Startup Option Pool: How Much to Allocate and Its Equity Impact

If you’re building an Australian startup and thinking about raising investment (or hiring your first key people), you’ll hear the term option pool very early.

An option pool can be one of the most practical tools you have for attracting talent when you don’t yet have the cashflow to pay “market” salaries. But it can also be one of the easiest ways to accidentally dilute yourself (and your co-founders) more than you expected - especially when investors start negotiating the size and timing of the pool.

In this guide, we’ll walk you through what an option pool is, how much startups commonly allocate, how it typically impacts your cap table, and the legal building blocks you’ll want in place before you start issuing options.

What Is An Option Pool (And Why Do Startups Use One)?

An option pool is a portion of your company’s equity set aside to grant options (or other equity incentives) to people who help build the business - usually employees, but sometimes advisors or contractors (depending on your approach and compliance).

An option gives someone the right (but not the obligation) to buy shares in your company in the future, usually:

• at a fixed price (often called the exercise price or strike price), and
• after certain conditions are met (most commonly, time-based vesting and/or performance milestones).

From a startup owner perspective, an option pool matters because it helps you:

• Hire key roles when cash is tight (think CTO, product lead, senior sales).
• Align incentives so your team is building long-term enterprise value, not just short-term deliverables.
• Compete with larger employers by offering meaningful upside.

It’s also worth saying upfront: an option pool doesn’t automatically mean you must issue options. It’s a strategic reserve. The pool can sit unused until you actually make grants.

If you want a plain-English overview of the mechanics, it can help to read up on share options before you decide how to structure your plan.

How Big Should Your Option Pool Be?

There’s no single “correct” option pool size, because it depends on your hiring plan, runway, and how close you are to investment.

That said, in Australian startups it’s common to see an option pool in the range of:

• 5–10% for very early-stage startups with limited hiring planned,
• 10–15% for venture-backed startups (especially pre-seed/seed) planning to hire multiple key roles, and
• 15–20% for startups anticipating aggressive hiring before the next funding round (less common, but it happens).

When you’re choosing your number, try to avoid guessing. A more defensible approach is to build it from your hiring plan.

Start With The Roles You Expect To Hire

Ask yourself: what roles do you need to hire in the next 12–24 months to hit your product and revenue milestones?

For example, you might plan to hire:

• a senior engineer
• a growth lead
• a customer success manager
• one or two additional engineers or sales hires

Once you have a rough list, you can estimate typical equity ranges for each role (based on your stage and market) and add a buffer. The point isn’t to be “perfect” - it’s to be intentional.

Don’t Forget You May Need A Buffer For Advisors

Some startups allocate a small slice of the option pool for advisors. Whether that makes sense depends on whether the advisor is truly strategic, what they’re committing to, and whether you’ve clearly documented expectations.

If you’re granting equity to advisors, make sure it’s still treated like a business decision with clear terms (vesting, confidentiality, IP ownership, and what happens if the relationship ends).

Avoid The Trap Of “Bigger Is Always Better”

A larger option pool can make it easier to hire. But it can also:

• dilute founders earlier than necessary,
• create messy expectations internally (“everyone should get equity”), and
• increase negotiation complexity in funding rounds.

The goal is not to create the biggest pool possible. The goal is to create a pool that supports your business plan without giving away more equity than you need to.

How An Option Pool Affects Founder And Investor Equity

The most important thing to understand about an option pool is that it affects your cap table even if you haven’t granted any options yet.

That’s because option pools are usually expressed as a percentage of the company on a “fully diluted” basis (meaning: assuming options are issued and exercised).

The “Pre-Money Option Pool” Issue (Why Investors Care)

In many seed and Series A negotiations, investors will ask you to “create” or “top up” the option pool before their investment goes in. This is often described as a pre-money option pool.

Why does this matter? Because if the pool is created pre-money, the dilution from the pool is typically borne mostly by founders (and existing shareholders), not the incoming investor.

From an investor’s perspective, the logic is often:

• the company will need to hire after the round,
• equity incentives are part of that hiring plan, and
• they want their investment to buy a clean percentage without being immediately diluted by new equity incentives.

From a founder’s perspective, this is a negotiation point. It’s not automatically “bad” - but you should understand what you’re agreeing to and model it properly.

A Simple Worked Example (What Dilution Can Look Like)

Let’s say (for simplicity) your startup currently has:

• 2 founders
• 100 shares total issued (50/50)

You agree to create a 10% option pool pre-investment.

Depending on how the pool is structured and calculated (for example, whether it’s calculated on a pre-money or post-money fully diluted basis, and whether you create new shares or reserve unissued shares), the exact dilution can differ. As an illustrative example only, if you increase the total number of shares so that 10% are reserved for options, the founders’ combined ownership could drop from 100% to around 90% on a fully diluted basis - even before investment.

Now add an investor coming in for (say) 20% post-money. After the round, the founders’ combined holding is diluted again.

The key lesson isn’t the exact maths (your cap table structure can vary). It’s this:

An option pool is real dilution. If it’s set up before a funding round, it can shift the economics meaningfully.

Option Pools Also Affect Early Co-Founders And Advisors

If you’ve already issued shares to a co-founder, an early contributor, or an advisor, they will also usually share in dilution when an option pool is created or increased.

This is why it’s so important to have clear equity documents early, including how decisions get made about issuing new shares or creating pools. In many startups, that’s handled through a tailored Shareholders Agreement and a fit-for-purpose constitution.

When Should You Set Up Your Option Pool?

Timing matters. Setting up an option pool too early can create complexity when you don’t yet need it. Setting it up too late can slow down hiring (or create pressure to “promise” equity before you have the framework to grant it properly).

