In collaboration with Robyn Shutak and the Infinite Equity team.

In startup funding and equity management, the size of the incentive pool during a fundraising conversation can often be a one-sided topic. It is closely mapped out and modelled from the VC perspective but their processes overwhelmingly focus on understanding their expected returns. Founders and their Finance teams modeling out pool allocation and utilisation however is rarely expected by investors as part of Due Diligence preceding a funding decision and it is rarely approached with the same rigour as other financial plans and forecasts by the companies raising.

The discussion on pool sizes should be centred on ensuring the incentive pool is properly budgeted, allowing both founders and investors to align on its size based on strategic needs rather than arbitrary increases or reductions (either based on rules of thumb or VC return models). A lack of strategic planning can lead to an inappropriately-sized pool either causing unnecessary dilution or leaving companies struggling to attract and retain the talent they need due to having too little to play with.

So, why isn’t the incentive pool managed with the same discipline as other budgeted expenses? And what’s the right way to go about it?

Note: periodic, typically quarterly board updates on Burn Rate and Pool Utilisation is a different beast altogether and is a much more common expectation from investors after ~Series B.

Key Takeaway: Founders should proactively model incentive pool allocations just as they would other financial forecasts, ensuring alignment with strategic hiring and retention needs rather than relying solely on investor-driven rule of thumbs or models.

Why is the Incentive Pool Allocation often not Dictated by a Robust Budgeting Process?

In an ideal world, a well-thought-out budgeting process would dictate the allocation of equity much in the same way it does for spending raised $ capital. However, this is often not a standard practice especially pre Series-C/D, even among top-tier VC funds and founders. There are several reasons for this:

1. Equity Is Perceived as Less Tangible: Unlike cash, equity allocations feel more intangible, and therefore, less urgent to budget meticulously even by seasoned investors and serial founders. In many cases, equity is viewed as a deferred, long-term cost that doesn’t need the same rigorous tracking as cash flow or operational spending.

2. Varying Approaches Across Stages: Each funding stage (seed, Series A, Series B, etc.) involves different priorities and, consequently, different approaches to compensation and incentives. There’s often an assumption that "equity will be allocated when needed" rather than having a predefined, strategic approach.

3. Short-Term Focus: Many early-stage companies focus on immediate needs like product development, customer acquisition, or building the right team, often leaving equity planning as an afterthought. At the same time, some investors may be focused on getting the company to the next milestone before worrying about incentive structures. Which makes sense to an extent, as focusing on an incentive plan more than growing a healthy business likely results in no viable business at all.

4. Investor Control: The responsibility of a properly budgeted incentive pool size rests with the companies, but they may be less familiar with the intricacies of this process. In such cases investor preferences or historical industry practices and averages dictate rather than a forward-looking, strategic plan.

Key Takeaway: A structured, data-driven approach to incentive pool budgeting should be implemented early with increasing complexity as the company grows. On this topic, you are better off prepping your shopping list before going to the supermarket rather than opening the fridge and cooking with what you already have in there.

What Makes a Good Incentive Pool Budget Preceding a Fundraise?

A good incentive pool budget is one that considers both the present and future needs of the company, aligning the interests of key talent with long-term company performance. This is where the right amount of equity comes into play—not too little that it under-rewards contributors, and not too much to overly dilute the rest of the stakeholders’.

Here’s what to think about when budgeting an incentive pool:

1. Industry and Stage: The benchmark for a good incentive pool can vary significantly based on the stage of the company and the sector in which it operates. The bigger the company the more evolved the equity granting system - which requires higher equity burn, and the more competitive the industry the higher the talent expectations. A good example in these times are AI companies, where award and pool sizes significantly exceed SaaS benchmarks.
   
   For example, according to Pave’s most recent data, the median new hire equity grant for AI/ML engineers is ~38% larger than for software engineers at all employee levels. And when Pave looks at the very top of the market, usually people in AI/ML researcher roles, awards are 3.58x larger at the 95th percentile of the market and 10.35x larger at the 99th percentile of the market.

As Matt Schulman, the CEO of Pave notes, “this means a single employee can disrupt your entire equity allocation plan, so hopefully you’re picking the right person and thinking about the size and design of their equity award very carefully.”

Pool size Benchmarks (Data source: Carta, Index Ventures):

• In general, please see market trends for a US vs Europe view. In short, US pools tend to be 2-5% larger than their European counterparts.

• Seed Stage: In early-stage startups, incentive pools are very often between 10% and 15% of the fully diluted captable. Carta is showing numbers between 13.5% and 15% depending on valuation whilst Index points that there has been a rule of thumb to set pool size at 10% at seed stage.

