ESOP Design and Option Pool Sizing: A Founder's Guide

What Is Driver-Based Revenue Forecasting?

A revenue forecast is a projection of the money your business will earn over a defined future period. There are two ways to build one:

Top-down forecasting starts with the total addressable market and works down to a market share assumption: “The UK B2B software market is worth £10 billion. If we capture 0.1%, we generate £10 million in revenue.” Useful for sizing the opportunity, useless for operational planning. Investors have heard thousands of 0.1% market share projections and are rightly sceptical.

Bottom-up, driver-based forecasting starts with the specific activities that generate revenue: “We have capacity to run 20 outbound sales conversations per week. Our conversion rate is 10%. Our average contract value is £12,000 per year. That gives us 2 new customers per week, or roughly 100 new customers per year, generating £1.2 million in new ARR.” Every assumption in that chain is testable, improvable, and explainable.

Driver-based forecasting is also the input layer for your 3-statement model — your revenue drivers feed the income statement, which integrates with the balance sheet and cash flow statement.

Why a Revenue Forecast Startup Needs a Different Approach

Established businesses forecast revenue by extrapolating historical data. Startups do not have historical data. The entire forecast must be built on forward-looking assumptions rather than trend lines. A driver-based model built on transparent assumptions is actually more useful to an early-stage investor than a statistical extrapolation, because it makes the business logic explicit and discussable.

The Core Framework: Identify Your Revenue Drivers

The pool sits at the intersection of finance and hiring, which is why it is usually decided badly. If you have not read cap table explained, start there.

What is an option pool and why does the investor care about it?

An option pool is a block of shares reserved for issuing to employees, advisors and directors as options. It is set aside in advance and sits on the cap table as an unallocated line until it is granted out.

The investor cares for a reason that is entirely legitimate. They are about to give you $5m to hire a team. If you do not have the equity to hire that team with, the money will not work. So they want the pool created before they invest, sized for the hiring you will do with their money.

The part that is less legitimate, or at least less transparent, is when the pool is created. The convention is that it is created from the pre-money, which means it exists before the new investor's shares are issued, which means the new investor is not diluted by it. Everyone else is.

Think about what that means. The pool exists to hire people who will build the company over the next eighteen months, and the investor benefits from those hires exactly as much as anyone else. But the cost falls entirely on the people who were there before. This is the pool shuffle, and it is one of the two or three most valuable things on a term sheet to negotiate, precisely because it is presented as a technicality.

The rough conventions are worth stating so you know when you are being asked for something unusual. Pools are commonly 10 to 20% post-money, with seed rounds usually at the higher end and later rounds lower as the company's hiring becomes less equity-intensive. A request for 20% at Series B, or 25% at any stage, is outside the normal range and should be met with a hiring plan rather than a shrug.

How much does the pool actually cost me? The worked example

It costs you the pool percentage multiplied by your share of the pre-money company, and the investor nothing. Here is the arithmetic in full.

Two founders hold 6,000,000 shares, split 60/40, and own 100% of the company. No prior rounds, no SAFEs, nothing else on the cap table, so we can isolate the pool effect cleanly.

Founder	Shares	Ownership
Ravi	3,600,000	60.00%
Elin	2,400,000	40.00%
Total	6,000,000	100.00%

The term sheet: $5,000,000 at a $20,000,000 pre-money valuation. Post-money: $20,000,000 + $5,000,000 = $25,000,000 ✓.

The investor's ownership: $5,000,000 / $25,000,000 = 20.00%. That number does not change regardless of the pool, which is the whole point.

Scenario A: no pool at all.

Investor: 20.00%. Founders: 80.00%. Ravi: 80.00% x 0.60 = 48.00%. Elin: 80.00% x 0.40 = 32.00%.

Check: 48.00 + 32.00 + 20.00 = 100.00 ✓.

Scenario B: 10% post-money pool, created from the pre-money.

Investor: 20.00%. Pool: 10.00%. Founders share the remaining 70.00%. Ravi: 70.00% x 0.60 = 42.00%. Elin: 70.00% x 0.40 = 28.00%.

Check: 42.00 + 28.00 + 10.00 + 20.00 = 100.00 ✓. Founders total: 70.00%.

Scenario C: 15% post-money pool, created from the pre-money.

Investor: 20.00%. Pool: 15.00%. Founders share the remaining 65.00%. Ravi: 65.00% x 0.60 = 39.00%. Elin: 65.00% x 0.40 = 26.00%.

Check: 39.00 + 26.00 + 15.00 + 20.00 = 100.00 ✓. Founders total: 65.00%.

