How Many Shares to Place into an Option Pool

After you’ve authorized shares, and after you’ve granted some to yourself you need to decide how much to contribute to the option pool. There is no count the norm is 10%-20% of the company. This means that if you issued 100% of the options in the option pool at that time, those granted those options would own 20% of the company.

20% is probably a good percentage early on, unless you have the cash to pay your early executives more cash. You need to use equity to keep your burn rate low. As you move forward and give more of the company to early employees, each subsequent round you may set aside less.

Yes, you heard that right. Each time you do a funding round you will set aside a certain percentage of the company into the option pool before the next batch of investors come in. If you don’t set aside enough, then the investors might feel you aren’t setting yourself up to attract good and motivated talent and it can actually kill the deal. The VC might pull out thinking you’re not willing to sacrifice for the company. As companies get bigger, they need more than a motivated CEO. Remember, in the share classes article we discuss how to keep control even when you give up economic ownership to investors and employees.

Early on 20% for each round might work, then 15% then 10%, then maybe 5% for some key hires as you head into later series raises. Eventually you won’t be handing out equity in any real capacity.

The option pool is deemed granted, in that any calculation that uses fully diluted (which is most finance calculations) you include the options set aside in the options pool in the total number of outstanding shares even if ungranted. That gives a better picture for modeling since the expectation is that those options will be granted so Let’s account for them now. The exception is an actual transaction. Since those options have no beneficial owners, you would not allocate them any proceeds from the transaction.

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