Employee options are one of the ways startups compete for people they may not be able to pay like a much larger company. The idea is simple: a member of the team gets the right to buy shares later if certain conditions are met. To make those grants possible, companies usually reserve a pool of shares for employees and future hires. The difficult question is how large that pool should be. Founders often hear numbers such as 10% or 15% and assume there is a standard answer. There is not. The right size should come from the people the company realistically expects to hire and the amount of equity it expects those roles to need.
Start with the hiring plan, not the percentage
Suppose the company plans to hire a head of engineering, a senior product person and two early commercial employees over the next eighteen months. The founders can estimate the equity range they are prepared to offer each role and work backwards from there. That gives the pool a business reason. It is being created to support a known hiring plan rather than because someone said every venture backed startup should reserve the same percentage.
The estimate does not have to be perfect. Hiring plans change and candidates negotiate. What matters is having a reasonable basis for the number. A company planning only two senior hires may not need the same pool as a company preparing to double its team after the funding round.
The timing of the pool can affect who gets diluted
This matters during fundraising because investors often ask the company to create or increase the option pool before their investment is calculated. If that happens, the dilution from the new pool usually falls on the existing shareholders, which means mainly the founders and earlier investors. The new investor then comes in after the larger pool has already been included in the ownership.
Founders should look beyond the headline investment percentage. An investor may say it is buying 20% of the company, but if the company must first increase the option pool by another 10%, the founders can end up with less than they expected. That does not make the request unreasonable. The investor may genuinely want the company to have enough equity available for the team it needs to build after the round. The founders should simply understand the full ownership effect before agreeing.
Existing unused options should count
A common mistake is to discuss the new pool as though nothing has already been reserved. If the company already has unused options available, those should be taken into account before agreeing to create more. Otherwise, the company may end up with a much larger pool than the hiring plan requires.
This is where a clean cap table becomes useful. It should show what has already been granted, what remains available and what the proposed new pool would add. The conversation can then move from “the investor wants 10%” to a more practical question: how many hires does the company expect to make and how much equity is realistically needed for them?
A large pool is not free simply because the shares have not been granted yet
Founders sometimes think unused options do not matter because nobody owns them yet. In a financing model, however, the pool can still reduce the founders' percentage if it is counted as part of the company before the investor comes in. That means an oversized pool can create dilution today for hires the company may never make.
At the same time, making the pool too small can create another problem. If the company uses the entire pool shortly after the round, it may need shareholder or investor approval to increase it again. The sensible aim is therefore not to minimise the pool at all costs. It is to create enough room for the hiring plan without treating equity as an unlimited reserve.
Think about the type of people you are trying to attract
Different roles may need different equity packages. A senior executive joining early and taking meaningful startup risk may expect more than a later hire in a role that is easier to fill with cash compensation. Geography can also affect expectations, as can the stage of the company and the level of salary being offered. Founders should be realistic about the market they are hiring into.
This is also where consistency helps. If two employees in similar roles receive very different grants without a clear reason, the company may create internal tension later. A simple equity framework can help the founders think about ranges for different seniority levels without turning the process into a rigid formula.
The option pool should support the company you plan to build after the round
There is no prize for having the smallest pool, and there is no reason to accept a large one simply because it appears in a term sheet. The pool is there to help the company recruit and retain people. That purpose should drive the number.
Before agreeing to a percentage, list the hires the company expects to make, estimate what those roles may require and look at how much equity is already available. Then put the proposed pool into the cap table and see what it does to founder ownership. Once the hiring need and the dilution are visible together, the discussion becomes much easier. The founders can decide whether the pool is enough for the team they need without giving away more of the company than the plan justifies.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.