The pool on the term sheet is a rule of thumb. A hiring plan with grant bands, forfeitures and a horizon gives the number to negotiate with.
Size it bottom up: list the hires planned until the next round, give each a grant as a percentage of the post-money fully diluted capital, add refresh grants and a contingency, and subtract what forfeitures will recycle. For an illustrative Series A company planning 32 hires over 18 months, that comes to 8.03 per cent of the post-money. A 15 per cent pool topped up inside the pre-money instead costs the founders 5.79 points of ownership, 1,448,519 of value at the round price, for options nobody plans to grant before the Series B.
Worked in full in The Venture Capital Associate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Term sheets often arrive with a pool size already written in, 10, 15 or 20 per cent, and with the top-up counted inside the pre-money valuation, so that existing holders pay for it. The investor's number is a rule of thumb. The founder's answer, and the associate's job when building the cap table, is a hiring plan that shows what the company will actually grant before new money arrives and the pool is topped up again.
| Cap table before the round | Shares |
|---|---|
| Founders | 6,400,000 |
| Seed investors | 1,000,000 |
| Options already granted | 300,000 |
| Unallocated pool | 300,000 |
| Fully diluted | 8,000,000 |
| Role, next 18 months | Hires | Grant each, % of post-money | Total |
|---|---|---|---|
| VP Engineering | 1 | 1.25% | 1.25% |
| VP Sales | 1 | 1.00% | 1.00% |
| Senior engineers | 8 | 0.30% | 2.40% |
| Engineers | 10 | 0.12% | 1.20% |
| Account executives | 6 | 0.10% | 0.60% |
| Operations and G&A | 6 | 0.06% | 0.36% |
| Refresh grants to current staff | 1.00% | ||
| Total grants | 32 | 7.81% |
Pool needed = grants × (1 − forfeiture rate) + contingency
= 7.81% × (1 − 10%) + 1.00% = 7.03% + 1.00% = 8.03% of the post-money
Forfeitures recycle 0.78 points: unvested options of leavers return to the pool and are granted again. The contingency covers an unplanned senior hire.
In Excel: =SUMPRODUCT(B2:B8,C2:C8)*(1-B10)+B11 with hires in column B, grant percentages in column C, the forfeiture rate in B10 and the contingency in B11.
With the pool inside the pre-money, the holders other than the pool, 7,700,000 shares, must end up with 1 − 20% − pool of the company. That fixes the post-round share count, then the price, then everyone's percentage. The mechanics are those of the option pool shuffle; here they are run across the pool sizes on the table.
Post-round shares N = 7,700,000 ÷ (1 − 20% − 8.03%) = 10,698,754
Price = 25,000,000 ÷ 10,698,754 = 2.3367; pool = 859,003 shares, a top-up of 559,003
Effective pre-money = 2.3367 × 7,700,000 = 17,992,750; founders 6,400,000 ÷ 10,698,754 = 59.82%
| Pool, % post | Price per share | Pool top-up, shares | Effective pre-money | Founders | Founders' cost vs plan |
|---|---|---|---|---|---|
| 8.03% | 2.3367 | 559,003 | 17,992,750 | 59.82% | 0 |
| 10.00% | 2.2727 | 800,000 | 17,500,000 | 58.18% | 409,558 |
| 15.00% | 2.1104 | 1,476,923 | 16,250,000 | 54.03% | 1,448,519 |
| 20.00% | 1.9481 | 2,266,667 | 15,000,000 | 49.87% | 2,487,481 |
Each extra point of pool costs the founders 0.83 points of ownership, 207,792 at the round price. The excess pool in the 15 per cent row is worth 1,742,750; the founders bear 1,448,519 of it and the seed investors and current option holders the rest, in proportion to their shares. The new investor bears none of it, which is why the investor proposes the pool size.
Not nothing: unused options stay in the pool and can be granted later, and a large pool spares the company a second top-up if hiring goes faster than planned. But at this plan's pace a 20 per cent pool covers about 45 months of hiring, more than two financing rounds. The unallocated balance will count towards the Series B investor's own pool target, so the shares are not wasted; what changes is who pays. Created now, the surplus is paid for by the founders and seed holders alone. Created as a top-up at the Series B, it would be shared with the Series A investor, who will by then be an existing holder inside the pre-money.
Negotiating the percentage instead of the plan. "Fifteen is market" and "ten is enough" are both assertions; a hiring plan with grant bands, a forfeiture rate and a dated horizon is evidence, and investors often accept a pool that a credible plan supports. The second mistake is to forget refresh grants and the forfeiture recycle, which move the answer in opposite directions, here by 1.00 and 0.78 points. The third is to model grants in shares rather than as a percentage or a value: a share count set before the round price is known will be wrong after it. The longer path of founder ownership through the following rounds is in how much founders own after seed, Series A and Series B.
An option pool should be the sum of the grants the company will make before its next round, net of forfeitures, plus a contingency. Here that is 8.03 per cent; the 15 per cent written into the term sheet would cost the founders 1,448,519 at the round price. Bring the plan to the negotiation and the percentage follows from it. The reserve and ownership arithmetic the book asks associates to run is worked through in the free workbooks for this book.
Term sheets commonly ask for 10 to 20 per cent of the post-money, but the right size is what the company will grant before its next round. In the illustrative case, 32 hires and refresh grants over 18 months total 7.81 per cent; net of 10 per cent forfeitures and with a 1.00 per cent contingency, the pool needed is 8.03 per cent.
When the top-up sits inside the pre-money, the existing holders pay for it and the new investor does not. In the illustrative round, raising the pool from 8.03 to 15.00 per cent cuts the founders from 59.82 to 54.03 per cent of the company and lowers the price per share from 2.3367 to 2.1104. Each extra point of pool costs the founders 0.83 points.
Yes. Unvested options of employees who leave return to the pool and are granted again, so the pool needs less than the sum of planned grants. With a 10 per cent forfeiture assumption, 7.81 per cent of planned grants needs 7.03 per cent of pool before contingency, a saving of 0.78 points. Refresh grants for current staff work the other way, adding 1.00 point here.
This article is one calculation from The Venture Capital Associate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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