Plan your ESOP size, model equity allocations, and understand dilution impact for hiring
This calculator helps startup founders and HR teams determine the optimal size for their employee stock option pool (ESOP). It considers your company's capitalization, planned hires, and industry benchmarks to recommend an appropriate pool size that will support your growth plans without excessive dilution.
The calculator uses a fully diluted share count, which includes all outstanding common shares, preferred shares (on an as-converted basis), outstanding options and warrants, and the entire option pool including unallocated shares. This is the standard method used by investors and in equity negotiations because it provides the most accurate picture of ownership percentages.
When you specify your current capitalization, the calculator determines the pool size needed to accommodate your hiring plan. It models each planned hire's equity grant as a percentage of fully diluted shares, then sums these allocations to show how much of your pool will be consumed.
The equity allocation suggestions in this calculator are based on 2025 market data compiled from venture capital firms, compensation surveys, and startup compensation platforms. Benchmarks vary significantly by:
The calculator shows how creating or expanding an option pool affects ownership percentages for founders and existing shareholders. When a pool is created before a funding round (pre-money), the dilution comes from existing shareholders. When created after funding (post-money), new investors share in the dilution. Understanding this distinction is crucial for founders negotiating term sheets.
You can model specific planned hires to see exactly how much of your pool they will consume. The calculator shows whether your planned pool size will accommodate all anticipated hires, with a recommended buffer of 20-30% for unexpected needs, retention grants, and future hires beyond your current plan.
Before raising a round of funding, use this calculator to determine the pool size you'll need. Investors typically require a certain pool size as a condition of investment, and negotiating the right size can significantly impact founder dilution. A pool that's too large unnecessarily dilutes founders, while one that's too small will require expansion before the next round.
When reviewing term sheets, the option pool size is a key negotiating point. Use this calculator to model different pool sizes and understand their impact on your ownership. If an investor is requesting a 20% pool but your hiring plan only requires 12%, you have data to negotiate a smaller pool that benefits existing shareholders.
When planning your hiring for the next 12-24 months, use this calculator to ensure your pool can accommodate all planned grants. Model each hire with their expected equity grant to see if you'll need to expand your pool. Planning ahead helps avoid the dilution of an emergency pool expansion.
When recruiting senior executives, you need to offer competitive equity packages. Use this calculator to model executive grants and understand how they impact the pool and overall ownership structure. This helps set expectations with the board before making offers.
When presenting to your board about equity compensation strategy, this calculator provides clear visualizations of pool utilization, planned allocations, and projected runway. Boards need to approve pool expansions, so having this data ready facilitates informed decision-making.
Use this calculator to compare your planned equity grants against market benchmarks. If your grants are significantly below market, you may struggle to attract talent. If they're significantly above, you may be depleting your pool too quickly or giving away more equity than necessary.
Many companies conduct annual reviews of their equity compensation program. Use this calculator to assess pool utilization, model refresh grants for high performers, and plan pool expansion if needed for the coming year's hiring.
Fully diluted shares represent the total number of shares that would be outstanding if all convertible securities, options, and warrants were exercised. This includes issued common stock, preferred stock (on an as-converted basis), all outstanding options (vested and unvested), all outstanding warrants, and the entire option pool (both allocated and unallocated). Ownership percentages are almost always discussed on a fully diluted basis because it provides the most accurate picture of the cap table.
When creating or expanding an option pool, timing relative to a funding round matters significantly. Pre-money pool creation means the pool is included in the pre-money valuation, so dilution comes primarily from existing shareholders (founders and early investors). Post-money pool creation means the pool comes out of the post-money cap table, with dilution shared between existing shareholders and new investors. Most term sheets require pre-money pool creation, which is more favorable to investors.
ISOs are tax-advantaged options available only to employees that, if held for required periods, result in capital gains treatment rather than ordinary income. NSOs can be granted to employees, contractors, advisors, and board members but are taxed as ordinary income on the spread at exercise. Most employee grants are ISOs (up to the $100K annual limit), with any excess as NSOs.
IRC Section 409A requires that stock options be granted at fair market value to avoid adverse tax consequences. A 409A valuation is an independent appraisal of common stock value, typically performed by third-party valuation firms. Early-stage startups usually have 409A values 25-50% of the preferred stock price due to lack of liquidity and other discounts. Companies should update their 409A annually or after material events like funding rounds.