In practice, option pools are often created:

• Just before you make your first key hire you want to incentivise with options, or
• As part of a funding round (especially seed), where investors expect an employee equity plan to be in place.

Step 1: Make Sure Your Company Structure Supports It

Option pools are most commonly implemented in an Australian proprietary limited company (Pty Ltd), because options and share plans are generally easier to administer in that structure.

If you haven’t yet set up your entity, it’s worth thinking about this early during your Company Set Up stage, particularly if you’re aiming for venture capital or growth hiring.

Step 2: Confirm Your Cap Table And Share Classes

Before you allocate an option pool, you’ll want to confirm:

• how many shares are on issue
• who holds them
• whether there are (or will be) different classes of shares
• what approvals are needed to issue options or shares

Some startups use different classes of shares to manage voting rights, investor preferences, or founder arrangements. If that’s on your radar, it’s worth understanding different classes of shares and how they interact with equity incentives.

Step 3: Put The Rules In Writing

A common mistake we see is founders agreeing “we’ll give you options” without having the plan rules documented. That can create disputes later, especially around vesting, what happens if someone leaves, or whether they can exercise.

The governing rules may sit across documents such as:

• a formal employee share plan (or option plan) rules document
• individual offer letters or equity grant letters
• your company constitution and shareholder documents

If you’re adopting or updating internal company rules, a tailored Company Constitution is often part of the foundation.

What Legal Documents Do You Need To Implement An Option Pool Properly?

When you’re building an option pool, you’re not just making a “commercial” decision - you’re putting in place a legal mechanism for issuing equity interests.

The right documents will depend on your stage, investor expectations, and whether you’re granting options to employees only or also contractors/advisors. But in many cases, you’ll want to consider the following.

Employee Share Plan / Option Plan Rules

This is the core document that sets the rules of the option pool and how grants operate. It commonly deals with:

• who is eligible to participate
• how options are granted
• vesting schedules (for example, a 12-month cliff and then monthly vesting)
• exercise rules and timeframes
• what happens if someone resigns or is terminated
• leaver provisions (good leaver/bad leaver concepts)
• board discretion and administration

For many startups, this sits within a broader Employee Share Scheme framework.

Offer Letters And Employment Contracts

If you’re hiring employees and offering options as part of the package, your paperwork should line up. That usually means:

• the offer letter clearly states that equity is subject to the plan rules and approvals, and
• the employment contract includes confidentiality and intellectual property clauses (so what your team builds is owned by the business).

Even if you’re paying a great salary, it’s still important to have a clear Employment Contract in place so expectations are aligned from day one.

Shareholder And Governance Documents

Equity incentives affect existing shareholders, so governance matters. Depending on your structure, you may need:

• shareholder approvals for issuing new shares
• director resolutions approving the plan and specific grants
• rules about pre-emptive rights (who gets first right to buy shares if someone sells)
• rules about what happens on an exit (sale of the company)

This is where a well-drafted shareholders agreement and constitution can prevent misunderstandings later, especially when your company starts to grow quickly.

Key Australian Considerations: Tax, Compliance, And Getting The Details Right

Option pools are not just a “startup thing” - they sit within real Australian legal and tax frameworks. While the right setup depends on your circumstances, these are some of the common areas founders should keep in mind.

Employee Share Scheme (ESS) Tax Rules

Equity incentives can trigger tax outcomes for the recipient, and the timing can depend on how the plan is structured (for example, whether it qualifies for certain start-up concessions).

Even though the tax is generally an issue for the participant, as the business owner you still need to structure the plan carefully and communicate the arrangement accurately.

It’s also important not to over-promise outcomes. For example, saying “this will definitely be tax-free” (or similar) is risky. It’s usually better to explain that tax depends on the individual’s circumstances and the plan’s design, and encourage them to get independent advice from a qualified accountant or tax adviser. (Sprintlaw can help with the legal setup and documentation, but we don’t provide tax advice.)

Corporations Law And Offer Rules

Issuing options can touch on fundraising and offer rules under Australian law, especially if you’re offering equity broadly or to non-employee participants.

In many startups, employee option plans can be structured to fit within relevant exceptions and reliefs, but you should still treat the paperwork seriously - particularly once you’re scaling headcount or adding sophisticated investors.

Contractors And Advisors Need Extra Care

It’s common for startups to work with contractors early. But offering equity to contractors isn’t always as straightforward as offering it to employees. You’ll want to ensure:

• the contractor relationship is properly documented
• IP created by the contractor is assigned to the company
• the equity arrangement is clear about vesting and what happens if work stops

In other words, don’t treat “equity for contractors” as a quick handshake deal. The option pool might be the incentive, but the contract is what protects the business.

Keep Your Cap Table Clean (Future You Will Thank You)

Every equity promise you make today will likely be scrutinised later - by investors, acquirers, and sometimes even key hires who want to understand their real upside.

As a practical habit, keep:

• a current cap table (including reserved options)
• signed plan documents and grant letters
• board/shareholder resolutions approving grants
• a record of vesting and exercises

This can make due diligence significantly smoother when you raise capital or exit.

Key Takeaways

• An option pool is equity set aside (usually on a fully diluted basis) so you can grant options to attract and retain talent as you grow.
• Australian startups commonly allocate 5–15%, but the right size depends on your hiring plan, stage, and funding strategy.
• Option pools create real dilution, and if the pool is set up pre-money in a funding round, founders often bear most of that dilution.
• It’s usually better to build your pool size from expected hires rather than choosing a number because it “sounds normal”.
• Getting the documents right matters: plan rules, offer documentation, employment/contractor terms, and governance approvals all help prevent disputes later.
• Option pools can raise Australian legal and tax considerations (including ESS tax rules), so it’s worth structuring the plan carefully before you start making grants.

If you’d like help setting up an option pool or employee equity plan for your startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.