Most startups can't pay big-company salaries, so they offer ownership instead. The employee option pool is the slice of the company set aside for that purpose. Getting it right affects who you can hire, how much founders end up owning and how motivated your team stays through the hard years. Getting it wrong can cost founders several percentage points of the company or leave you unable to make a key hire.
An employee option pool is the block of shares a startup reserves for employee stock options. A typical startup option pool size is 10% to 15% at seed and Series A, sized to the hiring plan until the next round. The usual stock options vesting schedule is four years with a one-year cliff. Plan your ESOP early, because investors often require the pool to be created before their money comes in.
This guide explains how option pools work, how big they should be, how investors negotiate them, and how to decide what to grant each person. Tax rules for employee equity differ a lot by country and change over time, so treat the tax points here as prompts for a conversation with an accountant, not as advice.
What an option pool is
An option pool (sometimes called an ESOP, or employee stock option plan) is a block of shares the company reserves for future grants to employees, advisers and sometimes directors. The pool itself isn't owned by anyone. When you grant someone options, those options come out of the pool.
A stock option gives the holder the right to buy a set number of shares at a fixed price, called the strike price or exercise price, usually set at the fair market value of the shares on the day of the grant. If the company becomes more valuable, the employee can buy at the old price and benefit from the difference.
On a cap table, the pool usually appears in two parts: options already granted, and options still available. Both count towards fully diluted ownership.
How big should the pool be?
There's no single right number, but common ranges look like this:
| Stage | Typical unallocated pool (post-money) |
|---|---|
| Pre-seed | Often 5% to 10%, sometimes created later |
| Seed | Around 10% to 15% |
| Series A | Around 10% to 15%, often topped up |
| Series B and later | Smaller top-ups as needed, often 5% to 10% |
The best way to size it isn't to pick a percentage but to build a hiring plan. List the people you expect to hire before your next funding round, estimate a grant for each, add a buffer for refreshes and surprises, and total it up. That number is your pool. It also gives you a strong argument when investors ask for a bigger pool than you need.
The option pool shuffle
Here's the part that catches many founders out. When you raise a priced round, investors usually ask for the pool to be created or enlarged before their money comes in, and they count it in the pre-money valuation. That means the cost of the new pool falls entirely on existing shareholders, mainly founders, not on the new investors.
Illustrative example. A company raises $3M at a $12M pre-money valuation, $15M post-money. The investor asks for a 10% unallocated pool post-money, created before the round. There's no pool today.
After the round: investor 20%, pool 10%, founders and existing holders 70%.
Without the pool requirement, founders would have kept 80%. The pool cost them ten points. In effect, the "real" pre-money valuation for existing holders was $10.5M, not $12M.
Our guide to post-money valuation works through the full calculation. The practical lesson: negotiate the pool size using your hiring plan, and understand that a bigger pool is the same as a lower valuation.
Vesting: how employees earn their options
Options don't belong to the employee on day one. They vest over time. The most common schedule is:
- Four years total,
- with a one-year cliff: nothing vests in the first 12 months; after a year, 25% vests at once,
- then monthly vesting of the remainder over the next three years.
The cliff protects the company if someone leaves early or doesn't work out. Monthly vesting after that keeps the incentive steady.
Variations you'll see
- Back-weighted vesting: more vests in later years, rewarding people who stay.
- Performance vesting: some options vest when milestones are hit. Useful for specific roles, but it complicates administration.
- Acceleration: vesting speeds up on certain events. "Single trigger" means on a sale. "Double trigger" means on a sale and the employee losing their job or role, which is more common and more acceptable to buyers.
Exercise windows
When an employee leaves, they usually have a limited time to exercise vested options, often 90 days. That can force people to find cash to buy shares, and in some countries pay tax, in a company they're leaving. Some startups extend the window to several years as an employee-friendly policy. Weigh it against the dilution of keeping more options outstanding.
How much to grant each person
Grants depend on role, seniority, stage and the cash salary you can pay. A few principles:
- Earlier hires get more. The first engineers and first salespeople take more risk and usually get meaningfully larger grants than people who join after Series B.
- Grant in value, not just percentage. As the company grows, percentages shrink. Many companies think about grants as a dollar value at the current share price, adjusted for stage.
- Use bands. Set ranges for each level so grants are consistent and defensible.
- Trade cash for equity transparently. Some candidates prefer more salary, others more equity. Offering a choice within a band works well.
- Executives are a separate conversation. Senior hires such as a VP Sales or CFO often receive larger, negotiated grants.
Refresh grants
After a few years, an early employee's grant may be mostly vested. Without new grants, their incentive to stay fades. Refresh grants are additional options given to strong performers, often annually or when a large portion of the original grant has vested. Plan for them in your pool sizing.
Refreshes matter especially after a down round, when existing options may be underwater.
Canada-specific points to check
If you're building in Canada, ask your accountant and lawyer about:
- CCPC treatment. Options granted by Canadian-controlled private corporations have historically received favourable tax treatment, including deferral of the taxable benefit until the shares are sold rather than when options are exercised, subject to conditions.
- The stock option deduction that can reduce the taxable benefit in qualifying cases.
- Changes in CCPC status. Taking money from non-Canadian investors can change your status, which affects option taxation as well as SR&ED credits.
- Provincial securities exemptions for issuing options to employees.
- US employees of a Canadian company, who need plans that work under US tax rules too.
Rules here have been the subject of federal changes in recent years, so get current advice before setting up or changing a plan.
Running the pool day to day
- Board approval: every grant should be approved by the board, with a valuation supporting the strike price.
- Grant agreements: each employee signs an agreement setting out the terms.
- Cap table software: once you have more than a handful of grants, tracking vesting and exercises in a spreadsheet becomes error-prone.
- Regular valuations: strike prices need to reflect fair market value, which usually means periodic independent valuations, especially after funding rounds.
- Clean records for diligence: missing approvals or unsigned grant agreements are among the most common problems in due diligence.
Common mistakes
- Accepting a pool much bigger than your hiring plan needs.
- Promising percentages in offer letters without board approval.
- Granting too much too early and running out before key hires.
- No refresh plan, so long-tenured employees lose their incentive.
- Poor communication, leaving employees unsure what their options mean.
- Letting paperwork lag behind promises.
A simple sizing exercise
Suppose you plan eight hires before your next round: two senior engineers, two engineers, a head of sales, two account executives and a marketing lead. Estimate a grant range for each based on your bands, add them up, then add a buffer of 15% to 25% for refreshes and unexpected hires. If the total comes to 7% of the company, ask investors for a 7% to 8% unallocated pool rather than accepting a default 15%. The difference can be worth several points of founder ownership.
Frequently asked questions
What is a typical option pool size?
Commonly 10% to 15% of fully diluted shares at seed and Series A, though the right size depends on your hiring plan until the next round.
What is the option pool shuffle?
The practice of creating or enlarging the option pool before a funding round and counting it in the pre-money valuation, so existing shareholders bear the dilution rather than new investors.
What is a one-year cliff?
A vesting rule where no options vest during the first year of employment. After one year, a quarter of the grant vests at once, and the rest typically vests monthly.
Do advisers get options from the pool?
Usually yes. Adviser grants are typically small and vest over one to two years.
What happens to unvested options when a company is sold?
It depends on the plan and the deal. They may be assumed by the buyer, converted, accelerated or cancelled, according to the plan terms and any acceleration provisions.