Right-Sizing Your Post-Financing Option Pool

Recent data from Carta indicates that at the time of a Series Seed or Series A financing, a company will typically have an available option pool equal to 10%-20% of the company's fully-diluted capital immediately following the financing. 

The principal factor in determining the size of the pool should be the need to incentivize current and future employees at least until the time of the next financing (i.e. typically over the next 12-24 months). A company with a strong core team already in place should not need as large a pool as a company that expects to hire one or more C-level officers in the near future. If the pool seems large, your potential investor may have a different expectation than you do about the future growth of the company and you should raise this with the investor and try to come to a consensus as to how the size of the pool should be determined. The goal should be to establish a pool that is the right size to meet the company’s needs for the foreseeable future. 

When considering the size of the pool, it is also critical to understand if the new option pool (or any increase to an existing option pool) is being calculated on a pre- or post-money basis. Including it in the pre-money valuation results in an illusory increase in the valuation because it assumes shares reserved in the option pool will be issued prior to an exit. 

To use a simple example, a pre-money valuation of $5 million that includes a 20% option pool actually values the company's outstanding equity at $4 million and would therefore be more dilutive to existing stockholders than if the pre-money valuation were $4.5 million but did not include an option pool. This is sometimes referred to as the “Option Pool Shuffle.” There is nothing inherently wrong with including an option pool in the pre-money valuation, but it is important for founders to understand that doing so has real economic impact.