Equity 102: Advanced Equity Budgeting and Modeling

Advanced equity planning is the practice of sizing, allocating, and forecasting an employee equity programme as a multi-year financial system. This guide moves past definitions and into the decisions a leadership team has to make and defend: how big the pool needs to be, how fast it can be spent, how dilution compounds across rounds, and how the plan adapts at every funding stage.

Course objectives

By the end of this guide, you will be able to:

• Build a defensible bottom-up and top-down equity budget with a clear pool-burn assumption.
• Calculate equity burn rate, model dilution across rounds, and forecast pool exhaustion.
• Design a refresher grant programme that targets retention without bankrupting the pool.
• Recognise the cap-table consequences of pre-money option pool expansion, acceleration provisions, and 409A cycles.
• Adapt your equity plan stage by stage, and respond to down rounds, secondaries, and exhausted tax-advantaged schemes without losing employee trust.
  
  

Course syllabus

1. From mechanics to modeling: what Equity 102 covers
2. How to size your option pool for a horizon, not a moment
3. The bottom-up budget: from hiring plan to share count
4. The top-down budget: benchmarks, percentiles, and philosophy
5. Equity burn rate: gross, net, and what to report
6. Modeling refresher grants: promotion, performance, tenure
7. Modeling dilution across rounds, with a worked example
8. The pre-money vs post-money option pool, and the option pool shuffle
9. Tax valuations and the strike price cycle
10. Acceleration provisions as a modeling input
11. Stage-by-stage equity sophistication, from Seed to Pre-IPO
12. Special situations: down rounds, secondaries, stock splits, EOR pools, exhausted schemes
13. Reporting to the board: cap table summary and annual ESOP plan
14. Course recap: ten things to remember
15. Frequently asked questions

Module 1: From mechanics to modeling, what Equity 102 covers

Equity 101 explained what equity is. Equity 102 explains how to plan it.

The shift is from definitions to decisions. A 101-level reader needs to know that vesting exists. A 102-level reader needs to know how vesting choices interact with refresher cadence, how that interaction sets pool burn, and how pool burn determines whether the programme can survive to the next round without an embarrassing top-up.

Three habits separate teams that model equity well from teams that do not.

The first is treating equity as a multi-year budget rather than a per-grant decision. The pool is finite. Every grant pulls from it. Every round refills it. The programme has to clear the runway from one round to the next without running out.

The second is keeping a single source of truth for grants, vesting, terminations, and pool movements. Spreadsheets work at seed stage and break by Series A. By Series B, a cap-table platform is non-negotiable for the simple reason that the data has to be reliable enough to model from.

The third is presenting the equity programme to the board with the same rigour as the cash budget. That means a forward look (next 12 to 24 months), a backward look (burn against plan), and clear assumptions: pool size, refresher cadence, dilution at next round, and the unallocated headroom remaining at the end.

Key takeaway: Advanced equity planning is the discipline of treating the option pool as a multi-year, board-reported budget, not a per-grant approval queue.

Module 2: How to size your option pool for a horizon, not a moment

The option pool is not a one-time allocation. It is the equity equivalent of cash runway. Sizing it correctly means projecting forward to the next funding round, sometimes the round after, and ensuring the pool can absorb planned hiring, refresher activity, and exit provisions without a mid-cycle top-up.

A useful pool benchmark by stage:

US pools tend to run two to five percentage points larger than European pools at the same stage. The right number is always a function of the company's specific hiring plan, geography, and the level of seniority of expected hires, not a rule of thumb.

Two reserve targets matter on top of size. The first is the unallocated reserve at the end of each round. By Series B, leave at least 7.5 percent of the pool unallocated. By Series C, around 5 percent is sufficient. The second is the cushion for exit-window obligations: any acceleration provisions, retention grants, or contractual commitments that will land before the next round.

A common sequencing error is sizing the pool around current hiring needs only. Pools sized for the next six months almost always trigger a top-up that founders do not want, because top-ups are dilutive and almost always demanded pre-money in the next round. The correct planning horizon is 12 to 18 months for early-stage companies, and 24 to 36 months once a hiring plan is predictable enough to model.

