How to Plan Stock Option Grants for Startup Hires

TL;DR

• Budget grants against your planned hires, unallocated option pool, expected dilution, and future refresh needs. Use Index Ventures OptionPlan as a planning reference, not a universal benchmark. Its tax assumptions date to 2018.
• Set grant ranges by role and level before negotiating offers. Account for seniority, technical scarcity, and cash compensation, then check comparable hires for consistency.
• Show candidates the option count and its percentage of fully diluted shares. Explain how future financing could reduce that ownership percentage.
• Have company counsel review grant documents and jurisdiction-specific tax treatment before issuing options. Give candidates the terms they need to assess the offer, including the strike price, vesting schedule, exercise window, and liquidity restrictions.

Start with the pool, not the offer

Build a grant budget before discussing equity with a candidate. List the engineering, product, and AI hires you expect over the next 12 to 18 months by role and seniority. Then check how many shares remain unallocated in the option pool, set aside shares for refresh grants, and divide the usable balance across the planned hires. Keep the cash hiring budget beside that plan so a larger grant does not become an unexamined substitute for salary.

For example, suppose your company has 10 million fully diluted shares and a 1.2 million-share option pool. If existing grants account for 400,000 shares, 800,000 remain unallocated. You might reserve 200,000 for refresh grants and budget 215,000 for six planned hires, leaving 385,000 for changes to the hiring plan. Those figures illustrate the calculation, not recommended grant sizes. Index Ventures OptionPlan offers pool-sizing and dilution scenarios you can use to test your assumptions, but its examples are not universal benchmarks. Its tax assumptions date to 2018.

Express each proposed grant as a percentage of fully diluted ownership alongside its option count. A grant of 60,000 options represents 0.6% of a 10 million-share company, but the option count alone tells a candidate little without the denominator. If a later financing dilutes existing holders by 20%, that 0.6% stake falls to about 0.48%, assuming the employee receives no additional grant. OptionPlan uses 20% as an illustrative Series A dilution assumption, not a forecast for your financing. Recheck the denominator and the remaining pool whenever your financing or hiring plan changes.

Set a grant policy before you're negotiating

A written grant policy gives you a starting range before a candidate asks for more equity. Set ranges by function and level, then decide where each hire falls based on expected role impact, relevant experience, technical scarcity, and cash compensation. Index Ventures OptionPlan separates grants by role and seniority and offers a useful planning reference. Its figures are not a universal standard, and its tax assumptions date to 2018.

Choose one method for setting the ranges. You can use ownership bands, subject to the pool budget, or size grants against base salary and convert the result into options using your current cap table. For example, a company might approve an illustrative 0.20% to 0.30% fully diluted ownership band for senior engineers. A hiring manager could propose a grant near the top for a hard-to-fill AI role, but the approver should check the remaining pool and document why that hire differs from comparable engineers.

Give hiring managers and Talent a short approval table that records each role’s range, who can approve an exception, and when the policy will be reviewed. Apply the same criteria to comparable hires so differences have an explanation beyond who negotiated harder. When you discuss a grant with a candidate, show its actual fully diluted ownership percentage. Explain the offer using your policy and available pool, not an unsupported “market standard” grant size.

Build three offers, not one

Offer three versions of the same role when you have room in both the cash budget and the option pool, and when the candidate wants to weigh salary against equity. A constrained pool or a salary already at your cash floor may leave no room for a choice.

Set one cash-to-equity exchange rate before presenting the offers. For example, suppose your approved policy lets a candidate trade $10,000 in annual salary for 10,000 additional options. Apply the rate in both directions, and check every version against the role’s grant range and your remaining pool. The rate governs your offers. It does not assign a cash value to an option.

Assume the company has 20 million fully diluted shares, including shares reserved for options, and has approved the following illustrative choices for one hire.

Keep the role, title, level, vesting schedule, and other offer terms fixed. Show the share count used to calculate each ownership percentage so the candidate can check the math. Future financing or new share issuance may reduce those percentages.

Have the CEO and finance lead approve any exception to the exchange rate or grant range before you discuss it with a candidate. The board or its authorized committee should approve the final grant under the company’s approval process. Tell the candidate plainly that the packages do not guarantee equal value. Salary provides known cash compensation, while an option’s eventual value depends on future company performance, dilution, exercise costs, and whether the shares can be sold.

Stress-test the plan against a real scenario

A four-person hiring plan can fit a seed-stage pool and still produce much smaller ownership percentages after fundraising. Assume a company has 10 million fully diluted shares, including a one-million-share option pool. It grants 50,000 options to an engineering lead, 30,000 to a product lead, 20,000 to an ML engineer, and 10,000 to a junior engineer. The cohort uses 110,000 shares, or 1.1% of the initial fully diluted capitalization, leaving 890,000 pool shares for later hires and refresh grants. The engineering lead’s initial grant represents 0.5% ownership.

