Stock Option Pool Planning

OPTION POOL FUNDAMENTALS

Understanding Option Pools

OPTION POOL FUNDAMENTALS

WHAT IS AN OPTION POOL?
☐ Reserved shares for employee equity
☐ Used for grants to employees, advisors
☐ Part of fully diluted share count
☐ Typically 10-20% of company

WHY OPTION POOLS MATTER:
☐ Attract and retain talent
☐ Align employee incentives
☐ Expected by investors
☐ Dilutes all shareholders proportionally

POOL LIFECYCLE:
1. Initial pool created (founding)
2. Grants made from pool
3. Pool depletes over time
4. Pool topped up (usually at fundraising)
5. Cycle continues

KEY TERMS:
Authorized: Total shares approved for pool
Granted: Shares allocated to individuals
Exercised: Options converted to shares
Available: Remaining unallocated shares
Forfeited: Returned to pool (employee left)

POOL MECHANICS:
Unallocated pool = dilution to all
Allocated (unvested) = conditional dilution
Allocated (vested) = real dilution
Exercised = actual shares outstanding

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POOL SIZING

How Much Pool to Create

POOL SIZING FRAMEWORK

SIZING FACTORS:

1. HIRING PLAN
How many people do you need to hire?
By level, what equity grants needed?
Sum of grants = pool needed

2. REFRESH BUDGET
Annual refresh grants for retention
Typically 0.5-1% of company annually
Factor into pool calculation

3. TIME HORIZON
How long until next fundraise?
Pool should last until then
Plus 6-month buffer minimum

4. INVESTOR EXPECTATIONS
Investors typically expect 10-15%+ pool
Post-Series A, 15-20% common
Pool created pre-money (dilutes founders)

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SIZING CALCULATION:

Step 1: Hiring Plan Grants
| Level | Grant Range | # Hires | Midpoint | Total |
|-------|-------------|---------|----------|-------|
| CEO | 5-10% | - | - | - |
| C-level | 1-3% | __ | 2% | ___% |
| VP | 0.25-1% | __ | 0.5% | ___% |
| Director | 0.1-0.25% | __ | 0.15% | ___% |
| Sr Eng/PM | 0.05-0.1% | __ | 0.075% | ___% |
| Mid-level | 0.025-0.05% | __ | 0.035% | ___% |
| Junior | 0.01-0.025% | __ | 0.015% | ___% |
| **TOTAL** | | | | ___% |

Step 2: Refresh Budget
Annual refresh: ___% × ___ years = ___%

Step 3: Buffer
Unexpected needs: 1-2% = ___%

TOTAL POOL NEEDED: ___%
Currently available: ___%
GAP (Top-up needed): ___%

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POOL MANAGEMENT

Ongoing Pool Management

OPTION POOL MANAGEMENT

TRACKING:

| Metric | Amount | % of FD |
|--------|--------|---------|
| Pool authorized | _____ shares | ___% |
| Granted (outstanding) | _____ shares | ___% |
| Exercised | _____ shares | ___% |
| Cancelled/forfeited | _____ shares | ___% |
| Available | _____ shares | ___% |

MONTHLY REVIEW:
☐ Update pool utilization
☐ Review upcoming grants
☐ Check hiring plan alignment
☐ Forecast runway

GRANT PROCESS:
1. HR/manager recommends grant
2. CEO approves level/amount
3. Board approves (or delegated authority)
4. Legal documents prepared
5. Grant entered in cap table tool
6. Employee signs option agreement

APPROVAL THRESHOLDS:
☐ CEO authority: Grants within bands
☐ Board consent: Executive grants
☐ Full board approval: C-level, large grants

POOL RUNWAY MONITORING:
| Period | Grants Planned | Pool After |
|--------|----------------|------------|
| This Q | ___% | ___% |
| Next Q | ___% | ___% |
| Q+2 | ___% | ___% |
| Q+3 | ___% | ___% |