Stock option grants typically vest over time to incentivize retention. The standard schedule is 4-year vesting with a 1-year cliff: no shares vest until the first anniversary, then 25% vest, with the remainder vesting monthly over the next 36 months. Some companies use 3-year vesting or accelerated schedules for senior hires. Vesting upon termination and change of control are important terms to define in the option agreement.
The exercise period determines how long after leaving the company an employee can exercise vested options. Traditionally this was 90 days, but many modern startups offer extended exercise periods of 5-10 years to avoid forcing early exercises. Extended periods are more employee-friendly but can complicate cap table management.
As options are granted, the unallocated pool shrinks. Companies need to "refresh" or expand their pool when it becomes depleted. Pool expansion requires board and often shareholder approval, and dilutes all existing shareholders proportionally. Planning pool size to last 18-24 months between funding rounds is a common strategy.
A key concept for communicating with candidates is that percentage ownership alone doesn't convey value. A 0.1% stake in a $1B company is worth $1M, while a 1% stake in a $10M company is worth only $100K. When discussing equity offers, providing both percentage and potential value scenarios helps candidates understand the true compensation.
Founders often agree to larger option pools than necessary during fundraising, either due to investor pressure or lack of hiring plan clarity. A pool that's 5% larger than needed means founders give up 5% of the company unnecessarily. Before agreeing to pool size, create a detailed 18-24 month hiring plan with expected grants to determine actual needs. Add a 20-30% buffer for flexibility, but no more.
Conversely, an undersized pool requires expansion before the next funding round, diluting all shareholders including founders. This is particularly painful if expansion happens during a down round or flat round. Plan for realistic hiring scenarios including executive hires that may require 1-3% grants each.
Offering equity grants significantly below market rates makes it difficult to attract and retain talent. Top candidates will have competing offers with market-rate equity. Conversely, grants significantly above market deplete your pool faster and set internal equity expectations too high. Use current benchmark data for your stage and market.
A common mistake is building a pool sized for current team expansion without accounting for future executive hires. Bringing on a VP of Engineering or CFO at Series A might require 1-2% grants each. If your pool can't accommodate these hires, you'll need an early expansion that dilutes everyone.
High performers and key retention targets may need refresh grants before their initial grant fully vests. Many companies provide annual refresh grants to top performers. If your pool planning doesn't account for refreshes, you may be unable to retain key talent without pool expansion.
Many founders don't understand that pre-money pool creation means they bear the dilution, not new investors. When negotiating term sheets, the pool size and whether it's pre or post-money significantly impacts founder ownership. A 20% pre-money pool with a $20M post on a $80M pre-money valuation means founders are diluted twice.
Giving different equity amounts to employees with similar roles and tenure creates internal equity problems. When employees compare notes and discover inconsistencies, it damages morale and trust. Establish clear grant guidelines by role and level, and apply them consistently.
Failing to properly document option grants, 409A valuations, and board approvals can create serious problems during due diligence for acquisition or IPO. Maintain meticulous records of all equity grants, valuations, and approvals. Work with experienced legal counsel to ensure compliance.
Employees often don't understand the value of their equity or how it might grow. This leads to undervaluing their compensation package and potentially leaving for higher cash salaries elsewhere. Educate employees about equity mechanics, potential value scenarios, and the company's growth trajectory.
Before setting pool size, create a comprehensive 18-24 month hiring plan that includes specific roles, levels, and expected equity grants for each position. Include executive hires even if timing is uncertain. Add a 20-30% buffer for opportunistic hires and retention grants. This data-driven approach helps negotiate appropriate pool sizes with investors.
Establish equity bands for each role level (e.g., IC1 through IC5, Manager, Director, VP, C-level) that specify grant ranges. Apply these bands consistently to ensure internal equity. Document exceptions with clear rationale. Review and adjust bands annually as the company grows and market conditions change.
Size your pool to last until the next funding round plus 6 months of buffer. This avoids the dilution of mid-round pool expansions. If your Series A pool should last through Series B (typically 18-24 months), model your hiring plan for that entire period when negotiating pool size.