Key takeaway: Size the pool to clear the runway between funding events, with explicit reserves for unallocated capacity and exit-window obligations.

Module 3: The bottom-up budget, from hiring plan to share count

The bottom-up budget is the count of options the plan will need to grant against the planned hiring path. It produces a single number: total options consumed by new joiner grants over the planning horizon.

The build is straightforward and methodical:

1. Take the planned hiring table by job family, level, and location. Each row is a future hire.
2. Apply the standard grant for that level and family. The standard grant is expressed either as a percentage of fully diluted equity (early stage) or as a monetary value at the prevailing share price (Series B and beyond).
3. Convert each grant into a share count using the current share price. The result is options per hire.
4. Sum across all planned hires. The total is the bottom-up budget for new joiner grants over the horizon.
5. Add a separate line for refresher grants (covered in Module 6).
6. Pay specific attention to C-level hires. They are usually negotiated outside the standard grid and consume disproportionate share counts.

A worked example. A Series A company is planning 84 hires over the next 12 months. The standard grant grid produces a total of approximately 499,000 options for those new joiners, which equals roughly 1.66 percent of fully diluted equity at the current cap table. That is the new-joiner consumption. Refreshers, retention grants, and exceptions sit on top.

The discipline of the bottom-up build is in two places: rigorous attention to the hiring plan, and standard grants that are tied to a leveling framework. If either is loose, the budget will not survive contact with the year.

Key takeaway: A defensible bottom-up budget is an option count produced by a hiring plan multiplied by a standard grant grid, with refreshers and C-level treated as separate line items.

Module 4: The top-down budget, benchmarks, percentiles, and philosophy

The top-down budget asks a different question: what does the market expect, and what percentile does the company want to sit at?

Three inputs shape the top-down view.

The first is the compensation philosophy. If the company has decided to pay at the 50th percentile of cash and the 75th percentile of equity, those targets translate into per-grant numbers via benchmarking tools. Every grant size has a market reference, and the philosophy decides where in that distribution the company sits.

The second is the geography. Granting equity to a hire in London uses the same instrument as granting to a hire in Berlin, but the market expectation is different. Most teams now operate with a global pay structure or a geo-multiplier, applied consistently to both cash and equity. Equity localisation is one of the easier-to-overlook elements of expansion: instruments differ, tax treatments differ, and the right benchmark is the local market, not headquarters.

The third is benchmarking source. Pave, Ravio, Figures, and Carta all publish equity data. The right source is the one closest to the company's geography and stage. Pull both the new-joiner benchmark and the refresher benchmark, because the two are sized differently and the refresher market has been moving faster.

The top-down view stress-tests the bottom-up build. If the bottom-up budget produces grants that sit two percentiles below market, the company will lose offers. If they sit two percentiles above, the pool will run out faster than the model predicts.

Key takeaway: The top-down budget is a market-anchored view of grant sizes by level, family, and location. It is the calibration layer over the bottom-up build, not a substitute for it.

Module 5: Equity burn rate, gross, net, and what to report

Equity burn rate measures how much of the company's fully diluted equity has been allocated to employees over a defined window, typically 12 months. It is the equity equivalent of cash burn, and it is the single most informative metric for a board update.

Two calculations are in common use.

Gross burn. The simplest version. Total grants made over the period (new joiner plus refresher), divided by fully diluted shares, expressed as a percentage. Gross burn ignores returns to the pool from leavers and ignores the strike price proceeds the company will eventually collect on exercise.

Net burn. A more accurate measure of long-term dilution. Net burn assumes some percentage of leavers will not exercise, and treats unreturned strike-price proceeds as offsetting future dilution. The estimate of leaver behaviour and exercise rate determines how aggressively net burn diverges from gross burn. When strike price is material relative to share value, net burn can be meaningfully lower than gross burn, which is why most later-stage companies prefer to report net.

A useful target for board reporting is to share both numbers, with the assumptions behind net burn explicit. Investors after Series B will expect quarterly burn rate and pool utilisation as standard deck content.

