Startups & Business › Building the Company

Option Pool

Shares set aside for future employees, and why investors ask for it before they invest.

Also known as: option pool, ESOP pool, unallocated option pool

The option pool is shares reserved for future employee grants — typically sized around 10–20% for early rounds — created or topped up at financings. Investors require it because it guarantees hiring ammunition exists; founders should understand that pre-money pool creation dilutes existing holders, not the new money.

$8M pre + $2M raise + 10% pool pre-money → founders absorb the pool's dilution
same pool post-money → new investors share the cost (rarely agreed)

Negotiate pool size on hiring-plan math, not rules of thumb: two years of planned grants, sized by role, plus buffer. Oversized pools dilute founders for hires that never happen; undersized ones force mid-cycle expansions (which also dilute founders, plus signal poor planning).

The classic mistakes:

• Accepting any pool size blindly. Each extra percent is founder dilution for hypothetical hires. Justify with the hiring plan, role by role.
• Unallocated pool treated as free. Unexpanded pool shares still dilute on paper and confuse everyone about true ownership. Track allocated vs unallocated explicitly in the cap table.
• Evergreen confusion. Some plans auto-replenish yearly (evergreen provisions) — convenient until compounding dilution surprises. Know whether yours does and cap it deliberately.
• Refresh math ignored. Pools sized for new hires but not refresh grants for stars vesting out. Model both, or the pool runs dry exactly when retention matters most (see pool shuffle).

Negotiate it as economics, not admin: pool size, timing (pre vs post) and refresh assumptions all move founder dollars. Model fully-diluted outcomes before agreeing — see pre/post money.