When investors request a certain pool size, counter with your detailed hiring plan and specific pool requirements. If they're requesting 20% but your plan shows 12% needed, propose 15% as a compromise with buffer. Data-driven negotiation is more effective than emotional arguments.
Traditional stock options aren't the only choice. Restricted Stock Units (RSUs) are simpler for employees to understand and don't require exercise decisions. Early exercise options allow employees to start their capital gains clock immediately. Profits Interests can work well for LLCs. Consider which structure best fits your company's situation.
Conduct annual reviews of equity utilization, remaining pool, and individual holdings. Identify high performers for refresh grants and retention packages. Compare your grants against updated market data. This proactive approach helps retain talent and avoid pool crises.
Many employees don't understand equity mechanics. Provide education on how options work, vesting schedules, exercise decisions, and tax implications. Help them understand potential value through scenario modeling. Informed employees value their equity more highly and make better exercise decisions.
Maintain comprehensive records of all option grants, 409A valuations, board approvals, and plan amendments. Use cap table management software to track grants and exercises. This documentation is essential for due diligence and compliance. Work with experienced legal counsel to ensure proper procedures.
As employees vest options, consider how they'll exercise and potentially gain liquidity before an exit. Extended exercise periods help departing employees. Secondary sale opportunities through tender offers can provide early liquidity. These programs improve employee satisfaction with equity compensation.
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Comprehensive answers to frequently asked questions about stock option pools, equity compensation, and startup equity planning.
Most startups create option pools of 10-20% of fully diluted shares. Seed-stage companies typically start with 10-15%, while Series A and later often have 15-20% pools. The appropriate size depends on your hiring plans, stage, and market. Very early pre-seed companies might have smaller pools (5-10%) that expand at later rounds. Companies in competitive hiring markets like AI/ML may need larger pools to attract talent.
Create a detailed 18-24 month hiring plan with expected equity grants for each role. If your total planned grants plus a 20-30% buffer equals less than 70% of your pool, it may be too large. If planned grants exceed 90% of your pool, it's too small and you'll likely need to expand before your next round. Compare your planned grants against market benchmarks to ensure you're not over or under-granting.
Expand your pool when the unallocated portion falls below what you'll need for 12 months of planned hiring. Many companies time expansion with funding rounds since it's a natural negotiation point. Avoid emergency expansions mid-round, which dilute shareholders at inopportune times. Plan ahead by sizing pools to last 18-24 months between funding rounds.
With pre-money pool creation, the pool is carved out before investor money comes in, so existing shareholders (primarily founders) bear the dilution. With post-money pool creation, the pool comes from the post-investment cap table, and new investors share in the dilution. Most term sheets require pre-money pools, which is more favorable to investors. This is a key negotiation point in financing rounds.
Early employee grants vary significantly by role and stage. At seed stage, an early engineer (first 5-10 hires) might receive 0.25-1.5%. An early product manager or designer might receive 0.25-1.0%. First VP-level hires often receive 1-3%. The first senior executive (C-level) might receive 2-5%. These percentages decrease as the company grows and becomes less risky. Use market benchmark data for your specific stage and geography.
Earlier stage companies offer larger percentages to compensate for higher risk. A senior engineer might receive 0.5-1.5% at seed, 0.15-0.5% at Series A, 0.05-0.15% at Series B, and 0.01-0.05% at Series C+. While percentages decrease, the dollar value may increase as valuations rise. Post-Series C, grants are often expressed in dollar value rather than percentage.
Yes, but typically less than employees. Advisors often receive 0.1-0.5% over a 2-year vesting period for meaningful ongoing involvement. Contractors may receive smaller grants if they're long-term and strategic. Use Non-Qualified Stock Options (NSOs) for non-employees since ISOs are only available to employees. Clearly document the advisory relationship and expected contributions.
Refresh grants are additional equity given to existing employees, typically high performers, to maintain retention incentives as initial grants vest. Many companies provide annual refresh grants to top 20-30% of performers. Grant sizes are typically 25-50% of a new-hire grant for that level. Starting refreshes around the 2-year mark helps before the cliff on the initial grant fully vests.
