Option Pool Size: How Big Should It Be, and Why the Pre-Money Trick Doesn't Work the Same Way Outside the US

Most startups reserve 10-15% of fully diluted shares for an employee option pool between seed and Series A, but the right number comes from your hiring plan, not that range. The bigger issue is who pays for it: investors typically require the pool sized as a percentage of the post-money cap table but created before their money comes in, so the dilution lands entirely on founders and existing shareholders — never on the new investor. Outside the US, a second wrinkle shows up: if your jurisdiction pushes you toward phantom shares or SARs instead of real options, "pool size" stops meaning the same thing on your cap table.

Search "option pool size" and almost everything that ranks is written from a Delaware-C-corp, 409A-adjacent vantage point — Carta, Pulley, US VC blogs. The math they explain is correct. What they don't cover is what happens when your ESOP isn't made of real shares at all, which is the normal case for a UAE mainland LLC, and increasingly common across MENA, Africa, and South Asia as founders reach for cash-settled instruments their entity type actually permits.

The number everyone quotes, and why it's the wrong starting point

10%, 15%, 20% — pick a range and you'll find a source citing it. Seedcamp's long-standing recommendation for European seed rounds is 10%. Y Combinator has pushed closer to 20% for slightly later hires. None of these numbers know anything about your company.

The number that matters is bottom-up: list every role you plan to hire in the next 18-24 months, price each one in equity based on seniority (a first engineering hire commands more than employee #15), and sum it. That total, plus a modest buffer for a hire you didn't plan, is your pool. If that comes out to 8%, don't pad it to 15% because a blog post said so. If it comes out to 18%, don't shrink it to fit a benchmark and end up back at your investors mid-round asking to expand it — which dilutes everyone, including you, a second time.

The reason bottom-up matters more outside the US specifically: your hiring plan is denominated in your local salary market, not Silicon Valley's. A Series A in Cairo or Karachi hiring senior engineers at a fraction of Bay Area cash comp will lean harder on equity to close the gap, which pushes the real number the plan generates higher than a borrowed 10-15% range assumes.

The option pool shuffle, with the actual math

Here's the mechanic investors use, and it's worth seeing in numbers once so you never miss it again.

A term sheet says: $5M pre-money valuation, $1.5M raised, 15% post-money option pool. It sounds like the pool is 15% of a $6.5M company. In practice, the standard structure creates that 15% pool before the investor's money is added — meaning the pool is carved out of the pre-money shares, which are entirely founder- and existing-shareholder-owned. The investor still gets exactly 15% × ($1.5M / $6.5M) of the company for their money. Your effective pre-money valuation, after the pool comes out of your side of the table, is closer to $4.25M than $5M.

This isn't a scam — it's a standard, disclosed term, and most experienced investors will explain it if you ask. But founders who don't know to ask sign it without noticing the number that matters isn't the headline valuation. Two things you can actually negotiate:

• Pool size, not just percentage — a smaller, correctly bottom-up-sized pool shrinks the dilution regardless of whether it's pre- or post-money.
• Timing — asking for the pool top-up to happen post-money (after the new investor's shares are issued) means the new investor shares the dilution instead of dodging it. Not every investor will agree, but it's a normal ask, not an aggressive one.

Where the whole model breaks: phantom shares don't sit in the pool

Everything above assumes the "option pool" is made of real, issuable shares — the standard case for a Delaware C-corp, a UK Ltd using EMI options, or most Indian private limited companies. It is not the case for every company reading this.

As covered in Phantom Shares vs Stock Options, a UAE mainland LLC generally has no clean legal mechanism for issuing real options to employees — onshore commercial law wasn't built for it. The standard workaround is phantom shares or cash-settled SARs: contractual promises that track share value and pay out in cash on a trigger event, with no shares ever changing hands.