• Series A: By the time a company has raised Series A funding, the pool generally grows to around 15%. Carta’s benchmarks here are 16-17% depending on valuation whilst Index is quoting the 15% number.

• Series B/C and beyond: As companies grow and need more talent the option pool also increases in size to accommodate the demand. However, share price growth at this stage also means that a company will need significantly less options to meet the target $ value. Hence typical pool size nudges only slightly higher to around 18-20% (according to both Carta and Index).

Burn rate Benchmarks (Data source: EquityPeople for Europe, Carta & Pave for US, we took 50th percentile data everywhere):

• Definition: percentage of fully diluted cap table allocated to employees (including leadership, initial and refresher grants) over a one year period. Does not consider equity flowing back from leavers. In essence equity burn rate is a metric that measures how much a company dilutes its existing shareholders' equity by issuing new equity to employees.

  Please note: the calculation method for net burn rate will vary from data source to data source.

• Our calculation method:

  1. Gross burn - does not consider the impact of:

     1. Unexercised options

     2. Strike price

  2. Net burn - assumes:

     1. A flat rate for the amount of options that gets exercised by leavers (will necessitate the estimation of the percentage of the company that might leave before a liquidity event).

     2. Strike price (if paid ahead of exit) will not be used for standard operations by the company and will grow the pot that is to be distributed as exit proceeds. When strike price is of a material size, net burn can be significantly lower than gross burn hence often chosen as the reported metric by a lot of companies.

• Gross burn rate benchmarks:

  • Seed Stage:

    1. Europe: 1.8-2.0%

    2. US: 2.6-2.8%

  • Series A:

    1. Europe: 2.0-2.2%

    2. US: 2.6-3.0%

  • Series B/C and beyond:

    1. Europe: 2.2-2.8%

    2. US: 2.6-3.2%

2. Market Trends: Different industries have different compensation norms. For instance, Silicon Valley tends to allocate more generous equity pools compared to regions like London or Berlin where talent expectations trend lower. As a result, U.S. companies often offer between 10% to 15% of the equity in early-stage startups, whereas UK and EU-based companies may offer slightly lower pools—around 8% to 12%. However, actual employee ownership at exit is much closer in the two jurisdictions due to generally shorter post-termination exercise windows in the US. More on this below in point 5, but the effect of a shorter time window for employees to put up their strike price obligation is that only about 25% of vested options actually gets exercised in the US.

3. Retention and Growth Targets: A good budget should also take into account the company’s long-term retention goals. For example, an incentive pool designed for key hires (e.g., executives, senior engineers) should be structured to keep these employees motivated through the major value inflection points, such as a potential exit or IPO.

4. Talent Strategy: If a startup wants to or needs to hire talent with big tech company backgrounds where the expectations of equity compensation is significantly higher and more complex, then the pool size and burn will need to reflect that. The difference in award sizes is in the multiples when compared to talent from small startups, and corporates.
   
   Pave has excellent data that shows this dynamic in action. When looking at software engineers, median total compensation (base salary plus annualized new hire equity) at public companies is ~1.5x to 2.0x higher than at early stage private companies with less than $20M in capital raised. Interestingly, super unicorns with more than $500M in capital raised pay more than public companies.

   
   

   

   
   

5. Leavers: How you govern leavers will also heavily influence your employee incentive pool budget and there are multiple layers here.

   • First, how do you define good and bad leavers, i.e. do you let people leave with vested options? It is common practice here to let everyone other than folks who have seriously wronged the company (e.g. gross misconduct etc.) or joined one of your top 2-4 competitors within 6-12 months of leaving your company (relevant also in terms of their geographical location, beware that non-competes are notoriously hard to enforce) to be a good leaver and to be allowed to keep the vested portion of their equity.

   • The second layer is the post-termination exercise window. The tighter the window the less people will actually put up the money to exercise and therefore the lower your actual pool burn. There are some tax-optimised schemes where the length of the post-termination exercise period is dictated by law. For example 90 days for ISO (US) or EMI (UK) schemes. BUT and this is a big but, you may allow your employees to exercise outside (all the way up to liquidity unless the options would lapse before that) this limited time at the expense of them (and you as a company) losing the tax-optimisation aspects of their scheme. Whilst we see more and more companies having longer post-termination exercise periods, which is a good thing, you need to be aware of the impact of your decisions here when building your pool budget.

“How you approach your leavers is a good representation of how you view employee ownership in general. Do you give it away freely and claw it back harshly or do you release it gradually and let people leave with it if they so wish? Whilst the right approach mostly depends on your talent strategy, I typically encourage portfolio companies to be up front and honest about whichever path they choose.” Isaiah Baril-Dore

Key Takeaway: Pool sizes and burn rates should be guided by market benchmarks but tailored to a company’s specific needs and hiring strategy. How you govern your leavers will have a significant impact on your burn rate.

