Sizing an option pool correctly is a delicate balancing act that many founders get wrong—a potentially costly mistake.
The size of your option pool affects how much equity ownership of your company you retain, as well as the company valuation and share price. In this guide, we’ll explain what you need to know to calculate your initial option pool, and how to limit dilution.
This video explains how to size your option pool and how it affects dilution.
Why sizing an option pool correctly is so important
An option pool (also called an employee stock option pool or equity pool) is a block of company shares set aside to issue to employees, advisors and other service providers. In an ideal world, you want your option pool to be just large enough to hire enough people to get you to your next round of funding. Too big, and you’ll dilute your ownership more than you have to. Too small, and potential investors might not be on board. Plus, you might not be able to attract enough talent to meet the operating plan you presented to investors (which can look bad when you begin fundraising again).
Option pools dilute your ownership
Well, technically they dilute all existing shareholders’ ownership. But investors often insist that you create a pool before they invest, so your first option pool usually only dilutes your shares. And dilution can happen faster than you’d expect. For example, if founders own 10,000 shares (100% of the company) and create an option pool of 1,500 shares, there are now 11,500 shares of company stock. And founders now own 87% of the company (10,000/11,500), not 100%.
Option pools affect your share price, valuation, and ownership
When investors give you a pre-money valuation, they usually include an option pool if one doesn’t already exist. And the bigger your pre-money option pool is, the lower your post-money ownership percentage will be. If an option pool already exists, your investor may ask to increase the size if they think it is not enough shares to cover hiring until the next funding round.
Here’s a side -by-side comparison of how an option pool size can affect a company’s valuation:
| Bigger option pool | Smaller option pool |
| $3 million company worth
+ $1 million investment + $1 million option pool = $5 million post-money valuation |
$3 million company worth
+ $1 million investment + $500,000 option pool = $4.5 million post-money valuation |
| Your ownership percentage: 60%
($3 million / $5 million) |
Your ownership percentage: 67%
($3 million / $4.5 million) |
In the example scenario above, if an investor offers you a $1M investment on a $4M pre-money valuation, they may really think your company is worth $3M but want you to create a $1M option pool. When that option pool is added to your company worth, it would get you to that $4M valuation. Add their investment of $1M on top of everything, and your post-money valuation would be $5M, leaving you with a 60% remaining ownership stake in the company (or $3M).
By comparison, if you created $500,000 worth of options for your pool, giving you a $3.5M pre-money valuation and $4.5M post-money valuation, your ownership percentage would be 67%.
Of course, this doesn’t mean you should create very few options—you do want to set aside enough shares to attract the hires you need. The key is finding the right size so your ownership percentage and share price feel fair to everyone.
Approaches to sizing your option pool
There are two main ways to size your option pool:
Top down
This approach looks at the data for what other companies typically do. The common rule of thumb is that the equity pool should represent 10 percent of company shares, but this data can be broken down further, by company stage, industry, and more to determine how your company stacks up against close peers. With this approach, you can base your option pool on typical industry practices.
Bottoms up
This method focuses on creating a hiring plan based on your company’s needs and projected growth until your next expected funding round. With this approach, you make a compensation plan and determine how much equity you’d need for each hire. Then you add up the total, plus expected refresh grants, to know how large an equity pool you will need.
We recommend employing both strategies: Start with the bottoms-up approach and determine your company’s needs, then see how it compares to industry benchmarks, to make sure you’re not way off-track.
Option pool calculation
Carta’s Option Pool Calculator is a free resource for pre-seed and seed founders to model potential stock option pools and financing rounds. Use the calculator to compare your anticipated option pool to your round size and expected hires based on the seed round you have raised or expect to raise. You can also use the tool to see how your option pool and your round compares to the market, based on Carta data.
Tips for sizing your equity pool
Don’t rely on benchmarks alone
While benchmarks from other companies can be helpful in ensuring your option pool size isn’t too off-base, they can be dangerous to solely rely on. There’s a reason why there’s such a large range in the typical percentage founders set aside, and every company is different. Carta data from Q2 2022 shows that the middle half of companies saw equity dilution between 9% and 23% at the seed stage. Some companies are more cash-intensive than others, and some require more (or less) headcount.
Be realistic about your future hiring needs
One of the best ways to estimate how big your option pool should be is to figure out which positions you want to fill in the next 18 to 24 months (or whenever you want to raise your next round of financing) and how many stock options you’d need to attract these key hires.
When building out this hiring plan, keep in mind:
- You may need to offer early employees more equity since they’re taking a bigger risk joining a relatively unproven company.
- Option pools are typically increased at each fundraising round. Especially if you anticipate hiring C-suite level executives before your next fundraise, you’ll likely need to offer them a healthy percentage to incentivize them to join.
- The size of your equity pool will typically increase as your company’s valuation rises.
As a bonus, having a specific compensation plan can help remove the temptation to over-grant equity, as you’ll only have a specific amount of shares to work with.
Try not to reserve more than you plan to issue
Investors prefer larger option pools because that usually means your option pool will last longer, potentially reducing their dilution. They may pressure you into creating a larger pool than you need, citing industry benchmarks. This is where your hiring plan comes in—by thoughtfully mapping out your key hires over the next year or two and how much equity they need, you can show investors how you came to your number and may be able to negotiate a smaller, more realistic pool.
Diving into the pool at the deep end
When you’re ready to create an option pool, check out Carta’s sample stock option plan. This document can serve as a starting point for you and your legal representation to begin creating your company’s option plan, which is often one of the toughest parts of the process.
