negotiating.

Resources

Guides and Calculators

Equity Benchmarking

  • Option Impact — Equity grant benchmarks by stage, role, location
  • Pave — Compensation data (cash + equity) for startups
  • AngelList Talent — Startup salary and equity data

Related Guides

Get Help with Option Pool Sizing

Getting your option pool size right is critical for fundraising and hiring. Too small, and you'll need a costly mid-cycle refresh. Too large, and you'll dilute founders unnecessarily.

If you need help with:

  • Calculating right option pool size for your stage
  • Building 18-month hiring plan and equity budget
  • Negotiating option pool terms with investors
  • Refreshing option pool mid-cycle
  • Modeling dilution from option pool creation

Contact Promise Legal for an option pool consultation.

Typical engagement:

  • Option pool planning: $500-$1,500 (hiring plan, equity budget, pool size recommendation)
  • Investor negotiation support: $1,000-$3,000 (review term sheet, negotiate pool size, draft counter-proposal)
  • Option pool refresh: $1,000-$2,500 (board approval, cap table update, amended option plan)

This guide was last updated in January 2025. Option pool practices, investor expectations, and equity grant benchmarks may evolve over time. Consult with a startup attorney or equity advisor for advice specific to your company.

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