	No pool	10% pool	15% pool
Ravi	48.00%	42.00%	39.00%
Elin	32.00%	28.00%	26.00%
Founders total	80.00%	70.00%	65.00%
Pool	0.00%	10.00%	15.00%
Investor	20.00%	20.00%	20.00%
Total	100.00%	100.00%	100.00%

Read across the investor row. 20.00%, 20.00%, 20.00%. The pool went from nothing to 15% of the company and the investor's stake did not move by a basis point. Every percentage point of pool came out of the founders.

Going from a 10% pool to a 15% pool cost the founders 70.00 - 65.00 = 5.00 percentage points. At a $25m post-money, 5.00pp is $1,250,000 of value.

Check: 5.00% x $25,000,000 = $1,250,000 ✓.

That is the price of a conversation most founders do not have, on a term sheet clause most founders read as boilerplate.

What is the effective pre-money once you account for the pool?

Lower than the headline, and this is the framing that makes the negotiation tractable. The pool shuffle is best understood as a hidden valuation reduction, and you can compute exactly how much.

The honest way to look at Scenario C: the founders own 65% of a $25m company, which is $16.25m of value. Before the round they owned 100% of something. What was that something worth, according to this deal?

Check: 65.00% x $25,000,000 = $16,250,000 ✓.

The investor says the pre-money is $20m. But the founders' pre-existing equity is only being credited with $16.25m, because $3.75m of the pre-money was consumed by creating the pool.

Check: 15.00% x $25,000,000 = $3,750,000, and $20,000,000 - $3,750,000 = $16,250,000 ✓.

So the effective pre-money, meaning the value actually attributed to what the founders built, is $16.25m, not $20m. The headline is 23% higher than the reality.

Check: ($20,000,000 - $16,250,000) / $20,000,000 = 18.75%. Or from the other direction: $20,000,000 / $16,250,000 = 1.231, so the headline is 23.1% above the effective figure ✓.

Now compare two term sheets, which is where this becomes genuinely useful.

	Term sheet 1	Term sheet 2
Pre-money	$20,000,000	$18,000,000
Investment	$5,000,000	$5,000,000
Post-money	$25,000,000	$23,000,000
Pool (post-money)	15.00%	8.00%
Investor %	20.00%	21.74%
Founders %	65.00%	70.26%
Founders' value	$16,250,000	$16,159,800

Check term sheet 2: $18m + $5m = $23m ✓. Investor: $5,000,000/$23,000,000 = 21.74% ✓. Founders: 100 - 21.74 - 8.00 = 70.26% ✓. Founders' value: 70.26% x $23,000,000 = $16,159,800 ✓.

The two term sheets are within $90,200 of each other for the founders, despite a $2m difference in headline pre-money. Term sheet 1 looks 11% better and is worth marginally less. A founder comparing headline valuations picks the wrong one, and a founder who computes founders' value in dollars sees immediately that these are the same deal.

Do this calculation on every term sheet you receive. It takes two minutes and it is the only way to compare offers honestly. Our term sheet explained guide covers the other clauses that behave this way.

How do you size a pool from the bottom up?

By building an eighteen month hiring plan, attaching an equity range to each role, and adding it up. The output is a number you can defend, which is worth more than the number itself.

The investor's 15% is not analysis. It is an anchor, and anchors move when met with arithmetic. Here is what the arithmetic looks like.

The company has just raised $5m and plans to hire for eighteen months, which is roughly the runway that buys. The rough equity conventions by seniority at a Series A stage company, expressed as a percentage of the fully diluted company:

Role	Count	Equity each	Total
VP Engineering	1	1.00%	1.00%
VP Sales	1	1.00%	1.00%
Senior engineers	4	0.35%	1.40%
Mid-level engineers	6	0.15%	0.90%
Product manager	2	0.30%	0.60%
Designer	2	0.20%	0.40%
Account executives	4	0.15%	0.60%
Customer success	3	0.10%	0.30%
Marketing	2	0.15%	0.30%
Ops and finance	2	0.10%	0.20%
Subtotal, new hires	27		6.70%
Refresh grants for existing team			1.50%
Advisors and board			0.50%
Buffer for hires not yet foreseen			1.00%
Total pool required			9.70%

Check the subtotal: 1.00 + 1.00 + 1.40 + 0.90 + 0.60 + 0.40 + 0.60 + 0.30 + 0.30 + 0.20 = 6.70% ✓.

Check the count: 1 + 1 + 4 + 6 + 2 + 2 + 4 + 3 + 2 + 2 = 27 ✓.

