Cash buys talent for only so long. For most UK startups, equity does the rest, and a share option pool is where that equity comes from. Size it well and you can hire without giving ownership away too early. Size it badly and the dilution lands on you.
What Is a Share Option Pool?
A share option pool is a portion of a company's equity reserved for future grants to employees, advisers and other eligible contributors.
It is an allocation of potential equity, not a separate block of issued shares. When the board grants options, the unallocated reserve falls and outstanding options rise. Shares are generally issued only when the holder exercises those options, subject to the scheme's terms and applicable law.
The pool reduces founders' percentage ownership on a fully diluted basis, even though creating the reserve does not itself issue new shares.
Carta's example makes this concrete: a founder holding 10,000 shares who creates a 1,500-share pool owns about 87% of the fully diluted company, down from 100%.Investors expect a pool. In HSBC Innovation Banking's 2026 Term Sheet Guide, 71% of the term sheets analysed created a pool or topped up an existing one.
The pool is also separate from the scheme that sits on top of it.
Our guide to the EMI share option scheme covers the tax rules; the pool simply decides how much equity is available to grant.
Why UK Startups Need a Pool Early
UK startups need a pool early because investors expect one at funding rounds and because equity lets you hire without adding to your cash burn. HSBC's guide analysed 711 term sheets, 643 of them for UK-headquartered companies.
Carta makes the cash point directly: equity can attract and retain talent without inflating your burn rate.
Timing matters too.
SeedLegals recommends setting up a pool before a funding round and before you scale hiring.
Option Pool Size: How Big Should Your First Pool Be?
A 10% pool is a common starting point for UK startups, although the right size depends on your hiring plan and funding terms. SeedLegals describes 10% as a rough guide rather than a requirement, and Index Ventures' 2018 handbook found 10% was the norm at seed in both Europe and the US.
Treat any headline option pool size as a starting point, not an answer.
Carta advises sizing the pool from a hiring plan covering the next 12 to 18 months, then sense-checking it against peer benchmarks, and it warns against defaulting to 10%.
Too large and you dilute yourself for equity you may never grant. Too small and you will need shareholder approval to enlarge it later.
Pre-Money vs Post-Money Option Pool
With a pre-money pool, the pool is included in the capitalisation used to calculate the investment, so existing shareholders generally bear its dilution. With a post-money pool, the new investor also bears a share of that dilution.
The exact result depends on the term sheet's definitions and calculations.
HSBC calls the pre-money result the "option pool shuffle": founders are diluted twice, once when the pool is created and again when the round's new shares are issued.
Carta notes that many VC term sheets require a pre-money pool. In the US, pools are typically pre-money, but HSBC says UK practice varies more widely.
Here is the arithmetic, using illustrative numbers. An investor puts £2m into a company at an £8m pre-money valuation, making it £10m post-money. The term sheet sizes the pool at 10% of the post-money capitalisation but includes it in the pre-money share count.
The investor therefore holds 20%, the pool 10% and existing shareholders 70%. Without the pool, existing shareholders would hold 80%. Their 70% stake is worth £7m at the £10m post-money valuation, so their effective pre-money valuation drops from £8m to £7m.
That is why the pre-money vs post-money option pool question draws such heavy negotiation. HSBC suggests asking for a cap table in the appendix, then negotiating a higher pre-money valuation or a post-money pool.
Startup Equity Allocation: How Much to Give Each Hire
Index Ventures' 2018 handbook puts non-founder C-level grants at 0.8% to 1.5% of fully diluted equity and VP grants at 0.3% to 0.8% at Series A. Use these as reference points for your own startup equity allocation, not as rules.
Fully diluted equity means issued shares plus outstanding options. Both ranges come from Index Ventures’ 2018 handbook, so treat them as dated guides rather than current UK market rates.
For engineers, the only benchmarks we found are US seed-stage figures collected by Advanced HR and cited by Index in 2018: roughly 1.00% for a senior engineer, 0.45% for a mid-level engineer and 0.15% for a junior engineer. They are not UK data, so use them only as a rough reference.
Carta's advice is to start from the hiring plan: list the roles you will add before the next round, assign each a grant, and add refresh grants for existing staff.
How the Share Option Pool Changes at Each Funding Round
Investors often ask founders to top up the pool at each funding round, and increases made after the round dilute every shareholder, investors included.
Unvested options from leavers often return to the pool, although this depends on the scheme rules and leaver provisions, so check yours rather than assuming it happens automatically.
Index Ventures' 2018 research found European pools did not grow round after round. They were topped back up to about 10% as existing options were diluted, while US pools typically rose from 10% at seed to 15% at Series A.
Creating or enlarging a pool commonly requires board and shareholder approval. Investor consent may also be necessary under the shareholders' agreement, depending on the company's articles, existing authorities and contractual terms.
Common Share Option Pool Mistakes
Founders usually make two mistakes with a pool: promising equity before a plan exists, and missing who bears the dilution.
Promising equity before the plan exists: Index warns that loose promises turn into IOUs, and that promised grants must be disclosed in due diligence and counted as allocated. Carta adds that an offer letter does not grant options; the board must formally grant them.
Missing who bears the dilution: A round can look good on paper but feel closer to a down round once a large pre-money pool is counted.
Conclusion
Your first share option pool is the equity budget for your first hires. Size it from a hiring plan, work through the pre-money vs post-money option pool maths before you sign, and keep every grant consistent with your startup equity allocation plan.
FAQs
1. How big should a share option pool be for a UK startup?
A 10% pool is a common starting point, but the right size depends on your hiring plan and funding terms. Carta advises sizing yours from a 12 to 18 month hiring plan rather than a default percentage.
2. Does a share option pool dilute founders?
Yes, on a fully diluted basis, and most heavily when the pool is created pre-money. Carta notes that unallocated shares still count towards the fully diluted share count.
3. When should a startup create a share option pool?
Create it before a funding round and before you scale hiring, according to SeedLegals. Investors will usually expect one at the round anyway.
Also Read: What UK Crypto Regulation Will Cost a Startup’s Runway
Sources: HSBC Innovation Banking Venture Capital Term Sheet Guide 2026; Carta UK, "What is an option pool?" (2026); SeedLegals share option pool guides (2024, 2026); Index Ventures, Rewarding Talent (2018 edition), including US seed benchmarks from Advanced HR (2018). Role benchmarks are dated and largely US-based.
The EP+ Editorial Desk covers UK startups, founder stories, and venture capital. All editorial content is independently produced and human-reviewed before publication.
