Founders Should Push Back on 20 Percent Option Pool Requests

Founders raising early-stage rounds: push back on requests to expand the employee option pool too early.

This is one of the questions I'm getting most often as founders wrestle with the employee equity question in the age of AI.

Now, it's no surprise why VCs would push for a larger pool (before completing the round): it saves them from some dilution! But 20% (or even 15%) is almost always too large a reserve for a company at Seed.

Data from 9,000+ startups that raised rounds since 2021 says the median option pool after a Seed round sits at ~12%.

There are a few differences between Deep Tech and Software companies (a little surprising that the Deep Tech starts a little bigger but levels off more quickly than the Software pools do).

And of course there are caveats: option pool definition is only one term in a term sheet. The amount raised, the valuation, and the option pool are all part of the same multivariate equation. So there can be trade-offs within the deal that move the pool one way or another.

Especially with seed-stage startups growing headcount at a much slower pace than in prior years, the option pool should reflect the hiring needs of the next 2 years with a little wiggle room. You can replenish the pool at the next fundraise as needed (in fact most companies only utilize 60%-70% of the pool before the next fundraise).

AI companies are utilizing a little less of the pool (but some are compensating their initial 10 hires more generously...it's kind of all over the place).

To be perfectly clear - I still advocate for employees to be given generous equity grants, they're the bedrock of company success after all! But founders can do that while also minimizing their own dilution in the earliest stages.

Share with a founder considering the pool question!

#startups #founders #optionpool #employeeequity