Basics of Employee Equity Plans
Granting equity to your employees can be confusing. Here are some guidelines on how to set up an equity pool and grant equity to your early hires.
What is an option pool?
An option pool is shares set aside for employees. Option pools are typically created when you incorporate a business.
How big should my option pool be?
The standard advice is to set aside 10% of your total shares into an option pool. We think this standard advice is incorrect because it doesn't fit all companies. If you set aside too many shares, founders may take on unnecessary dilution. If you set aside too few shares, founders may not have enough equity to give employees and need to do complicated paperwork to increase their option pool size.
The goal with the option pool is to set aside enough shares to hire the people you need before your next round. Ask these questions:
- Who do you need to hire?
- How much equity do you need to grant them?
Work backgrounds to determine how large your equity pool should be. For example, if you raised a large seed and need to hire 20 engineers to build the prototype, you may need more than a 10% equity pool. If you do not need to hire anyone because you have a large team of co-founders, you will need a smaller option pool.
Why is an unused option pool bad for founders?
Unused shares in the option pool before your next equity round means more dilution for you and your co-founders if you're raising on post-money SAFEs (common for most startups).
- Post-money safe: unused option pool affects founders and NOT seed investors.
- Pre-money safe: unused option pool dilutes founders AND seed investors. There is no difference between founder ownership with an excess option pool.
What is the slight difference in dilution mean? That depends on how much your company will be worth in the future.
How do I set up my option pool?
Creating an option pool means filling out paperwork to set aside a portion of your shares. You can get these documents through your lawyer or Pulley. We do not recommend googling and using random docs online to create your option pool - there are too many poorly written documents online.
You can record your option pool on Pulley and start issuing options. Pulley gives you option templates, handles the signing, and the subsequent board issuance.
What happens to your option pool at series A?
The size of your initial option pool will increase over time. As you hire great people, you will give them options and have fewer options remaining in the pool. You top off your option pool at each round of funding.The increase in the size of the option pool is a term negotiated at your series A, B, C, and each subsequent funding round. The option pool increase does not dilute the series A investor, and only dilutes existing stakeholders (yourself, employees, existing investors). This increase affects all existing stakeholders equally.
Confused? Equity can be complicated and not related to your primary role of growing your business. We can help you create your option plan and issue options to hire & grow.