Now assume a Series A dilutes existing holders by 20%, followed by a Series B that brings cumulative dilution to roughly 33%. Those figures follow Index Ventures OptionPlan’s illustrative round assumptions, not a forecast for this company. With no further pool increase, the engineering lead’s 0.5% falls to 0.4% after Series A and about 0.33% after Series B. A new pool increase would reduce it further.

Exit terms can have a larger effect than that percentage suggests. Suppose the two rounds raised $70 million in total, both investors hold one-times participating preferred shares, and the company sells for $100 million. In this simplified example, investors receive their $70 million preference first, then take their combined one-third ownership share of the remaining $30 million. Common holders split the other $20 million. Assuming every share in the fully diluted count participates, the engineering lead’s 50,000 options produce about $100,000 in gross sale proceeds, not the roughly $333,000 suggested by multiplying 0.33% by the sale price. An exercise cost of $1 per share would leave about $50,000 before taxes.

Actual proceeds depend on the financing documents, other preference claims, vesting, exercise costs, and the shares outstanding at exit. Ask counsel to model the company’s terms before using any exit illustration in an offer.

What to tell candidates so they can evaluate the offer

Give candidates a written equity summary with the offer, before they have to ask for one. Include the option count and its percentage of fully diluted shares, calculated using the current share count, outstanding options, and shares reserved in the option pool. State that future financing and additional grants can dilute that percentage.

Use a short explanation alongside the figures. “Your offer includes the right to buy a specified number of common shares after they vest. You pay the strike price if you exercise. The shares may never become liquid, and the amount you receive in a sale depends on the sale terms and what other shareholders receive first.” Then give the candidate the documents and answers needed to test that explanation.

• 409A and exercise cost. Provide the date and value of the current 409A valuation of common stock, the proposed strike price per share, and the total cost to exercise the full grant. Explain when the board expects to approve the grant. If a new valuation takes effect before approval, the final strike price may differ from the offer estimate.
• Vesting and departure. Show the vesting schedule, cliff, and what happens to unvested options when employment ends. State the post-termination exercise window in the plan and grant agreement, including whether the candidate must pay to exercise vested options before they have a way to sell the shares.
• Option type and tax limits. Identify whether the grant is intended to be an incentive stock option (ISO), a nonqualified stock option (NSO), or a combination. Under the $100,000 annual ISO limit, grant-date share value above the limit for options first exercisable in a calendar year receives NSO treatment. Explain that exercising an ISO can create alternative minimum tax exposure even without a sale, while exercising an NSO can create taxable income.
• Early exercise. Say whether the plan permits exercise before vesting and whether the candidate can make an 83(b) election on unvested shares. An eligible candidate generally has 30 days after the relevant share transfer to file the election and should get individual advice before exercising.
• Exit rights. Explain that option holders generally buy common shares, while investors may hold preferred shares with payment priority. Provide the relevant preference terms so the candidate does not mistake their ownership percentage for a guaranteed percentage of sale proceeds.

Tell candidates to consult their own tax and legal advisers about their circumstances and jurisdiction, including possible California AMT treatment. Have company counsel review the equity plan, offer language, and grant documents before issuance.

Where this breaks down and when to get help

Option grant policy needs review whenever your hiring plan or capitalization changes. A new round changes the fully diluted share count, and a shift toward senior AI hires may use more of the remaining pool than you planned. If you keep using old grant bands, comparable hires can receive different ownership stakes without a reason you can explain.

Ad hoc offers create another consistency problem. If you offer one candidate more options in exchange for lower salary without a documented exchange rate and an approval owner, the next hiring manager cannot apply the same trade-off. Record exceptions and revisit grant bands after financing, pool changes, or a material change in planned roles.

During a hiring surge, Invenio Talent can help your founders and Talent team compare proposed grants against approved role-level bands and calibrate offers with hiring managers across engineering, product, and AI searches. Your finance lead should own the pool calculations, while company counsel reviews grant documents and jurisdiction-specific tax treatment. Recruiting support can help keep offers consistent, but it does not replace equity or legal advice.

FAQs

• How often should you revisit the grant policy? Review it when your hiring plan, cash budget, option pool, or financing plans change. Before the next offer, check whether the existing role-level ranges still fit the shares available.
• What triggers a new 409A valuation? A company generally refreshes its 409A at least annually and after a material event, such as a financing round. Ask counsel whether an upcoming transaction affects the current valuation before promising a strike price. The strike price for a new grant depends on the valuation in effect when the company grants it, not when the candidate signs the offer. Read more about 409A timing.
• What happens if a hire leaves before their options vest? Unvested options generally expire when employment ends, subject to the grant documents. The hire should check the separate deadline for exercising any vested options. ISO tax treatment can also depend on when the hire exercises after departure.
• Why might two people in the same role receive different grants? A consistent policy can allow differences within a documented range. Seniority, the scope of the role, cash compensation, and the timing of each grant can affect the offer. Record the reason for any difference so comparable hires receive comparable treatment.