How big should a startup option pool be?

Large enough to cover planned hires until the next financing, plus a buffer for advisors and refreshes. Carta's 2026 data puts the median employee pool at 12.1 percent at seed, and its guidance puts the median near 15 percent at Series A. Investors sometimes ask for more. A pool built from a specific hiring plan gives a defensible answer when they do.

How often should startups give refresh grants?

There is no single standard. Companies commonly tie refreshes to annual reviews, promotions, or the point when an employee's initial grant is mostly vested, since that is when retention weakens. What matters is a written policy covering eligibility, sizing, and timing, and enough room in the pool so refreshes do not force an early pool increase.

What happens if options are granted below the 409A value?

Options with a strike price below fair market value on the grant date can be treated as deferred compensation under section 409A. The holder can face immediate income inclusion, an additional 20 percent federal tax, and interest, and some states add their own penalties. Companies avoid this by granting only under a current independent 409A valuation and refreshing it after material events.

Should a startup offer early exercise?

It is generous to employees, letting them file an 83(b) election and start holding periods while the spread is small. The costs are administrative and tax related: the company must track and potentially repurchase unvested shares, and early-exercisable ISOs count toward the 100,000 dollar ISO limit in the grant year. Many companies offer it mainly to early hires, when share value is low.

Designing a Startup Equity Compensation Programme

A startup equity compensation programme has five parts: an option pool sized to the next 12 to 18 months of hiring, grant bands by level, a refresh policy, 409A valuations that keep strike prices defensible, and exercise terms. Carta data puts the median pool near 12 percent at seed and 15 percent at Series A.

Size the pool to a hiring plan

The option pool is shares reserved under the equity plan for future grants to employees, advisors, and directors. Its size is a negotiation with investors as much as a compensation decision, because a pool created or increased in a priced round is usually counted in the pre-money valuation, so the dilution falls on existing holders rather than the new investor.

Published market figures give a reference point. Carta's Founder Ownership Report 2026 puts the median employee pool at 12.1 percent of equity at seed. Carta's cap table guidance puts the median at about 15 percent when a company raises its Series A, rising to 16.4 percent by Series C and 19.6 percent by Series E and later. Carta's own guidance is to match the pool to the hiring plan for the next 12 to 18 months rather than to a round number.

The method that holds up in a negotiation:

List the hires planned before the next financing, by role and level.
Assign each a grant from the bands below.
Add a buffer for advisors, promotions, and refreshes.
Express the total as a percentage of post-round fully diluted shares.

A pool built from a hiring plan gives a defensible number to put against an investor request for a larger pool.

Build grant bands by level

Bands are ranges of grant size for each level, such as early engineer, senior engineer, manager, and executive. They make offers consistent, let a hiring manager move fast, and give a principled answer when a candidate asks for more.

Three common ways to express a band:

Percentage of fully diluted shares. Simple at the earliest stage, but it ages badly as the share count grows.
Fixed share counts. Easy to administer, but every financing changes what a share is worth.
Target dollar value. A value per level divided by a reference price per share, often the latest preferred price, converted to a share count at grant. This keeps grants meaningful as the company grows, and is how many later stage companies set offers.

Whichever method is used, record the band for each grant. Inconsistent grants for the same role are hard to explain once employees compare notes, and they will.

Vesting. Four years with a one year cliff and monthly vesting after that is the common convention. Departures from it, such as back-weighted schedules, should be deliberate choices.

An illustrative dollar band

Illustrative numbers only. A company sets a target grant value of 60,000 dollars for a senior engineer and uses its latest preferred price of 2.00 dollars per share as the reference. The grant is 30,000 options. The strike is the 409A value of common stock on the grant date, which will be lower than the preferred price.

Plan refreshes before you need them

Initial grants retain people while they vest. Once most of a grant has vested, the incentive to stay weakens, and that is when competing offers land.

Refresh grants are additional grants to existing employees, commonly tied to performance reviews, promotions, or the point when an initial grant is mostly vested. A written refresh policy should say who is eligible, how size is set, and where the shares come from, since refreshes draw on the same pool as new hires. Leave room for them when sizing the pool, or the first refresh cycle forces an early pool increase.

Pricing, exercise terms, and securities rules

409A valuations. In the United States, options must have a strike price at least equal to the fair market value of common stock on the grant date, or the holder faces penalties under section 409A. An independent appraisal gives the company a presumption that the value is reasonable, which holds for up to 12 months unless a material event, such as a new financing, makes it stale. Order a new valuation after each priced round and before the next batch of grants.

Early exercise. Letting employees exercise before vesting allows an 83(b) election within 30 days, starting capital gains and QSBS holding periods early while the spread is small. The company then holds unvested shares subject to repurchase and must administer them. Early-exercisable ISOs count toward the 100,000 dollar annual ISO limit in the year they first become exercisable, which for an early-exercisable grant is the grant year, so large grants may be split into ISO and NSO portions.

Post-termination exercise window. The common default is 90 days. A longer window is valuable to departing employees but converts ISOs to NSOs after three months and keeps more options outstanding.

Securities law. Grants to employees by a private US company commonly rely on Rule 701, which limits sales in any 12 month period to the greatest of 1 million dollars, 15 percent of total assets, or 15 percent of the outstanding class, and requires additional disclosure, including financial statements, when sales exceed 10 million dollars in 12 months. State rules also apply. Grants outside the United States need local advice.

This page is general information, not legal or tax advice. Plan design, 409A compliance, and securities exemptions depend on the company's documents and jurisdiction, and should be set up with counsel.

Frequently asked questions

How big should a startup option pool be?: Large enough to cover planned hires until the next financing, plus a buffer for advisors and refreshes. Carta's 2026 data puts the median employee pool at 12.1 percent at seed, and its guidance puts the median near 15 percent at Series A. Investors sometimes ask for more. A pool built from a specific hiring plan gives a defensible answer when they do.
How often should startups give refresh grants?: There is no single standard. Companies commonly tie refreshes to annual reviews, promotions, or the point when an employee's initial grant is mostly vested, since that is when retention weakens. What matters is a written policy covering eligibility, sizing, and timing, and enough room in the pool so refreshes do not force an early pool increase.
What happens if options are granted below the 409A value?: Options with a strike price below fair market value on the grant date can be treated as deferred compensation under section 409A. The holder can face immediate income inclusion, an additional 20 percent federal tax, and interest, and some states add their own penalties. Companies avoid this by granting only under a current independent 409A valuation and refreshing it after material events.
Should a startup offer early exercise?: It is generous to employees, letting them file an 83(b) election and start holding periods while the spread is small. The costs are administrative and tax related: the company must track and potentially repurchase unvested shares, and early-exercisable ISOs count toward the 100,000 dollar ISO limit in the grant year. Many companies offer it mainly to early hires, when share value is low.

Key takeaways

Size the pool to a hiring plan, not a convention; Carta data puts the seed median near 12 percent of fully diluted equity.
Grant bands by level make offers consistent, faster to approve, and easier to defend internally.
A refresh policy decides whether equity keeps retaining people after their first grant is mostly vested.
A current independent 409A valuation is what makes option strike prices defensible to the IRS.
Early exercise and longer exercise windows are generous to employees but carry administrative and tax consequences for the company.