What is an Option Pool?
An option pool is a percentage of company equity reserved for future employee stock options. It's set aside to attract and retain talent without requiring shareholder approval for each grant.
Typical option pools range from 10-20% of fully diluted shares. Larger pools provide more hiring flexibility but dilute existing shareholders more.
Why Option Pools Matter
Investors typically require a certain option pool size before investing, and they want it created from pre-money (before their investment). This means the pool dilutes founders and existing shareholders, not the new investor.
A "15% option pool on pre-money" effectively reduces your valuation. If an investor offers $10M pre-money with a 15% pool, founders are really being valued at $8.5M because the pool comes out first.
Option Pool Strategy
Negotiate pool size based on actual hiring plan. A 20% pool when you only need 10% is unnecessary dilution. Present a detailed hiring plan to justify a smaller pool.
Formula
Founder Dilution from Pool = Pool Size % × (Pre-Money ÷ Post-Money)
Effective Founder Valuation = Pre-Money × (1 - Pool Size %)
Example
Pre-Series A situation:
- Existing option pool: 5% (mostly allocated)
- Series A investor requests: 15% unallocated pool
The 15% pool comes from pre-money, diluting founders before investor takes their percentage.
If pre-money is $10M with 15% pool refresh, founders effectively get $8.5M valuation for their stake.