Check the total: 6.70 + 1.50 + 0.50 + 1.00 = 9.70% ✓.

Now sanity check this against the money, because a hiring plan that your cash cannot fund is not a hiring plan. Twenty seven hires over eighteen months on $5m: if the average fully loaded cost is $130,000 per year and hires arrive evenly across the period, the average hire is employed for roughly nine months of the eighteen, so the cash cost is approximately 27 x $130,000 x (9/12) = $2,632,500. Add the existing team and other costs and $5m is tight but coherent for eighteen months.

Check: 27 x $130,000 = $3,510,000 per year at full complement; x 0.75 = $2,632,500 ✓.

If the arithmetic had said the plan needed $9m, the plan is wrong and the pool built on it is wrong. This is where the runway and burn calculator earns its keep, and where ARR per employee benchmarks tell you whether 27 hires is a sensible shape for the revenue you expect them to produce.

So: 9.70% is the answer the plan gives. Round to 10% and you have a defensible position that happens to be 5 percentage points below the anchor and worth $1.25m to you.

When you present this, present the plan, not the conclusion. An investor who is handed a role-by-role hiring plan with equity ranges and a cash cross-check is being shown a founder who has thought about it, which is worth something independent of the negotiation. An investor who is told "we think 10% is enough" is being asked to take your word for it.

One caveat that cuts the other way. Do not undersize the pool to win the negotiation. If you take a 7% pool and run out of equity in month twelve, you will top the pool up before the next round, at which point you are diluted anyway and you have spent a year unable to make competitive offers. The goal is the right number, defended, not the smallest number. A pool that is genuinely too small is a hiring constraint, and hiring constraints kill companies more often than dilution does.

What design decisions matter more than the size?

The exercise window, the refresh policy and the vesting terms. Founders spend all their negotiating energy on the pool percentage and almost none on these, which is backwards, because these are what determine whether the equity you grant is actually worth anything to the person receiving it.

The exercise window. This is the most consequential and least discussed term in startup equity. A standard option plan gives a departing employee 90 days to exercise their vested options or lose them. That sounds procedural. Here is what it means in practice.

An employee joins at Series A, works four years, and vests 40,000 options at a $0.50 strike. The company has done well and the 409A is now $6.00. They leave. They have 90 days to find $20,000 in cash to exercise.

Check: 40,000 x $0.50 = $20,000 ✓.

Worse, in the US, exercising triggers alternative minimum tax on the spread. The spread is 40,000 x ($6.00 - $0.50) = $220,000. The AMT bill could be tens of thousands more.

Check: 40,000 x $5.50 = $220,000 ✓.

So the employee must find perhaps $70,000 in cash, within 90 days, to buy shares in a private company that may never be liquid, or forfeit four years of equity compensation entirely. Most people cannot do this. Most people therefore walk away with nothing, and the shares return to the pool, and the company reissues them to someone else. Four years of below market salary, compensated with an instrument they could not afford to claim.

The fix is an extended exercise window, commonly seven to ten years for employees with some minimum tenure. It costs the company almost nothing in cash terms. It has real consequences that should be understood rather than hand-waved: in the US it converts ISOs to NSOs after 90 days, which changes the tax treatment, and it means departed employees remain on your cap table for years, which some investors dislike. But the alternative is an equity programme that systematically fails the people it was designed to reward, and increasingly candidates know to ask. If you offer a 90 day window, you should be able to explain why.

Refresh grants. An employee who joined four years ago is now fully vested and has no forward-looking equity incentive at all. Their remaining reason to stay is the salary. Refresh grants, typically a smaller grant on a fresh four year schedule made annually or on promotion, keep a rolling incentive in place. Budget for them in the pool from the start, which is why the plan above carries a 1.50% line for it. Companies that forget this find themselves out of pool exactly when their best people become fully vested.

Vesting. Four years with a one year cliff is the standard for employees and there is little reason to deviate. The cliff protects you from bad hires, the four years reflects the arc of building something. Where founders sometimes err is in offering accelerated vesting to early employees as a recruiting sweetener. It is expensive and it creates awkward precedents. Better to grant slightly more equity on a standard schedule than the same equity on a special one.

Documentation. Every grant needs a board approval, a grant agreement, a current 409A to support the strike price, and a record that ties the three together. This sounds obvious and it is the single most common diligence problem in a Series B. Options granted verbally, options approved by email, options with a strike price nobody can support: these surface in diligence, cost real money to remediate, and occasionally blow up a deal.

How should the pool show up in your model?