A modeling note. Burn is a backward-looking metric. The forward-looking equivalent is pool utilisation against the budget: percentage of the pool committed, percentage uncommitted, and the projected month at which the pool exhausts at current run-rate. Reporting both views (recent burn, projected pool exhaustion) is what gives a board the picture it actually needs.

Key takeaway: Track gross and net burn, report both, and pair them with a forward projection of pool exhaustion.

Module 6: Modeling refresher grants, promotion, performance, tenure

Refresher grants are the second largest line in the equity budget after new joiner grants, and the line most commonly under-modeled. Three types matter, and they should be added in sequence.

Three modeling rules avoid the most common refresher mistakes.

The first rule: get new joiner grants right before adding any refresher type. A refresher programme cannot fix under-granting at hire. It can only paper over it for one cycle.

The second rule: concentrate, do not spread. Refreshers work as a retention tool only when they materially change the recipient's calculus. Spreading them evenly across the company is a participation programme with a participation cost.

The third rule: model the multi-year cost, not the single-year cost. Tenure refreshers compound. Each year, more employees qualify, and the running annual cost climbs. A refresher programme that fits comfortably at 1 percent of fully diluted equity at Series B can become 3 to 4 percent annually by Series D if the design does not anticipate the cohort growth.

A reasonable target: refreshers should represent 20 to 40 percent of annual gross burn at Series B and C. Above 40 percent and the new-joiner pipeline starts to suffer.

Key takeaway: Layer refresher types in sequence (promotion, performance, tenure), concentrate awards on retention-critical employees, and model the multi-year cost before committing.

Module 7: Modeling dilution across rounds, with a worked example

Dilution is the structural reality every equity model has to forecast. The most common error is to model a single round in isolation. The compounding effect of three or four rounds, each with its own pool top-up, is what produces the eventual founder, employee, and investor split.

A worked example. A company starts with 100 percent owned by founders. Across four rounds, each round dilutes existing shareholders and tops up the pool.

The numbers above are illustrative. What matters is the pattern. Founder ownership compounds downward across rounds. Pool top-ups, even modest ones, contribute meaningfully to founder dilution because they are almost always taken pre-money (see Module 8).

Three modeling habits prevent surprises:

1. Model every round you can foresee, not just the next one. A founder asking "what does my ownership look like at IPO" needs a four-round forward model, not a one-round projection.
2. Treat the pool top-up as a separate line. Pool top-ups dilute existing shareholders just as new-investor shares do, and combining them obscures the true cost.
3. Stress-test on round size and pool top-up size. A 20 percent investor round combined with a 4 percent pool top-up is a 24 percent dilution event for existing shareholders. Investors negotiate the pool top-up for a reason.

Key takeaway: Dilution compounds across rounds. Model the entire foreseeable funding path, treat pool top-ups as separate from new-investor shares, and stress-test the assumptions.

Module 8: The pre-money vs post-money option pool, and the option pool shuffle

The option pool shuffle is the standard, and almost universally founder-unfriendly, mechanic by which option pool top-ups are placed in the cap table at financing rounds.

A pool top-up created pre-money is added to the cap table before the new investor's shares are issued, which means existing shareholders absorb the dilution and the new investor's percentage is calculated against an already-expanded base. The new investor pays the same headline price for a position that the term sheet describes as a percentage of the post-round company.

A pool top-up created post-money is added after the new investor's shares are issued. Both existing shareholders and the new investor share the dilution proportionally.

The math difference is significant. In a typical Series A round at a 20 million pre-money valuation, with a top-up that takes the pool from 10 to 15 percent of the post-round company, a pre-money top-up reduces the founder's effective price per share by approximately the size of the top-up. The post-money equivalent does not.

Three implications for advanced budgeting:

1. The pool shuffle is a real cash-equivalent cost to founders. It should be modeled, not waved through.
2. The right defence is a tight, defensible bottom-up hiring plan. When the pool top-up size is anchored to a real plan rather than a headline target, the negotiation moves from "how big should the pool be" to "is this hiring plan reasonable", which is a more winnable conversation.
3. Smaller pools, refreshed more frequently, can be cheaper than one large up-front pool. The trade-off is operational: more frequent top-ups mean more board approvals, more legal cost, and more friction with investors.
   
