Pre-Seed Share Option Pool Sizing for Founders: Balancing Market Norms and Hiring Plans

How to Size an Employee Share Option Pool at Pre-Seed

Determining how much equity to set aside for an employee option pool is one of the first critical, and often confusing, decisions a pre-seed founder makes. An investor's term sheet may suggest a standard percentage, but that number directly impacts your ability to attract top-tier talent and the scale of your own dilution. Setting the pool too small can starve your startup of the equity needed for crucial early hires. Over-sizing it means giving away a larger piece of your company than necessary, a decision that is nearly impossible to reverse.

The key is to move beyond generic benchmarks and build a data-driven justification for a pool size that fits your specific hiring roadmap. This is not just a cap table entry; it is a strategic tool for building your team over the next 18 to 24 months. This guide provides a framework for balancing market expectations with your operational needs to arrive at a number that serves your company best.

What an Option Pool Is and Why It Dilutes Founders

An employee share option pool (ESOP), or simply an option pool, is a percentage of a company's total shares reserved for future issuance to employees, directors, and advisors. It is the currency you use for equity incentives, a fundamental component of early-stage compensation designed to align the team's interests with long-term company success. However, its creation directly impacts founder ownership through dilution.

This dilution typically occurs on a “pre-money” basis. This means the pool is created from the existing shares before an investor’s new capital comes into the company. By creating the pool first, the new shares reduce the ownership percentage of the existing shareholders, namely the founders. The investor’s ownership is then calculated based on the post-pool, pre-investment capitalization. In practice, we see that this ensures investors do not have their own stake diluted by the equity grants you will make to the team they are funding you to hire. For UK accounting treatment of these schemes, see the ICAEW help sheet on share options under FRS 102.

Consider this simplified example of how creating a 10% option pool impacts founder ownership before a new investment. Imagine a company with two founders who hold all 1,000,000 existing shares, giving them 100% ownership. To create an option pool that will represent 10% of the company *after* the new shares are issued, the company must issue 111,111 new shares for the pool. This brings the total fully diluted shares to 1,111,111. The founders' 1,000,000 shares now represent only 90% of the company, and this dilution happens before the investor contributes any capital.

The Sizing Process: How Much Equity Should You Set Aside?

Sizing your first option pool correctly is a balancing act between what the market expects and what your company actually needs. Failing to forecast your headcount growth can lead to a scramble for an expensive pool top-up in your next funding round, often on less favorable terms. A thoughtful approach involves a three-part process: understanding top-down market benchmarks, building a bottom-up hiring plan, and reconciling the two to arrive at a defensible final number.

The goal for an initial option pool is to cover all hiring needs for 18 to 24 months, lasting until your next funding round, such as a Series A. This ensures you have enough equity to execute your plan without needing to ask investors for a pool increase between rounds, which can be a dilutive and distracting process. For detailed planning on subsequent pool increases, see our guide on Series A Option Pool Expansion: Dilution Planning.

Part 1: The Top-Down Approach and Market Benchmarks

The top-down approach starts with understanding investor expectations and market data. This gives you the baseline for any negotiation. The standard investor request for an employee option pool at the pre-seed or seed stage is between 10% and 15%. This range has become a deeply entrenched market norm, and deviating from it requires a strong justification based on your specific business needs.

Recent data supports this range. According to Carta's Q4 2023 data, the median seed option pool is 12.5%. This reflects a shift in the market; what was once a 10% 'rule' is now often considered a floor, not a ceiling, for ambitious, talent-hungry startups. These benchmarks are not universal and vary based on geography and industry.

• Geographic Benchmarks: In the US market, a 10% to 15% pool is standard. In the UK and Europe, the figure has traditionally been closer to 10%. However, this gap is closing. A report from Index Ventures, 'Rewarding Talent', highlights that European benchmarks are trending towards US levels as the global competition for world-class talent intensifies.
• Industry Benchmarks: Your industry's talent needs are a major factor. Deep Tech and Biotech startups often require larger pools of 15% or more to attract senior, highly specialized PhDs and scientists whose expertise is rare and valuable. In contrast, SaaS or E-commerce companies tend to align with the 10% to 12.5% benchmark, as their early hiring plans may be less concentrated on a few exceptionally senior and expensive roles.

This top-down number is your starting point. It is the expectation you need to either meet or negotiate against with a clear, data-backed plan.

Part 2: The Bottom-Up Approach for Your Hiring Plan

While market data provides essential context, your option pool should be sized based on your operational reality. The bottom-up approach calculates the exact amount of equity you need to fund your hiring plan for the next 18 to 24 months. This process is how you avoid guessing and build a pool that truly serves your strategy.

Step 1: Map Your Hiring Plan

List every role you realistically plan to hire before your next funding round. Be specific and tie hiring to business milestones. For example, instead of "engineering help," plan for "two senior back-end engineers after closing the beta." For each role, determine the seniority level, as this is the primary driver of equity compensation.