Best Practices - Budgeting for an Incentive Pool Preceding a Fundraise

To ensure the incentive pool serves its intended purpose of motivating and retaining top talent, consider the following best practices:

1. Current and new headcount: Make sure you include 12-24 months of headcount growth, and their equity allocation. The main things to estimate as accurately as possible are: number of people and their average seniority. Are we filling up the senior bench, or have we done that already and we’re hiring juniors and mid-level employees? Senior talent requires multiples of the junior sized equity grants.

2. The exec bench: We cover this topic separately from the headcount modelling as it is so crucial for your equity budget. You will need to have some idea about the personas in the founding team and their career growth plans and paths to know what C-level team members you might need in the future (e.g. a late CTO). Benchmarking here happens in a much more refined fashion per stage and valuation but in your mind you should be thinking that you will need to invest 1-3% of your company into acquiring top talent for these seats. Toward the top end of this spectrum are: CTO, CPrO, COO, CFO and the best negotiators of them all the CROs.

3. Refresher Grants: A good equity scheme comes with a refresher grant strategy. These grants typically reward promotion, tenure or performance. They are typically awarded annually, so if you’re budgeting for 24 months, keep that in mind. These are great, highly motivating. Don’t forget to include them in your budget.

“Ensure that you periodically review your allocation spend. The balance between new hires and performance rewards will naturally shift over time and in response to hiring projections. For example, if a seed or series A company is allocating 70% of its annual budget on performance rewards rather than new hires, it's worth reconsidering your approach and the frequency of your top-ups and refreshes.” Isaiah Baril-Dore

4. Review equity benchmarks: Collect data for your stage (valuation, employee size), industry, and location. If you’re having a hard time finding data for certain specialised departments, create blends of the data that you do find. Find the closest departments and assign the weight it represents in your specialised department.

5. Model the employee journey: Determine a few representative personas and model out their total future equity value after they’ve been with you for 4 years. For example, a high performing senior engineer: determine a new hire grant value today vs in the future, add a promotion grant after 2 years and add that to the future value, then add performance grants for each of the 4 years and model the future value for that as well.
   With that you now have a good approximation of what your top performing engineers will receive, and you can sense check the numbers before adopting the methodology for the entire company. Are the modeled outcomes motivating enough?

6. Leave a buffer: No modeling is perfect, but the less confident you are in the model the higher the buffer should be. We typically see a 20% buffer for these cases and a 5% buffer for the models we have more confidence in.

7. Review Regularly: A pool set at the beginning of a funding round may not reflect the company’s evolving needs. As the company grows, and talent requirements change, revisit the pool size to ensure it’s aligned with future hiring plans and business milestones. Repeat this every 12 months, and confirm whether the pool size will be able to sustain the next 12 months of growth.

8. Consult Your Investors: Ensure that investors are aligned with the incentive pool structure, as they will often need to approve the budget. Open discussions can help balance the interests of both the company and its backers.

9. Keep Dilution in Mind: A well-planned pool takes into account the impact of dilution on both current and future stakeholders. Setting an incentive pool too large can end up hurting the value of founder and investor equity, while too small a pool can demotivate key talent.

10. Use Pool for Key Hires, Not Everyone: A common culprit of over-dilution  is over-allocating equity to junior employees who are unlikely to have a transformative impact on the company. Instead, ensure you have enough room for senior team members, or critical hires who will directly influence the company's success. This is not to say that you should not have a path for equity for all. Be mindful about contribution rates and refresher programmes.

“The big old ‘should we grant equity for all or only key hires’ is a question that pops up in our portfolio almost every week. My take? Equity is valuable, invest it where you can see the path to a positive ROI in a fair and consistent way. This typically translates to new hire grants for all hires in early stages, but that should shift quickly as you scale. Avoid entitlement culture around equity - in later stages new grants should be made via performance (clearly communicated) or for key hires. New hire grants may be needed lower down in the org in specific departments to meet candidates’ total compensation expectations Series C/D and beyond.” Isaiah Baril-Dore

Key Takeaway: A disciplined, proactive approach to incentive pool budgeting ensures long-term talent retention, prevents over-dilution, and aligns with investor expectations.

Conclusion

Equity pools typically dilute every stakeholder in the company; employees, founders, and investors. Taking the time to establish a thoughtful, data-backed budget for equity allocation preceding a fundraise does not only help align incentives but also ensures long-term growth and sustainability. Therefore it’s important to create a methodology that leads to a positive ROI for everyone, affected by the allocated equity.