As a live line that ties to your hiring plan, with allocated and unallocated tracked separately, and with the next round's top-up already forecast.

Three specific things your financial model should do.

Track allocated versus unallocated pool. The single most useful number is "how much unallocated pool do we have left", and a surprising number of companies cannot answer it quickly. It should be one cell. When it drops below what your next two quarters of hiring require, you need to act, and acting early means a planned top-up rather than an emergency one.

Tie the pool to the hiring plan, not to a fixed percentage. When you add a VP of Engineering to the plan, the pool requirement should move. When you push a hire out two quarters, it should move back. A pool that is a hardcoded 10% is not a model, it is a memory of a negotiation.

Forecast the next round's pool top-up. The investor at your Series B will want the pool sized for their hiring plan, and any unallocated pool you carry in counts towards it. This is the reason not to grant out your entire pool generously in the meantime: unallocated pool at the next round is a negotiating asset, because it reduces the top-up the new investor can demand, and the top-up comes out of your pre-money. A founder who arrives at Series B with 4% unallocated and a credible plan is arguing from a much better position than one who arrives with nothing and needs a fresh 12%.

The deeper point across all of this is that equity is your scarcest resource and the only one you cannot raise more of. Cash you can go and get; you can watch it in the runway calculator and top it up. The company is 100% and that is all there will ever be. Every point you spend on a pool you did not need, or a hire who did not work out, or a negotiation you did not have, is gone permanently. Treat the pool with the same seriousness you would treat a $1.25m expense, because in our worked example that is exactly what five percentage points was.

This is educational content, not legal, tax or investment advice. Option plan design, exercise windows and grant mechanics have significant tax consequences that vary by jurisdiction and by individual circumstance. Take advice on your specific plan before adopting it, and before making changes to an existing one, since amendments to option terms can themselves be taxable events.

Frequently Asked Questions

Should the pool come out of the pre-money or the post-money? Convention says pre-money, which means you pay for all of it. Arguing for a post-money pool, so the new investor shares the cost, is a real economic ask and you will usually lose it, because the convention runs strongly the other way and investors treat it as a settled point. The more productive fight is the size: bring a bottom-up hiring plan and argue the pool down from an anchored 15% to a defended 10%, which in our example is worth $1.25m and is achievable. Win the winnable negotiation rather than the principled one.

What is a typical option grant for an early employee? It depends heavily on stage, role and seniority, and the ranges are wide. At a Series A stage company, a VP-level hire is commonly in the region of 0.5 to 1.5%, a senior engineer perhaps 0.25 to 0.5%, and a mid-level individual contributor 0.1 to 0.2%. Employee number three at a pre-seed company might get 2% or more, because they are taking founder-adjacent risk for employee compensation. The percentages fall sharply as the company matures and the shares become more valuable. What matters is that the grant is meaningful relative to the person's cash sacrifice, and that you can explain your logic consistently across the team, because they will compare.

What happens to unallocated pool shares at an exit? They generally evaporate rather than being distributed. Unallocated pool shares are reserved but unissued, so there is no holder to pay. At an acquisition, the unallocated pool is typically cancelled and the proceeds that would notionally have gone to it are shared among the actual shareholders in proportion to their holdings. This is why an oversized pool that never got granted is not a total loss, but it is a poor outcome: you paid for it in dilution at the round and got the benefit back only partially and years later. Size it right rather than banking on the reversion.

Can I increase the pool between rounds? Yes, with board and usually investor consent, and it dilutes everyone including the investors who are consenting, which is why they will ask why the plan changed. It is a normal thing to do if you have hired ahead of plan or if a key hire needs more than you budgeted. The cost is that you are diluting outside a financing, so there is no new money arriving to offset it. Doing this repeatedly is a sign the original pool was undersized, which is the argument for getting it right at the round rather than optimising for the smallest headline number.

Are options the right instrument in every jurisdiction? No, and this matters more than founders expect if you hire internationally. Options work well in the US and, via EMI, in the UK for qualifying companies. Elsewhere the tax treatment varies enormously: some jurisdictions tax at grant, which can leave an employee with a bill for an instrument they cannot sell, making options actively harmful. Alternatives include growth shares, restricted stock, phantom equity and virtual share plans, each with different mechanics and different consequences. If you are hiring across borders, get advice per jurisdiction before you make an offer, because an equity package that is excellent in San Francisco can be worse than useless in another country.

Further Reading

• What Is a Startup Financial Model?
• The Rule of 40 Explained
• Churn Rate Calculation and Cohort Analysis
• Runway and Burn Calculator
• Financial Model Pro