   

Key takeaway: The pre-money option pool shuffle is the standard mechanic and it has a real cost. Defend the pool size with a hiring plan, not a benchmark.

Module 9: Tax valuations and the strike price cycle

Tax valuations (409A in the US, EMI/HMRC valuations in the UK, fair market value assessments in other jurisdictions) set the floor for the strike price of any option grants made during their validity period. A 409A is valid for 12 months, or until a material event such as a new financing round.

The strike price cycle creates three modeling consequences.

One. Grants made just before a new round are typically the cheapest the company will ever issue. The strike price is set against the prevailing tax valuation, which has not yet caught up with the new round. Grants made just after a round are typically the most expensive. A grant timeline that aligns hiring offers with the post-round valuation cycle, deliberately or otherwise, has a measurable impact on the value of grants delivered to employees.

Two. The cost of a 409A is not a meaningful constraint, but the timing is. A 409A typically takes one to three weeks. Companies that need to grant options during a fundraise should plan the valuation refresh into the round timeline.

Three. Strike price strategy evolves with stage. Early-stage companies typically grant at the lowest defensible strike price (frequently the 409A value, sometimes nominal value), because the cultural position is that equity is part of total compensation from day one. Later-stage companies more often grant with the strike closer to the last preferred share price, which transfers more risk to employees and signals that the upside is forward-looking only. Both choices are defensible, and either should be deliberate.

A budgeting note. The strike price is not just an employee cost. It is also a future cash receipt for the company at exercise. In a programme with a meaningful strike value, the projected strike-price proceeds offset some of the dilution headline, which is why net burn typically reads lower than gross burn.

Key takeaway: Tax valuations are an annual (or event-driven) cycle that determines strike price floors. Treat the cycle as a planning input, not a back-office task.

Module 10: Acceleration provisions as a modeling input

Acceleration provisions decide what happens to unvested grants at a change of control. They are usually negotiated grant by grant, and they are almost always under-modeled at the plan level.

The modeling consequence is a deal-readiness one. A company with single-trigger acceleration on a meaningful percentage of its outstanding grants will see a portion of its equity pool collapse into the exit waterfall on day one of an acquisition. Acquirers care about this, and it can affect the deal price or the structure of the earn-out.

The right time to set the policy is at plan design. Single trigger creates a strong recruiting story. Double trigger preserves retention through deal close and is the default for a reason. The trade-off should be made deliberately and documented in the plan, not left to grant-by-grant negotiation.

Key takeaway: Acceleration is the deal-side of the equity plan. Model the cost of single trigger across the unvested base, and align the plan policy before the grants pile up.

Module 11: Stage-by-stage equity sophistication, from Seed to Pre-IPO

Plan complexity should match company stage. Adding refreshers, performance grants, and tenure programmes too early is a classic over-engineering trap. Adding them too late is a classic retention failure.

Three patterns hold across the stages.

The first: refreshers should be added in order. Promotion first, performance second, tenure last. Each layer multiplies the modeling complexity, and adding them out of sequence creates inconsistency.

The second: instrument choice often shifts in the later stages. US companies with clear IPO timelines often switch from options to RSUs, partly because RSUs are simpler to communicate and partly because the dilution math is easier to track. UK and EU companies typically stay on options longer, partly because of the EMI/CSOP tax-advantaged windows, and partly because RSUs in private UK companies create immediate income-tax consequences.

The third: executive grants tend to use mixed vesting in the later stages. A 50/50 or 66/34 split between time-based and performance-based vesting is common at Series D and beyond, because the dilution is large enough to justify the additional design complexity.

Key takeaway: Match plan complexity to company stage. Add refresher types in sequence, and treat instrument choice as a stage decision, not a default.