That changes what "option pool size" even measures. A real option pool is authorized share capital sitting on your cap table today, diluting existing holders the moment it's created. A phantom pool is a set of future cash liabilities that don't touch the cap table until they're triggered — usually an exit or a defined liquidity event. If you're modeling a UAE mainland company's dilution the way a US guide tells you to, you'll either double-count phantom grants as share dilution that isn't happening, or ignore them entirely and get blindsided by the cash payout obligation years later. Track the two pools — real and phantom — as separate line items, because a spreadsheet or a US-centric cap table tool that only understands one instrument type will quietly merge them into a number that's wrong either way.

Saudi Arabia sits in between: its current Companies Law now explicitly permits real employee incentive share schemes, so a Saudi entity has more room to issue actual options than a UAE mainland LLC does — but the drafting still has to be jurisdiction-correct, and plenty of Saudi startups still default to phantom instruments for simplicity or because their cap table already has enough complexity from SAFEs and convertibles.

Sizing the pool without guessing twice

A practical order of operations, whether your instrument ends up being real options or phantom shares:

1. Build the hiring plan first. Roles, seniority, timeline to your next round. This is a business decision, not a legal one, and it's the input everything else depends on.
2. Price each role in equity, using your current fully diluted share count, not a percentage pulled from a benchmark.
3. Confirm what instrument your jurisdiction actually supports before you finalize the number — this is the one-time decision worth a lawyer's time, as covered in ESOP Without Lawyers. Everything after that — individual grant agreements — is repeatable paperwork, not a fresh legal question each time.
4. Model the dilution both ways — pre-money and post-money — before you accept a term sheet's pool language, so the number you're negotiating against is the real one.
5. Re-check the pool before every new round. Unused shares don't expire or return to founders; they carry forward, and a new investor will often want the pool topped back up to a target percentage before their money goes in — which reopens the pre-money question all over again.

A cap table tool that models scenario planning across SAFEs, convertibles, and both real and phantom instrument types — rather than just a share count — is what makes step 4 something you can actually see before you sign, instead of discovering after the round closes.

Govy's ESOP module supports stock options, RSUs, SARs, and phantom shares as distinct, jurisdiction-aware instrument types on the same ledger, with dilution modeling that shows pre- and post-money scenarios before you agree to either. See how it fits your cap table at govy.tech.

FAQ

What percentage should a startup's option pool be? Most seed-to-Series-A companies land between 10% and 15% of fully diluted shares, though the right number comes from your actual 18-24 month hiring plan, not a borrowed percentage. A pool sized to a generic benchmark is either too small (forcing a dilutive top-up mid-round) or too large (equity you didn't need to give away). Add up planned hires by seniority, price each role in equity, and size the pool to that total plus a buffer.

Is the option pool created pre-money or post-money? Almost every priced-round term sheet specifies the pool as a percentage of the post-money cap table, but creates or tops it up before the new investor's money comes in — which means the new shares dilute existing shareholders only, not the incoming investor. That's the "option pool shuffle": the investor's post-money percentage stays exactly what they negotiated, and 100% of the pool's dilution lands on founders and earlier shareholders.

Do phantom shares or SARs come out of the option pool? No, and this is where a lot of non-US founders get their cap table wrong. Phantom shares and cash-settled SARs are contractual promises to pay, not real shares, so they don't sit in the authorized share pool and don't show up as dilution on the cap table at all — they show up later as a cash liability when they're triggered. If your jurisdiction pushes you toward phantom instruments, "option pool size" and "phantom pool size" are two different numbers tracked two different ways.

What happens to unused option pool shares? Unused shares stay authorized but unissued — they don't expire, and they don't automatically return to founders. They typically get carried into the next round's cap table math, where a new investor will often ask you to top the pool back up to a target percentage before their money goes in, which triggers another round of the same pre-money dilution question.

Should the option pool be the same size for every co-founder or hire structure? No. A two-person founding team hiring a VP of Engineering and a VP of Sales in year one needs a larger, more senior-weighted pool than a four-person team that plans to hire mostly junior engineers. Pool size should be derived from your specific hiring plan and the seniority of the roles in it, not copied from what a peer company or accelerator used.