Set your option pool size and structure before you start negotiating your term sheet, not after. That's the rule that keeps this checklist simple: order beats precision. Get the sequence right and the percentage mostly takes care of itself. Get it backwards and you're stuck trying to unwind a number that's already baked into a signed document.
I've watched this go wrong twice from the inside, once as the founder eating the dilution and once advising a friend through it. Both times the pool itself wasn't the real problem. The order was.
Why the order matters more than the size
An option pool set before your hiring plan exists gets sized on a guess, and guesses get padded high by whoever benefits from the padding, usually your lead investor, since a pre-money pool dilutes only you. An option pool set after you've mapped your next 18 to 24 months of hires gets sized on math you can defend in the room.
This is also why two founders raising the same round size can end up with wildly different dilution. One negotiated from a hiring plan. The other negotiated from a number their investor suggested and a vague sense that 15 to 20 percent "sounds standard."
The mistake: sizing the pool after the term sheet is signed
The most common failure isn't picking the wrong percentage. It's agreeing to a number verbally during term sheet talks, before your lawyer or board has seen an actual hiring plan, then discovering during document drafting that the pool is too small to cover your next three offers, or too large and diluting you for nothing.
By the time you notice, the number is already a term. Reopening it means reopening the whole negotiation, and most founders don't have the leverage or the appetite to do that three weeks from a close.
The six-step checklist to run before you close
- Build the hiring plan first, not the pool. List every role you expect to fill before your next round, with target start dates. No plan, no defensible number.
- Convert each role into an equity range, using current market data for your stage and function rather than a flat guess across the board. A first sales hire and a VP of engineering do not sit on the same grant curve.
- Add a 2 to 3 percent buffer, and stop there. This covers a surprise senior hire or a retention grant. Anything past that is padding, not planning.
- Decide pre-money or post-money before you negotiate, not after. Pre-money pool expansion dilutes only founders; post-money splits the dilution with new investors. Know which one you're agreeing to before the number gets written down.
- Get board approval on the specific number, not just a range. A board that approved "10 to 15 percent" hasn't actually approved anything you can act on.
- Lock your 409A valuation timing to the pool's creation date, not the round's close date. A pool created before the 409A is priced against stale numbers.
What it looks like when you skip a step
A founder I advised skipped step one. Her board approved a 15 percent pool during term sheet negotiation because it was "market," with no hiring plan behind it. Four months later she needed to make an offer to a first Head of Sales at a grant size that ate almost a third of the remaining pool. The board meeting to approve a top-up took six weeks, and the candidate had another offer on the table before it closed.
The fix wasn't a bigger pool. It was building the hiring plan she skipped the first time, which showed the original 15 percent was actually right in total, just allocated in the wrong order with no room reserved for the sales hire that mattered most.
The first move to make this week
Before your next board or investor conversation, build a single spreadsheet: every role you plan to hire before your next round, a target equity range for each from current market data, and a running total. That total, plus a small buffer, is your option pool number. Bring that into the room instead of a percentage someone else suggested.
Frequently asked questions
What is the correct order for setting up an option pool?
Build the hiring plan first, convert it into equity ranges, add a small buffer, decide pre-money or post-money, then get board approval on the exact number, not a range.
Should I create the option pool before or after signing the term sheet?
Before. Once the pool size is written into the term sheet, changing it means reopening the whole negotiation.
How big should a seed-stage option pool be?
Most land between 10 and 15 percent, though this should come from your hiring plan rather than a market average.
What happens if the option pool runs out before the next round?
You either ask the board for a top-up mid-round, which dilutes existing shareholders again, or you delay an offer, which risks losing the candidate.
Do I need a 409A valuation before or after creating the pool?
Time the 409A to the pool's creation date. A pool priced against an outdated 409A undervalues or overvalues every grant that follows.
Run this checklist in order and the size question mostly answers itself. Skip the order and no percentage will save you from redoing the math under pressure, mid-negotiation, with far less leverage than you have right now.