Founders often get the message that they should reserve 10% to 20% of equity for future hires. It sounds reasonable enough, and it often is for startups once they’ve raised a priced round. For early-stage startups, equity is what attracts top talent to leave their high-paying jobs at incumbent tech companies, and so startups should have plenty of dry powder reserved for these hires.
But this conventional wisdom fails to capture the dangers of over-allocating equity to the option pool in the startup’s early days, before they raise a priced round. The main risks of over-allocating in the early days are (1) issuing inflated option grants to early hires, and (2) effectively gifting additional shares to SAFE holders when SAFEs convert in the startup’s first priced round. These risks stem from a common culprit: the unissued
portion of the option pool.
This post breaks down how over-allocating can lead to unintentional and unnecessary dilution to founders, and why most startups today should have smaller option pools, particularly in their early days.
Problem #1: Issuing Inflated Option Grants to Early Hires
At incorporation, many founders pick an option pool size based on something they read, like a blog or VC checklist suggesting 20%, rather than on their projected equity needs. This approach often causes excessive and unintentional dilution to founders. This is because most startups make equity grants based on benchmarks tied to percentage of fully diluted capitalization. What founders often fail to grasp, though, is that fully diluted capitalization includes the unissued
portion of the option pool. The examples below show the impact of the unissued shares in the option pool.
Example 1: Acme.ai Inc., an AI startup, incorporates with 10 million shares authorized. It issues 8 million shares to the founders and allocates 2 million shares to the option pool, effectively creating a 20% option pool. The founder finds a 10x engineer and promises her 2.5% of the company on a fully diluted basis, meaning 2.5% of the 8 million issued shares and the 2 million shares allocated to the option pool. The 10x engineer receives 250,000 shares.
Example 2: Assume the same facts. But this time the startup only allocates 500,000 shares to the option pool, as the founder believes that they only need that amount to get to their first priced round. Hence, the same 2.5% equity offer to the 10x engineer yields only 212,500 shares, as the fully diluted capitalization of the company is 8.5 million shares.
These examples show how early option grants can be inflated when a startup creates an unnecessarily large option pool at incorporation. Instead of creating an option pool based on generic advice, startups should focus on what’s realistically needed before raising their first priced round. This approach reduces the likelihood of the founders absorbing excessive dilution from option grants to early hires. The worst-case scenario with a smaller option pool is blowing through the budget before raising your first priced round, but this problem is easily solved by simply allocating more shares to the pool.
Founders that fail to heed this advice and allocate 20% to the pool reflexively face the risk of excessive dilution with option grants to early hires And, as we’ll see in the next section, they also risk additional dilution due to the structure of the post-money SAFE. Given that many startups raise on at least one round of SAFEs, this is a real risk for most startups.
Problem #2: Effectively Gifting Shares to SAFE Holders at Conversion
Post-Money SAFEs are simple to use, but their terms are not so simple to understand. One example of this is the impact of a startup’s option pool—particularly the unissued portion of the pool—when the SAFEs convert in a priced round. There’s a dilution trap embedded here that most founders miss.
Related Post: The Ultimate Guide to SAFEs for Startups
SAFEs convert based on a formula. The higher the denominator, the better deal the SAFEs get when they convert. The denominator counts the existing option pool immediately prior to the priced round in which the SAFEs convert—including any unused portion of the pool. The more unused shares there are in the option pool when SAFEs convert, the better the deal for the SAFE holders. This comes at the expense of founders. As a consequence, every unused share allocated to the pool becomes a hidden discount to the SAFE holders when the SAFEs convert, subsidized by the founders.
Example 1: Acme.ai raises $1 million on a Post-Money SAFE with a $10 million valuation cap. Acme.ai subsequently raises a priced seed round of $4 million at a $16 million pre-money valuation. At the time of the seed round, Acme.ai has a 20% allocated but unissued option pool, which is included in the calculation of the SAFE’s price per share, yielding a $0.90 price per share.
Example 2: Same facts, except that prior to the priced round, Acme.ai zeroes out its option pool, effectively removing 2 million shares from the denominator in calculating the SAFE price per share. The result is a $1.125 price per share for the SAFE.
In these examples, Acme.ai would effectively give the SAFE holder an additional price per share discount of $0.225 by converting with the 20% unissued option pool, which would increase the number of shares the SAFE holder is able to purchase from 888,888 to 1,111,111. It bears emphasis that this effective discount was not bargained for. The SAFE holder doesn’t control the size of the option pool prior to the priced round. It’s in the startup’s power to reduce the size of the pool as in example 2.
The easiest way to avoid this unintentional transfer of value is to zero out the option pool prior to the first priced round. The option pool will of course need to be increased in connection with the priced round, but that increase will dilute not only the founders but also the SAFE holders.
The Impact of Artificial Intelligence
The clear takeaway from this post is that, in general, oversized option pools tend to unintentionally dilute founders. That has been the case, particularly for the SAFE, since at least 2018 when the Post-Money SAFE was introduced.
But there’s another trend in 2025 that makes the case for smaller pools even stronger: the shift toward AI-enabled and automation-heavy teams.
With the rise of generative AI, no-code platforms, and fractional, AI-augmented contributors, early-stage startups are increasingly doing more with less headcount. Tasks that once required full-time engineering or operations teams can now be accomplished with fewer hires—or none at all. The effect of this may be to reduce the amount of equity that startups need to issue to attract talent. This would be all the more reason for startups to limit the size of their option pools in the early days before raising their first priced round.
Takeaways
Here are some best practices for early-stage startups when creating their initial option pool:
- Start small. Reserve only what you expect you’ll need prior to your first priced round. To do this effectively, you’ll need to create an option budget.
- Reassess and reduce before your priced round. Shrink the pool to reflect only granted or promised options before your SAFEs convert in a priced round.
- Tailor your strategy to your team model. If your startup is AI-enabled, or otherwise lean on human talent, budget option grants based on your actual startup’s projected needs, rather than using a generally applicable budgeting template.
