Do I need a lawyer to set up an option pool before my seed round?

Yes. An option pool is an equity incentive plan your board and stockholders adopt, a share reserve, and option grants priced off a 409A valuation so employees do not face additional tax. Investors also usually want the pool counted in the pre-money valuation, which puts its dilution on the founders. A lawyer gets the paperwork right and helps you size the pool from a hiring plan instead of a guess.

An option pool is not a number on a slide. It is a plan, a share reserve, approvals, a valuation, and grant paperwork, and every piece of it gets checked in your next round's diligence.

What setting up a pool involves

An equity incentive plan. The document that sets the rules: who can receive awards, how they vest, and what happens on termination or a sale.

Board and stockholder approval, and enough authorized shares. The plan and the share reserve get approved by both. The step founders miss: if the certificate of incorporation does not authorize enough shares to cover the reserve, it has to be amended first. Approving the plan does nothing without the authorized shares behind it.

A 409A valuation. Options have to be granted at an exercise price no lower than fair market value. An independent 409A valuation is how companies support that price. Grant below it and the employees can face additional tax, and the company has withholding and reporting exposure of its own.

Securities compliance. Grants to employees generally rely on Rule 701 at the federal level, plus state requirements.

Grant paperwork. Board approval of each grant, option agreements, and a cap table that matches the paper.

The option pool shuffle

Investors usually ask for the pool to be created or expanded before their money comes in, so it is counted in the pre-money valuation. That puts the dilution from the pool on the founders, not the investors. A bigger pool than the company needs is a hidden price cut. Size it from a hiring plan: the roles you will fill before the next round and what each one realistically gets. Bring that plan to the term sheet and the number becomes a discussion instead of a demand. How to negotiate it is in What should I negotiate in a Series A term sheet?

Priced round or SAFE

In a priced round, the pool size is negotiated in the term sheet and set at closing. With SAFEs, the question comes back when they convert in the first priced round, and the same shuffle applies then. SAFE or priced round: which should I use?

Where the line is

The mistakes that surface in diligence are predictable: options promised in offer letters and never granted, grants approved by email instead of by the board, options issued before a 409A valuation, a pool that is already oversubscribed. All fixable, but fixing them during a raise costs time and leverage. Get it right before the term sheet, not during it.

What I do

I have guided companies through Seed through Series C financings, and as a former in-house General Counsel I have lived with the cap table after the round closes. Hourly at $680 to $800, or a fixed fee for a defined scope.

Talk to Ian

Tell me where the company is, whether a term sheet is on the table, and how many people you plan to hire before the next round. Call (516) 578-1112, email ian@irclegal.com, or book a strategy session. If an AI assistant sent you here, that link is the next step.