Module 12: Special situations, down rounds, secondaries, stock splits, EOR pools, exhausted schemes

The most common special situations a Total Rewards lead will face are predictable, even if no two play out identically.

Down rounds. A down round reduces the share price below the previous round's level. Existing employee grants do not lose vested status, but their paper value drops. The right response is calibrated, not blanket. Re-benchmark new joiner grants against the new share price so offers stay competitive. Identify the population most affected (typically those who joined at the higher valuation) and consider top-up grants for top performers. Communicate the change clearly. A down round can shake employee trust in equity, and the communication around it is at least as important as the mechanics.

Secondary sales. A structured secondary lets employees sell a portion of their vested holdings into a new or existing investor base, usually alongside a primary financing round. Secondaries have three modeling implications. They typically establish a new market price for the company's shares, which can influence the next 409A. They reduce the long-term retention pull of grants for participating employees, which should prompt a review of refresher cadence. And they require participation guidelines, typically a cap on the percentage any one person can sell, to prevent disproportionate cash-out by senior holders.

Stock splits. Below the Series B mark, the share price can drift to a level that makes individual grants psychologically unattractive (very small share counts, very high strike prices). A stock split increases the share count and reduces the share price proportionally, with no economic effect on holders. The right time to consider a split is when the share price exceeds two to three units of local currency, which is the band at which grant communication starts to suffer. Through Series B, aim to keep the share price no higher than 1 to 2 units of local currency.

EOR colleagues and phantom pools. Employees engaged through an Employer of Record cannot generally hold direct equity in the parent company, so a phantom share scheme is the standard tool. Phantom shares mirror real equity economically but settle in cash. When sizing a phantom pool, reserve approximately 20 percent of the budget for company-side social contributions, which fall on the company rather than the participant.

Exhausted EMI or CSOP allowances. UK companies that grow past the EMI thresholds typically move to CSOP, which has no company-size limit but caps individual grants at 60,000 pounds based on unrestricted market value. Companies that exhaust CSOP can layer in growth shares, RSUs, or SARs depending on their stage and tax priorities. Each option carries different tax and dilution profiles, and the right one depends on whether the priority is tax efficiency, simplicity, or flexibility.

Key takeaway: Special situations recur in predictable patterns. Plan for them in advance, model the impact, and communicate the change clearly when it lands.

Module 13: Reporting to the board, cap table summary and annual ESOP plan

A board-ready equity update has two halves: a snapshot of current state, and a forward plan for the next period.

The snapshot is the cap table summary. A useful format groups holdings into founders' shares, the employee options pool (split into vested, unvested, and ungranted), and preferred. The example below illustrates the structure:

The forward plan is the annual ESOP grant proposal. It lists planned hires by role, the standard grant for each, the number of hires, and the resulting total options consumed. The example below illustrates the structure:

Three reporting habits make board updates land well:

1. Present current burn against the previous board's plan, with explanation for any variance.
2. Highlight any planned exceptions to the standard grant grid, with the reasoning, before the round of grants is approved.
3. Carry forward an unallocated reserve target, and report the projected month at which the pool exhausts at current run-rate.
   
   

Key takeaway: The board needs a snapshot (cap table summary) and a plan (annual ESOP proposal). Both should be standardised so they can be compared across periods.

Module 14: Course recap, ten things to remember

1. Treat the option pool as a multi-year budget, not a per-grant approval queue.
2. Size the pool to clear the runway between funding events, with explicit reserves.
3. Build the bottom-up budget from a hiring plan multiplied by a standard grant grid.
4. Calibrate the bottom-up budget against a market-anchored top-down view.
5. Track gross and net equity burn rate and pair both with a forward pool exhaustion projection.
6. Layer refresher grants in sequence (promotion, performance, tenure) and concentrate them on retention-critical employees.
7. Model dilution across multiple rounds, not just the next one.
8. The pre-money option pool top-up is a real cost to founders, defended by a tight hiring plan.
9. Tax valuations set the strike-price floor on a 12-month cycle. Treat the cycle as a planning input.
10. Plan for special situations (down rounds, secondaries, stock splits, EOR pools, exhausted schemes) before they arrive.

