Refreshing The Option Pool

In the vast majority of venture financings, the size of the option pool reserved for employees is increased just prior to (and in conjunction with) the closing.  The argument entrepreneurs will hear from their prospective investors is that the new investor, "doesn’t want to be diluted by employees hired right after they invest" which makes about as much sense as saying, "I don’t want any of the proceeds of this financing go toward paying future salaries of employees."  Despite that, it is customary that the option pool is increased and you should really think of it as part of the "price" negotiation.  What you can do is to preempt the conversation by putting together an "equity budget" that shows that the pool plus a particular refresh you suggest provides enough equity for the hiring plan for at least the next 18 months.

In putting together the budget, a rough estimate that you’ll want to tweak based on the particulars of your company is 1-2% for CXO’s and VPs, 0.5% for Directors, 0.25% for managers/developers and 0.1% or less for others.  You will also want to look at existing key employees and assess if any additional refreshes are necessary.  If you want to get more specific data on what is the "right" number, an excellent source is the annual startup compensation study done by Prof. Noam Wasserman at HBS.

You’ll want to take the data for your hiring plan from your financial model and use the equity budget for each position to create the pool refresh.  For Series A/B deals, the typically the total pool will be 15-20% after the financing (excluding the founder(s)) and usually about half of that will be ungranted and reserved for new hires.