An option pool is a block of shares set aside for future grants to employees and advisers. Investors almost always ask about it, and they often ask for it to be increased as part of their round. I think the size of the pool should come from the company's actual hiring plan for a defined period, after taking account of the grants and promises already made.
Who pays for the pool depends on the financing terms. A 10% pool measured after the round costs the founders more than a 10% pool measured before it, because of the way the new investor's price is calculated, so the hiring plan and the round model need to be looked at together, along with the legal authority the company has to grant options.
Build the pool around actual hiring
The first step is to list the roles the company expects to fill before its next round or review, which is usually the next 18 to 24 months, and to think about cash pay and equity together. A senior hire who takes a large salary cut is making a very different bargain from someone on a full market salary who receives a smaller grant. Writing these assumptions down means that when the hiring plan changes, the change in the pool can be explained.
The plan should also include refresh grants for early employees whose vesting is coming to an end. The figures should be reviewed whenever the hiring budget changes, and roles the company no longer plans to fill should be removed.
Grant sizes depend on the role and the company's stage. Published benchmarks from US or European startups can be a useful starting point, but I would not treat them as a rule for a seed‑stage company in Lagos, since what matters is the whole package and what the company is asking the person to give up.
Separate the total pool from what is left
Any pool figure should show separately what has already been granted and what is still available. The plan and the model should define the total in the same way and show each part on its own line, so that the board can compare the available balance with the hiring plan and decide whether an increase is needed.
Offer letters and adviser agreements often contain promises the board has not yet approved, and these should be reconciled with the option register first. The company should then check whether lapsed or cancelled options have actually returned to the pool under the plan rules, because the available pool has to reflect the legal position, whatever the team intends to cancel later.
The opening balance should be reconciled against grants and permitted returns to confirm the closing balance. I cover the individual grant terms behind those figures in what your employee option grant means, and how the pool appears next to issued shares in making sense of the company's cap table.
Calculate the increase under the financing terms
An investor who asks for "a 10% unallocated pool post‑money" is asking for something different from a 10% pool before the round, so the share count used and the point at which it is measured need to be agreed precisely. The conversion of SAFEs and notes should be included in the same model, using their own definitions.
A simple example shows how this works. Suppose the pre‑money share count is 1,000 units, including a pool of 100, and the investor receives 250 new shares, so that the pool is 100 out of 1,250, or 8%. Holding everything else fixed, increasing the pool to 10% requires about 27.78 more units, which brings the pool to 127.78 out of 1,277.78. In practice the figure is rounded to whole shares and the resulting percentage checked, and because this example keeps the investor's number of shares fixed, a real round, where the price usually moves with the pool, needs the full calculation described below.
Most term sheets price the new shares on a pre‑money share count that already includes the pool increase. That lowers the price per share and increases the number of shares the investor receives, so the whole increase falls on existing shareholders. The company should establish whether the increase is to be borne before the investment or shared afterwards, and reconcile the full calculation accordingly. I explain how SAFEs treat existing pools and increases linked to a round in how pre‑money and post‑money SAFEs affect ownership.
Put the legal structure behind the spreadsheet
The pool only exists legally through a share option plan or a similar arrangement that the company has properly adopted. The plan should name the issuing company and the share class, and the board and shareholder approvals required by CAMA and the articles must be in place, including any waivers of pre‑emption rights. The number in the model is simply the capacity available under that plan.
The authority to make grants should say who can approve them and up to what size, and whether investor consent is required. Recruiters and hiring managers should understand that they can describe a proposed grant but cannot promise one the board has not approved, and the exercise price and vesting terms should be explained to the candidate with the offer.
Valuation and tax advice should cover both the issuing company and the countries where the recipients work. Options in a Nigerian company can give rise to tax on exercise, while options in a US parent bring US rules on exercise price and valuation, and the finance team will also need information for the accounting treatment, even though no cash changes hands when the options are granted.
Keep the figures accurate as people join and leave
The plan should explain vesting and the terms that apply when someone leaves, including good leaver and bad leaver rules. A former employee with vested options still holds them until they exercise or the exercise period ends, so those options should remain in the calculation until then.
For refresh grants, the company needs to decide whether the new grant adds to the old one or replaces it. On an acquisition, it should consider whether options will be taken over or replaced and whether vesting will accelerate, since both affect the outstanding commitments.
Before new offers go out, the board should receive an updated statement of the pool. If more capacity is needed, the increase should be approved with its effect on ownership calculated, and the new balance and the date of approval recorded, so that the next grant is made against the correct figure.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.