Resolving Verbal Equity Promises Prior To Financing Rounds
Unresolved verbal equity promises convert into legal liabilities during diligence, forcing formal capitalization settlements or structured debt agreements before investment closing.
option pool sizing
Meaning
Equity reserve allocation calculates the proportion of unallocated common stock set aside for future employee equity compensation packages. The process of option pool sizing determines the total percentage of fully diluted shares reserved prior to or following a venture financing round. This calculation governs the recruitment capacity of the enterprise by establishing equity reserves for key hires while defining the dilution burden borne by existing equity holders.
The scope stops at reserved unissued share limits, creating no individual grant obligations until specific equity awards receive board approval.
Dilution Distribution
Investors often request specific pool sizes as a condition of financing to ensure post-round hiring needs are met without immediate further dilution. Negotiating option pool sizing balances founder equity preservation against the projected headcount requirements of the upcoming growth phase. Placing pool creation in the pre-money valuation shifts dilution entirely onto existing shareholders rather than incoming investors.
The term sheet documents the required pool percentage, establishing the baseline for equity allocation models.
Grant Velocity
The speed at which unallocated pool shares are awarded to employees dictates how quickly new reserves must be authorized. Proper option pool sizing prevents premature board votes to authorize additional shares before subsequent funding rounds. Tracking grant velocity against hiring plans reveals whether reserved equity allocations align with actual recruiting costs.
Miscalculated pool reserves force early charter amendments to expand available share reserves.
Cap Table Impact
Expanding available option pools changes the fully diluted share count used to calculate per-share purchase prices. The calculated option pool sizing alters baseline shareholder ownership percentages immediately upon cap table recalculation. Clear capitalization records document reserved pool shares alongside allocated grants.