Options, pools, and advisor equity

LAST REVIEWED 2026-08 · SOURCED FROM 2 SESSIONS, JAN–MAY 2026

TL;DR

ISOs go to W-2 employees, NSOs to contractors and advisors. Get a third-party 409A once you’ve raised or have real revenue, and aim for the lowest justifiable strike — that’s the point. Advisors get 0.1–0.5% on 1–2 year vesting; anyone asking for more than 1–2% is telling you they don’t understand the game. And never, ever pay anyone a percentage of money raised — that’s broker-dealer territory and the company is on the hook.

ISOs, NSOs, and the 409A

ISOs are for W-2 employees only and carry tax advantages; NSOs go to contractors and advisors and are taxed on the spread at exercise. Both need a defensible fair-market-value strike price.

Before a priced round or meaningful revenue, the board can set FMV low on its own analysis. After either milestone, get a third-party 409A valuation — it’s cheap through cap-table platforms and gives IRS safe-harbor protection. And understand the goal:

“This valuation analysis is really, like, what is the lowest justifiable valuation we can give people their shares at?”

— Startup securities attorney, 15 years of practice · session, Jan 2026

A low strike maximizes the incentive value of every grant. This is one of the few times in a startup’s life you want the low number.

Watch the 90-day post-termination exercise window — the default. Longer windows help recruiting but can strand pool equity in the hands of departed employees.

The pool: small, and sized to a hiring plan

Reserve roughly 10% at formation — enough for about 12 months of hires. Two reasons to resist a bigger pool: term-sheet top-ups are computed pre-money so founders eat the dilution, and an unused pool inflates SAFE-conversion dilution (see Term sheets and red flags). Increasing the pool later is a routine board-plus-stockholder consent.

Advisor equity: the bands

Grant	Range from the sessions
Typical advisor	0.1–0.5%, with ~0.25% the common center
Heavy hitter	Up to ~1%
Vesting	1–2 years, re-uppable if they prove out
Early CTO at formation	10–20%
CTO joining post-raise	3–5%

“If someone asks for anything more than 1 or 2%, they’re not the type of advisors you would want, because they don’t know how the game works.”

— Same attorney · session, Jan 2026

Next-round investors will demand clawbacks of outsized grants anyway — the market corrects it, painfully. An “advisor” asking for a double-digit stake to open doors is a walk-away.

The broker-dealer line

Commission on revenue an advisor brings in: fine, with tight contract language. Commission on investment dollars raised: a securities-law violation unless they’re a registered broker-dealer — and the company is liable for aiding and abetting, with enforcement rising. The clean workaround: pay for deck preparation and introductions, unconditioned on whether money closes.

Two adjacent traps: early contractors compensated only in equity carry wage-claim risk in California and Washington (true contractors should have their own business entity), and equity-only “helpers” without paper may own their work product — see Founder stock, vesting, and 83(b).

Sources

Two working sessions with a startup securities attorney (Jan and May 2026) covering option mechanics, 409A strategy, advisor grants, and compensation compliance. Benchmark data referenced: Carta compensation benchmarks.