Templates

Stock Option and Incentive Plan

Allocates equity to employees and advisors through stock options or other awards, helping attract and retain talent.

Understanding Option and Incentive Plans in Venture-Backed Startups

Equity isn’t just ownership—it’s a powerful tool for motivation, alignment, and long-term retention. For startups raising institutional capital, implementing a robust Option and Incentive Plan is essential. Whether you’re hiring your first engineer or scaling to 50+ employees post-Series A, how you structure and manage your equity pool will impact your cap table, investor negotiations, and ability to attract talent.

What Is an Option and Incentive Plan?

An Option and Incentive Plan (also called an Equity Incentive Plan or Share Option Scheme) is a formal framework that allows a company to grant equity—typically in the form of stock options—to employees, advisors, and other stakeholders. These options give recipients the right to purchase shares at a set price (the exercise price) after meeting certain conditions, usually tied to time (vesting) or performance.

Equity compensation is particularly important in startups, where cash compensation is often limited but upside potential is high.

Key Components of an Option Plan

Option Pool Size: The total percentage of company shares reserved for grants.
Vesting Schedule: Typically 4 years with a 1-year cliff (25% vesting after one year, monthly thereafter).
Exercise Window: The period post-termination during which options can be exercised.
Eligibility: Who can receive options (employees, contractors, advisors, etc.).
Plan Administration: How grants are approved, tracked, and modified—usually involving board oversight.

Seed vs. Series A: How Incentive Plans Evolve

As startups grow, so do expectations from investors and team members. Here’s a comparison of how equity plans typically shift between Seed and Series A rounds:

Term	Seed Round	Series A
Option pool size	10%–15% of post-money	15%–20% of post-money
Vesting schedule	4 years with 1-year cliff	4 years with 1-year cliff
Refresh grants	Rare	Often included for key hires
Plan coverage	Founders and early employees	Expanded to broader team
Board approval required	Usually informal	Formal process with board & investor input
Exercise window post-exit	Short (e.g., 90 days)	May be extended (e.g., up to 10 years)

The Role of the Option Pool in Fundraising

During a priced equity round (especially Series A), investors will often require the option pool to be included in the pre-money valuation. This means founders effectively absorb the dilution from the pool, not the investors. It’s critical to model this in your cap table projections to avoid surprises.

Investor Tip: Many Series A term sheets specify a post-close option pool size (e.g., 15%). Be aware that this might require expanding your current pool pre-investment to meet that requirement.

Best Practices for Founders

Start small but plan ahead: A 10% pool is often enough at Seed. Expand as you scale and bring on senior hires.
Document everything: Use a proper board-approved plan and clear grant letters.
Educate your team: Many employees don’t understand equity—transparency builds trust.
Model dilution scenarios: Use cap table tools (e.g., Carta, Pulley) to plan future rounds and option refreshes.
Stay aligned with investors: Work with them to ensure your equity strategy supports growth without unnecessary dilution.

Closing Thoughts

An equity plan is more than a legal formality—it’s a critical part of your startup’s compensation philosophy and growth engine. Founders who treat their option and incentive plans with strategic care will be better positioned to build and retain high-performing teams, while maintaining control and alignment through each fundraising milestone.

Need help structuring your option pool before your next round? I can help model dilution, compare market benchmarks, or draft a founder-friendly plan that aligns with VC expectations. Just ask.