How an option pool works, how big to make it, and who really pays for it when investors arrive.

A strong senior hire can change a startup’s path. Most early-stage companies simply can’t match the salary they’d earn elsewhere.

We asked Stephen Pessenbacher, a corporate and commercial attorney at Dommisse Attorneys who advises founders on raises and cap tables, how founders should use share options…

Startups often lack the cash to pay the talent they need, so they ring-fence shares for key hires instead. The hire becomes, in effect, a shareholder, and their reward grows with the company.

“The more value they add and the more the company grows, the more they benefit.”

Stephen says companies typically ring-fence 10% to 15% of their issued shares for an employee share option pool. That looks like a lot at first glance. It’s worth it for people who can take the company further than you expected.

Don’t pick a round number. List the key roles you plan to fill before your next funding round, usually the next 18 to 24 months, and the equity each would need. That gives you a pool size you can defend. A pool that’s too big is founder dilution for nothing; one that’s too small means topping it up later, which dilutes you again.

This is what Stephen calls the unseen dilution. Investors often expect the pool to be created before they invest, so the dilution falls entirely on the founders and existing shareholders, not on the new money. It’s known as the option pool shuffle: the headline valuation stays the same, but what your shares are effectively worth goes down. A hiring plan is your best argument for a smaller pool.

The standard approach is four years of vesting with a one-year cliff. Nothing vests in the first year; then a quarter vests, and the rest builds up monthly over the next three years. Someone who leaves early takes little or nothing, and their unvested options go back into the pool for the next hire.

Before you raise, look hard at your cap table and model it. If you plan to hire people you can’t pay in cash, reserve the shares, accept you’ll be diluted accordingly, and give investors a cap table that shows exactly what they’ll get and how the founders are diluted. Get advice on how the scheme is set up and taxed in South Africa before anyone signs.

Used well, share options let a cash-strapped startup hire people it otherwise couldn’t, and keep them for years. Plan the pool before the round and you decide what it costs you, instead of finding out in the term sheet.

This is one piece of How Much Equity Should You Give Away and When?, Stephen’s full masterclass inside the Founder Collab, which answers the question every founder asks and few can pin down:

You’ll also get access to 40+ other masterclasses from SA founders and operators on sales, fundraising, UX, paid media and more inside The Founder Collab.

Get more SA tech and business news, tips and business-building workflows and subscribe to The Open Letter.