EDC for Startups: How to Structure an Option Pool Before Series A

The Option Pool: A Founder’s Essential Tool for Pre-Series A

When you’re gearing up for a Series A round, the option pool is one of the most critical—and most misunderstood—tools in your founder kit. Think of it as the reserve magazine for your cap table: you need the right capacity, the right ammo type, and you need to load it before you step into the fight. Getting the structure wrong can leave you with unnecessary dilution or a team that’s under-incentivised. For a full breakdown of the mechanics, including UK-specific EMI and SEIS/EIS tax advantages, check out the original guide on how to structure an option pool before Series A.

Best for

This tool is essential for any UK-based founder planning to raise a Series A within the next 6–12 months. It’s also critical if you’re hiring key talent (CTO, VP of Sales, Head of Product) who expect equity as part of their total compensation. If you’re bootstrapped and not planning to raise, you can skip this—but if you’re on the VC track, the option pool is non-negotiable.

Key Specs

• Typical size: 10–20% of fully diluted shares post-money. Most VCs expect 10–15% for a Series A.
• Dilution type: Pre-money vs. post-money. Pre-money pools dilute only the founders; post-money pools dilute everyone (including new investors) proportionally.
• Tax wrappers (UK-specific): EMI (Enterprise Management Incentives) for tax-advantaged options up to £250k per employee. SEIS/EIS for early-stage investor relief.
• Vesting schedule: Standard 4-year monthly vest with a 1-year cliff. Some pools allow accelerated vesting on change of control.
• Exercise price: Must be at or above market value for EMI compliance. For unlisted shares, this is typically the latest 409A valuation or a formal valuation report.

Tradeoffs

Pre-money vs. post-money dilution. This is the biggest lever. A pre-money pool (e.g., 10% before the round) means the founder takes all the dilution. A post-money pool (e.g., 10% after the round) spreads the dilution across all shareholders, including the new investor. VCs almost always push for pre-money because it protects their ownership. The tradeoff: you keep more control of the cap table now, but you give up more of your own equity.

Pool size. Too small (under 8%) and you’ll run out of options before your next hire. Too large (over 20%) and you signal to investors that you’re either over-hiring or undervaluing your current team. The sweet spot is 10–15% for a typical 15–25 person team post-Series A.

EMI vs. unapproved options. EMI options are tax-efficient for employees (no NI, lower income tax) but require a formal valuation and have a £250k cap per employee. Unapproved options are simpler but less tax-friendly. If you’re hiring senior talent, EMI is almost always the better carry.

How to Choose

1. Size the pool based on your hiring plan. Map out the next 18 months of hires. Assign a notional option grant for each role (e.g., 0.5% for a mid-level engineer, 1–2% for a VP). Sum it up, then add a 20% buffer for unexpected hires or retention grants.
2. Decide pre-money vs. post-money early. If you have strong negotiating leverage (e.g., multiple term sheets), push for post-money. If you’re in a competitive round, expect to concede pre-money. Either way, model the dilution impact on your own ownership before you agree.
3. Set the exercise price at or above market value. For EMI, you need a formal valuation from a qualified accountant. For unapproved options, you can use the latest 409A or a board-approved valuation. Setting it too low creates tax problems; setting it too high makes options unattractive to employees.
4. Document the vesting schedule and cliff. Standard is 4-year monthly vest with a 1-year cliff. For key hires, consider single-trigger acceleration on change of control (vests all unvested options if the company is sold). For everyone else, double-trigger (vests only if they’re also terminated) is more founder-friendly.
5. Review the tax wrappers with your accountant. EMI is the gold standard for UK startups, but it requires annual filings and a formal valuation. SEIS/EIS are for investors, not employees, but they can affect the option pool structure if you’re running a parallel scheme.

Conclusion

The option pool is not a set-and-forget tool. It’s a living part of your cap table that needs to be sized, structured, and documented before you walk into a Series A negotiation. Get it right, and you’ll have the firepower to attract top talent without giving away the farm. Get it wrong, and you’ll be back at the table with your investors asking for more—and that’s a conversation you don’t want to have. Treat it like your EDC: carry the right tool, for the right job, at the right time.

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