Warning: If pool drops below 5%, plan top-up

Grant Level Benchmarks

EQUITY GRANT BENCHMARKS

BY LEVEL (% of Fully Diluted):

EARLY STAGE (Seed - Series A):
| Level | Early Join | Later Join |
|-------|------------|------------|
| C-level (non-CEO) | 1-3% | 0.5-2% |
| VP | 0.5-1.5% | 0.25-0.75% |
| Director | 0.2-0.5% | 0.1-0.3% |
| Senior IC | 0.1-0.25% | 0.05-0.15% |
| IC | 0.05-0.15% | 0.02-0.08% |

GROWTH STAGE (Series B+):
| Level | Typical Range |
|-------|---------------|
| C-level (non-CEO) | 0.5-1.5% |
| VP | 0.15-0.5% |
| Director | 0.05-0.15% |
| Senior IC | 0.02-0.08% |
| IC | 0.01-0.04% |

FACTORS AFFECTING GRANT SIZE:
☐ Company stage (earlier = larger)
☐ Employee seniority
☐ Criticality of role
☐ Candidate negotiation
☐ Equity vs. cash trade-off
☐ Market competitiveness
☐ Internal equity

NOTE: Ranges vary significantly by:
- Location (SF vs. other markets)
- Industry
- Company valuation
- Funding status

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FUNDRAISING PLANNING

Pool Top-Up at Fundraising

POOL TOP-UP AT FUNDRAISING

HOW IT WORKS:
1. Investor negotiates pool size (post-money)
2. Company creates new shares for pool
3. Pool increase dilutes existing shareholders
4. New investment comes in at diluted share count
5. Investors buy at post-dilution price

Example:
Pre-money cap table: 10M shares
Target pool: 15% post-money
Post-money shares: 10M / (100% - 15% - 20% new investor)
= 10M / 65% = 15.4M shares
Pool = 15.4M × 15% = 2.3M shares

NEGOTIATION POINTS:
☐ Pool size % (investors want larger)
☐ Pre vs. post-money pool creation
☐ What counts as "available"
☐ Inclusion of new hires committed

TYPICAL POOL BY ROUND:
| Round | Pool % Target | Notes |
|-------|---------------|-------|
| Seed | 10-15% | Initial pool |
| Series A | 12-18% | Top-up if needed |
| Series B | 10-15% | Usually top-up |
| Series C+ | 10-12% | Maintenance |

FOUNDER DILUTION:
☐ Pool created pre-money
☐ Founders bear pool dilution
☐ Important to model in term sheet review
☐ Negotiate pool size carefully

Pool Scenario Modeling

POOL SCENARIO MODEL

Scenario: Series A Fundraising

CURRENT STATE:
Shares outstanding: 10,000,000
Current pool (available): 500,000 (5%)
Current pool (allocated): 1,000,000 (10%)

PROPOSED ROUND:
Investment: $10M
Pre-money valuation: $40M
Target post-money pool: 15%

CALCULATION:
Post-money valuation: $50M
Post-money shares: Need to solve

Let X = post-money shares
Pool shares = 15% × X = 0.15X
Existing + pool = X - investor shares
10M + 1M + pool = X × (1 - 20%)
11M + 0.15X = 0.8X
11M = 0.65X
X = 16.92M shares

Pool shares = 0.15 × 16.92M = 2.54M
Available needed = 2.54M - 1M allocated = 1.54M
Current available = 0.5M
NEW SHARES FOR POOL = 1.04M

IMPACT:
| Shareholder | Before | After | Dilution |
|-------------|--------|-------|----------|
| Founders | 60% | 47.1% | -12.9% |
| Employees | 10% | 7.9% | -2.1% |
| Seed investors | 15% | 11.8% | -3.2% |
| Series A | 0% | 20% | - |
| Pool (available) | 5% | 9.1% | - |
| Pool (allocated) | 10% | 4.1% | - |

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