Step 2: Budget Equity for Each Role

Assign an equity percentage to each planned hire based on current compensation data. Using reliable benchmarks from services like Pave, OpenComp, and Carta is crucial here to avoid under- or over-granting equity, which can harm morale or cause unnecessary dilution. Based on 2023 data from these sources, here are some typical seed-stage equity grant ranges:

• C-Suite (e.g., CTO, CRO): 1.5% - 3.0%
• VP-level (e.g., VP Engineering): 0.8% - 1.5%
• Senior Engineer or Product Manager: 0.4% - 0.8%
• First 10 Non-Founding Employees: 0.3% - 1.0%

Step 3: Sum the Grants and Add a Buffer

Total the equity percentages for all planned hires. Then, add a crucial buffer to account for unforeseen needs like opportunistic hires, performance-based refresh grants, or promotions. A buffer of 25% to 30% added to the sum of planned grants is standard. The reality for most pre-seed startups is more pragmatic: pre-seed stage companies can justify a larger buffer of approximately 30% to 40% due to the inherent uncertainty in their plans, while seed stage companies with more defined roadmaps typically use a 25% buffer.

Let's walk through an example for a pre-seed SaaS startup with an 18-month hiring plan that includes one VP of Engineering, two Senior Engineers, and one Product Manager.

1. Budget Grants: VP of Engineering (1.2%), Senior Engineer 1 (0.6%), Senior Engineer 2 (0.6%), and Product Manager (0.7%).
2. Sum the Grants: 1.2% + 0.6% + 0.6% + 0.7% = 3.1%.
3. Add a Pre-Seed Buffer (35%): 3.1% multiplied by 0.35 equals 1.085%.
4. Calculate Total Required Pool: 3.1% plus 1.085% equals 4.185%.

This bottom-up analysis shows a required pool of approximately 4.2%. This number is your operational truth.

Part 3: Reconciling the Two Approaches

The final step is to compare your top-down market number (e.g., 10-15%) with your bottom-up calculated need (e.g., 4.2%). This is where you form your negotiation strategy with investors.

Scenario 1: Your Bottom-Up Need is Less Than the Market Norm

In our example, the 4.2% need is significantly lower than the 10% investor expectation. This is a common scenario. In this case, you can argue for a smaller pool, for example, 7% or 8%. Use your hiring plan as evidence. The argument is simple: “Our detailed hiring plan for the next 18 months only requires 4.2%. We would prefer to create a pool of 7% to preserve equity and can increase it at the Series A if our hiring velocity exceeds expectations.” This protects founder equity from unnecessary dilution and demonstrates financial discipline to investors.

Scenario 2: Your Bottom-Up Need is More Than the Market Norm

If you are a Deep Tech company hiring three specialized PhDs, your bottom-up calculation might be 16%. In this case, your detailed hiring plan is your justification for requesting a larger-than-standard pool. You are not picking a number arbitrarily; you are showing your investors that you have a clear, specific plan for deploying that equity to build long-term value. This proactive, data-driven approach is far more compelling than simply asking for more because you feel you need it.

Governance and Managing Your Option Pool

Sizing your option pool is a strategic decision, not just a mathematical one. Your final number should be a deliberate reconciliation between market expectations and your specific, well-researched hiring plan. Once the pool is established, proper governance is essential for managing this valuable asset.

First, ensure every grant you make adheres to standard market terms. The most common structure is a 4-year vesting schedule with a 1-year cliff. This means an employee earns no equity for their first year of service. On their first anniversary, they earn 25% of their total grant. The remaining 75% is typically earned monthly or quarterly over the following three years. This structure protects the company from granting significant equity to an employee who leaves quickly.

Effective cap table management is crucial from day one. Using software or maintaining a meticulous spreadsheet to track all grants, vesting schedules, and the remaining pool balance is non-negotiable. This provides a clear view of your equity allocation and helps you plan for future needs. Founders in the US must also consider 409A valuations for setting the exercise price of options. If you use tax-advantaged EMI schemes in the UK, you must follow HMRC notification guidance carefully.

The goal is to build a powerful equity incentives program that attracts and retains the talent needed to reach your next milestone, all while managing founder dilution intelligently. To learn more about structuring your equity plans, continue at our Share Option Schemes hub.

Frequently Asked Questions

Q: What happens if I run out of options before the next funding round?
A: If your pool is depleted, you may need to ask your board and existing investors to approve a pool increase or "top-up." This is often dilutive to all existing shareholders, including founders, and can be a difficult negotiation. This is why careful upfront planning and including a buffer are so important.

Q: Should the option pool be created pre-money or post-money?
A: Option pools are almost always created on a pre-money basis. This means the dilution from the pool's creation affects the existing shareholders (founders) before the new investor's capital comes in. Investors insist on this to ensure their ownership percentage is not immediately diluted by employee grants.

Q: Do options for advisors and consultants come from the employee pool?
A: Yes, typically the ESOP is used for grants to employees, directors, consultants, and advisors. When building your bottom-up hiring plan, be sure to include any planned grants for advisors to ensure your pool is sized to cover all equity-based compensation needs for the next 18 to 24 months.

Q: How does an option pool refresh work at Series A?
A: At the Series A round, investors will typically require you to "refresh" or increase the option pool to ensure it is sufficiently funded for the next 18-24 months of hiring. This new pool is also typically created on a pre-money basis, diluting all prior shareholders, including the founders and seed investors.