When gearing up for a funding round, startup founders can often get lost in the world of valuations, investment documents, pitch deck preparation, and how to find the best investors.
Whilst all of these factors are influential in securing an investment that lasts, there is another factor that can often be overlooked: setting up an option pool.
This can boost your chances of securing investment and recruiting top talent, and ensure you have a solid foundation for growth.
An option pool is a set portion of a company’s shares set aside to be granted to employees and key contributors. This is particularly beneficial to early-stage startups, by allowing them to attract top talent by offering equity as part of their compensation, without having to deplete cash reserves.
An option scheme, such as EMI, is a specially designed scheme that offers recipients the promise of shares, should the requirements set by the company be satisfied.
This deferred structure is a way to tie employees into the success of the company, as their options become shares only once specific criteria (such as employment time or hitting certain milestones) is met.
By defining your option pool early, you can decide how much equity you allocate to future hires. Waiting until further down the line, the voices of stakeholders and investors may influence your choice and reduce your flexibility in this decision.
If an option pool is set up pre-investment, the dilution primarily affects the founder’s stake. This can therefore be predicted and accounted for in your ownership structure.
However, if an option pool is set up post-investment, the dilution affects all shareholders, including investors. Most investors prefer the option pool to be set up pre-investment, as they don’t want to buy into a company only to be immediately diluted.
Establishing the pool early ensures transparency and aligns expectations with investors, making your startup more attractive.
A pre-existing option pool is a clear sign to investors that you have carefully thought out your employee retention strategy, which boosts your reliability and credibility surrounding your forecasts and projections.
A clear, well-thought out option pool signals long-term planning, and ensures your cap table stays investor friendly.
Key employees want a stake in the company’s success. Having a clear option scheme is a great way to onboard great employees without having to break the bank.
Especially in a competitive job market, employee perks are crucial in onboarding the best people, and setting up an option scheme is key in showing you value long-term success incentives.
A well-structured and clean cap table is key for smooth negotiations with investors. A pre-set option pool enhances clarity, ensuring investors can quickly assess equity allocation and make informed decisions. This makes your company more investor-ready, and the increased transparency reduces the risk of complications during the investor onboarding process.
This is an extremely common question founders have, and will often look to other businesses to establish a framework for their own equity structure. However, what works for one company may not be the best fit for your own.
Typically, employee option pools will sit at around 10-20% of a company’s total equity, though the exact percentage will vary depending on your hiring strategy, industry norms, and expectations of investors.
Within the pool, equity can be distributed strategically, allocating different percentages to employees based on their seniority, time of joining, and level of contribution to the company.
Your option pool allows you to ensure key hires receive meaningful stakes in the company, without over-diluting your future hiring capacity. You can use Vestd’s equity sharing calculator to model scenarios and help you establish the optimum pool size for your business.
Creating an option pool doesn’t have to be complicated. With Vestd, you can set up and tailor your own option scheme, distribute shares at the click of a button, and manage your cap table digitally.
Whether you’re preparing for an investment round or growing your team, our digital platform streamlines the process, so you can stay in control of your business without admin headaches.
Thinking about setting up an option pool ahead of your next funding round? Book a call today to get started.