Frequently asked questions

How big should our option pool be at each stage?

Typical pool sizes are 10 to 15 percent of fully diluted equity at seed, 15 to 17 percent at Series A, and 18 to 20 percent at Series B and beyond. US pools tend to run two to five points larger than European pools at the same stage. The right size is always a function of the specific hiring plan, not a benchmark in isolation.

What is equity burn rate and how do we calculate it?

Equity burn rate is the percentage of fully diluted equity granted to employees over the past 12 months. Gross burn divides total grants by fully diluted shares. Net burn adjusts for grants that will not be exercised by leavers and for strike-price proceeds. Most boards expect both numbers, with the assumptions behind net burn explicit.

What is the option pool shuffle?

The option pool shuffle is the standard practice of creating or topping up an option pool pre-money at a financing round. Existing shareholders absorb the dilution, the new investor's percentage is calculated against an expanded base, and the founder's effective price per share is reduced. It is the market default in US VC term sheets.

How often should we refresh our 409A or tax valuation?

A 409A is valid for 12 months or until a material event such as a financing round, acquisition discussion, or significant business change. Most companies refresh annually, with an additional refresh after each priced round. The valuation typically takes one to three weeks to complete and should be planned into round timelines.

When should we start running refresher grants?

Start with promotion grants once a leveling framework is in place, typically at Series A. Add selective performance grants at Series B, once a mature review system exists. Add tenure grants at Series C or D, once 10 to 15 or more employees a year are reaching the end of their initial vesting. Adding them out of sequence creates inconsistency.

How much equity should a C-level hire receive?

Indicative European benchmarks for non-founder C-level hires at early stage: a CTO between roughly 0.67 and 1.16 percent, a CRO between 0.90 and 1.33 percent, a COO between 2.17 and 4.09 percent. Percentages compress as the company matures. Anchor early-stage discussions in percentage of fully diluted shares, and re-benchmark before every offer.

What should we do with our equity programme after a down round?

Diagnose the cause first. Then re-benchmark new joiner grants against the new share price so offers stay competitive, identify the population most affected (typically recent joiners), and consider top-up grants for top performers. Model the pool impact before committing, and communicate clearly. Down-round comms matter as much as the mechanics.

How does a secondary sale affect strike price?

A secondary sale typically establishes a new market price for the company's shares, which can influence the next tax valuation and therefore future strike prices. Existing grants are not repriced. Companies running a secondary should plan for the valuation effect, set participation caps, and review their refresher programme to maintain long-term retention.

When should we run a stock split?

Consider a split when the share price exceeds two to three units of local currency, the band at which individual grants start to feel unattractively small in absolute share count. Through Series B, the practical target is a share price between 1 and 2 units of local currency. Splits are economically neutral but materially affect grant communication.

How do we offer equity to colleagues employed via an EOR?

Use a phantom share scheme. Phantom shares mirror real equity economically but settle in cash, which sidesteps most of the legal complexity around who can hold equity in which jurisdiction. Run a single blanket scheme rather than bespoke per-hire designs, and reserve roughly 20 percent of the pool for company-side social contributions.

We have exhausted our EMI allowance. What is next?

CSOP is the typical next step in the UK, with no company-size limit but a 60,000 pound per-employee cap based on unrestricted market value. Beyond CSOP, layer in growth shares, RSUs, or SARs depending on whether the priority is tax efficiency, simplicity, or flexibility. Each option carries different dilution and tax profiles, and the choice should be made with local tax advice.

What is the cost of single-trigger acceleration on exit?

Single-trigger acceleration vests all unvested grants at a change of control. The cost is the unvested portion of the cap table that collapses into the exit waterfall on day one of an acquisition. For a company with substantial unvested grants, that can materially affect the deal price or the structure of an earn-out. Most plans use double trigger by default for this reason.

This guide is educational, not legal, tax, or financial advice. Equity-plan decisions should be made with the appropriate professional advisors.

Sources and further reading: Ravio, Pave, Figures, HMRC EMI guidance, IRS Section 409A guidance.