How to set up an Employee Stock Option Plan for a seed-stage company

Setting up a stock plan at the seed stage follows a clear sequence: board-approved equity incentive plan first, option pool sized at 10–15% of fully diluted shares, first grants issued on standard 4-year vesting with a 1-year cliff, before your first hire. Get that order right and you never have to pause a hire offer to sort out your equity infrastructure.

The alternative: you've just closed your seed round, you're ready to hire your first three engineers, and every candidate is asking the same question: "what does the equity look like?" You have a rough number in your head, but no plan, no documents, and no way to formally issue a grant. The hire you need most takes another offer while you scramble.

This guide walks you through how to do it right, from the first board resolution to the first grant letter.

Seed-stage stock plan vs corporate ESOP: an important distinction

When most people hear "ESOP," they think of the employee stock ownership plans common at large companies, where a trust buys shares on behalf of employees over time. That is not what seed-stage founders are building.

At the seed stage, a stock plan is an equity incentive plan that gives employees the right to purchase shares at a fixed price in the future. These are options, not shares. Employees hold the right to buy shares if they stay long enough and the company grows.

For US companies, grants are typically structured as Incentive Stock Options (ISOs) for employees and Non-qualified Stock Options (NSOs) for advisors and contractors.

Sizing the option pool: 10–15% for most seed-stage companies

The option pool is the block of shares reserved for future employee grants. It lives on your cap table as unissued shares, and investors will scrutinize it at your Series A.

For most seed-stage companies, 10–15% of fully diluted shares is the right starting range. Too small forces you to go back to shareholders for approval sooner than you want; too large creates unnecessary dilution when every percentage point matters.

At Cake, we typically see seed-stage companies land at 10% for lean hiring plans and 15% for aggressive ones. Start with your 18-month headcount plan and work backward.

The legal documents you need

Before you issue a single grant, you need three documents in place, all approved by your board of directors.

Equity incentive plan

The master document governing your entire option program. It sets shares reserved, defines eligibility, outlines award types (ISOs, NSOs, restricted stock), and establishes rules for exercise, termination, and expiration. Your startup attorney will typically produce this from a standard template.

Stock option agreement

The grant-level contract between the company and the individual employee. It references the plan and specifies the number of options, strike price, vesting schedule, and what happens on termination or change of control.

Grant notice

‍A shorter document that summarizes key terms for the employee in plain language. Both parties sign it, and it becomes the employee's record of their grant.

You will also need a board resolution approving the plan and each individual grant. Grants issued without board approval are legally defective.

Grant strategy: Benchmarks for seed-stage hires

Equity benchmarks shift quickly with market conditions and company stage, so treat any numbers as directional, not definitive. That said, here is what we typically see at seed stage in the US:

• ‍Early engineer (pre-product-market fit, first 5 hires): 0.25–1%. The range is wide because timing and leverage matter enormously; your first engineer carries more risk and usually receives more.‍
• VP-level hire (first VP of Engineering, VP of Sales): 0.5–2%. The upper end reflects the seniority and scarcity of the role; a VP joining pre-revenue takes on real risk.‍
• Advisor: 0.1–0.5%. Active advisors who show up consistently sit toward the top of this range; board observers and light-touch advisors toward the bottom.

These figures are informed by sources like Holloway's Guide to Equity Compensation. Use them as a starting point for internal benchmarking, then adjust for your specific stage, geography, and the individual's other options.

Document your grant rationale for each hire so you can explain decisions across similar roles later.

Vesting standard: Why 4-year / 1-year cliff is non-negotiable at the seed stage

The standard vesting schedule for employee stock options in the US is four years of vesting with a one-year cliff. After 12 months, 25% of the grant vests in one block. The remaining 75% vests monthly over the following 36 months.

This structure exists for good reasons, and deviating from it creates problems you will feel at Series A.

The cliff protects the company from early departures. If someone leaves in month eight, they walk away with nothing.

The four-year total aligns incentives over a realistic startup timeline. Shorter vesting means key hires are fully vested while the company is still early, removing a retention lever when you need it most.

Non-standard vesting terms, such as shorter schedules, back-loaded vesting, or grants without a cliff, will get flagged in due diligence and can slow or require remediation before closing.

Adopt 4-year / 1-year cliff as your default on day one and treat any deviation as an exception that requires a strong reason and board sign-off.

The right structure from your first grant

Setting up a stock plan at the seed stage is not a later problem. It is a decision that shapes how your company attracts and retains the people who build it. Get the structure right now, and every hire after that is a cleaner, faster conversation.