Option Pool Planning: Best Practices for Startups

Creating and managing an employee option pool is one of the most important decisions for startup founders. A well-structured option pool helps attract top talent while minimizing unnecessary dilution.

What is an Option Pool?

An option pool is a reserved portion of company equity set aside for employee stock options. It's typically created before major funding rounds and represents future equity grants to employees.

Typical Option Pool Sizes

By Stage:

• Pre-seed/Seed: 10-15%
• Series A: 15-20%
• Series B+: 5-10% (refresh pools)

By Company Size:

• <10 employees: 15-20%
• 10-50 employees: 10-15%
• 50+ employees: 5-10%

When to Create Option Pools

Before Fundraising:

• Investors expect a pool to be in place
• Pool comes out of founder ownership (pre-money)
• Plan for 12-18 months of hiring

Pool Refreshes:

• When pool drops below 5% available
• Before major hiring pushes
• Usually smaller than initial pool

Allocation Guidelines

By Role Level:

• C-Level: 0.5-2.0%
• VP Level: 0.2-0.8%
• Director: 0.1-0.4%
• Senior IC: 0.05-0.2%
• Mid-Level: 0.01-0.1%
• Junior: 0.005-0.05%

By Department:

• Engineering: Typically highest allocations
• Sales: Performance-based considerations
• Marketing: Standard allocations
• Operations: Conservative allocations

Best Practices

1. Plan Ahead

• Model future hiring needs
• Consider role levels and compensation
• Account for growth and promotions

2. Be Consistent

• Establish clear guidelines for allocations
• Document decision criteria
• Maintain equity bands by level

3. Communicate Clearly

• Explain vesting schedules
• Provide equity education
• Set realistic expectations

4. Monitor and Adjust

• Track pool utilization
• Benchmark against market
• Plan refresh timing

Common Mistakes

1. Pool too small: Can't attract talent
2. Pool too large: Excessive founder dilution
3. Poor allocation: Inequitable distribution
4. No refresh planning: Running out of equity

Tax Considerations

• 409A valuations for option pricing
• Early exercise provisions
• Tax implications for employees
• Compliance requirements

Use our Equity Compensation Calculator to model different option pool scenarios and understand the impact on your cap table.