Founder and employee shares are usually earned over time. Vesting protects the company from dead equity, and pool size determines whether it can hire without another dilutive top-up.
11 min read · Level 3
Vesting looks like a technicality until someone leaves, at which point it decides whether the company keeps a quarter of its equity or loses it permanently. I think it is the single most valuable clause in early company formation, and its absence tells you something about how carefully the rest was set up.
Vesting. Shares or options are earned over a period, commonly four years with a one-year cliff: nothing is earned in the first year, then a quarter vests at the twelve-month mark and the rest monthly.
A founder holding 4,000,000 shares who leaves after 18 months, on a four-year schedule:
Vested: 4,000,000 x 18/48 = 1,500,000 shares Unvested: 2,500,000 shares returned to the company
Without vesting, the same founder would keep all 4,000,000 - dead equity that dilutes everyone still building the company.
Employee equity. Options are granted from the pool. The pool depletes as hiring proceeds:
Pool at Series A 10% of the company 20 hires averaging 0.3% each 6.0% granted Remaining for future hires 4.0%
If hiring plans require more than the pool holds, the company must enlarge it, which dilutes existing shareholders again - often at the next round, inside the pre-money valuation.
Grants also refresh. Employees who vest fully after four years often receive new grants to keep them, consuming more of the pool over time.
Because vesting determines whether the cap table stays aligned with who is actually contributing, and pool size determines how much future dilution is already implied.
For an investor, an under-sized pool is a hidden cost. A company that must double its pool at the next round will dilute existing holders more than the headline round size suggests.
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Two companies raising a Series A, both offering 20% for 5,000,000.
Item Company A Company B Existing pool 10% 4% Hiring plan next 18 months 18 people 22 people Pool needed about 6% about 7% Pool top-up required at round none enlarge from 4% to about 10%
Company B's round will include a pool increase of about 6 percentage points, created inside the pre-money valuation. For existing shareholders, the effective dilution is materially larger than Company A's, despite identical headline terms.
Reading a term sheet's dilution as the round size alone, without checking whether the option pool must be enlarged to support the hiring plan.
Check the schedule, cliff and what happens on departure or acquisition.
Multiply expected hires by typical grant sizes and compare with the pool remaining.
Add the pool increase to the round's dilution when assessing the real cost.
Find whether existing employees are due new grants that will consume more pool.
When reviewing a cap table before investing, or when a company you hold is preparing a round.
Do not treat a large pool as automatically wasteful. A company hiring heavily needs one; the test is whether its size matches a credible plan.
Startup advisers commonly describe option pools being topped up at each financing, with the increase typically included in the pre-money valuation, so that existing shareholders bear the dilution. Model documents published by industry bodies address pool sizing explicitly for this reason.
Expect pool top-ups at future rounds and include them when projecting your eventual ownership.
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