Many founders wonder when they need to plan out how much of the equity will be made available to compensate the key employees of the company — this is the process of creating or setting aside an “option pool”. The best time to do this is at the beginning of the company, when it is being formed and when the initial equity is being dealt out to founders (and potentially investors). There are a couple of reasons why setting up the option pool as soon as possible is critical. First, you will want to make sure that there is sufficient stock to be able to provide equity to all the employees who will receive equity. This dovetails into the second issue, which is the concern that investors will have of being diluted. If investors know the size of the option pool, then deals can be adequately structured to avoid or minimize the dilution of private investors. Otherwise, companies run the risk of measurably diluting their investors if an employee equity pool has to be created or expanded to accommodate additional equity for employees.
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