Fully diluted ownership includes all shares that would be outstanding if every convertible security was converted. This includes: issued common stock, preferred stock (on as-converted basis), all outstanding options (vested and unvested), outstanding warrants and convertible notes, and the entire option pool (even unallocated shares). This gives the most accurate ownership picture and is the standard measure in term sheets and negotiations.
A 409A valuation is an independent appraisal of your common stock's fair market value, required by IRS Section 409A. Options must be granted at or above this value to avoid adverse tax consequences. Early-stage companies typically have 409A values 25-50% of preferred stock price due to illiquidity discounts. Get a new 409A after material events (funding, major contracts) or at least annually. Using an outdated 409A can result in significant tax penalties for employees.
Incentive Stock Options (ISOs) offer tax advantages for employees: no tax at grant or exercise (though AMT may apply), and gains are taxed as capital gains if shares are held for required periods. Non-Qualified Stock Options (NSOs) are taxed as ordinary income on the spread at exercise. ISOs can only be granted to employees and are subject to a $100K annual limit on exercisable value. Any excess is treated as NSOs. NSOs can be granted to anyone.
The standard schedule is 4-year vesting with a 1-year cliff: nothing vests until the first anniversary (protecting against quick departures), then 25% vests, with remaining shares vesting monthly over 36 months. Some companies use 3-year vesting for competitive offers. Executive hires sometimes negotiate accelerated vesting or no cliff. Consider acceleration provisions for change of control events.
When an option pool is created before a funding round (pre-money), founders bear the dilution. For example, with a $10M pre-money valuation, $10M investment, and 15% pre-money pool: founders are diluted by both the pool (15%) AND investor stake (50% of post-money). Investors only see dilution from actual grants over time. A larger pool means more founder dilution. This is why pool size negotiation is crucial.
Right-size your pool based on actual hiring plans, not investor demands. Use market benchmark data to avoid over-granting. Consider higher cash compensation to offset lower equity for later-stage hires. Time pool expansions strategically around funding events. Negotiate post-money pool creation when possible. Remember that appropriate dilution for talented employees creates value exceeding the dilution cost.
Unallocated pool shares typically disappear in an acquisition - they don't convert to acquisition consideration. This is why investors prefer larger pools (unused shares effectively return to common shareholders including themselves). Some deals allocate unused pool as retention bonuses for key employees. The treatment should be clearly specified in merger documents.
Help employees understand their potential value with multiple scenarios: current value (shares x current 409A price minus exercise cost), future value at various company valuations, and percentage ownership on fully diluted basis. Explain vesting, exercise decisions, and tax implications. Provide context about the company's growth trajectory and typical exit timelines. Transparent communication helps employees value their equity appropriately.
The exercise window is how long after leaving a company an employee can exercise vested options. Traditionally 90 days, this short window forces employees to exercise (and pay taxes) quickly or forfeit options. Many modern companies offer extended windows of 5-10 years, allowing employees to wait for liquidity events. Extended windows are employee-friendly but can complicate cap table management.
Early exercise allows employees to start their capital gains holding period immediately, potentially qualifying gains for long-term rates sooner. It's most beneficial when the 409A price is low (reducing exercise cost and tax) and the employee believes in the company's success. However, early exercise means paying for shares that might never have value. Employees should file an 83(b) election within 30 days of early exercise. This is a significant financial decision requiring careful consideration.
Essential documents include: the Stock Option Plan (approved by board and shareholders), individual Option Agreements for each grant, Exercise Agreements for option exercises, current 409A valuation, board resolutions approving grants, and securities law filings if required. Work with experienced startup counsel to ensure proper documentation and compliance.
At minimum, update annually. More frequent updates are needed after material events: funding rounds, significant revenue changes, M&A discussions, or major contract wins/losses. A 409A more than 12 months old, or one that predates material events, may not provide safe harbor for option pricing. Budget for 2-4 valuations per year during active periods.
Option grants are securities transactions subject to federal and state laws. Common exemptions include Rule 701 (for private companies up to certain thresholds), Regulation D, and California Section 25102(o). Requirements vary by state and company size. Larger option programs may need securities registration. Work with legal counsel to ensure compliance and provide required disclosures to option holders.
Need help structuring your stock option plan, negotiating pool size with investors, or setting up equity compensation? I offer consultations for startups on equity and corporate matters.