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Option Pool
Shares reserved for future employee equity grants, typically established before a funding round and included in pre-money valuation.
Formula
Option Pool Dilution:
Pre-money = Post-money - Investment - Option Pool
Example:
- $10M post-money, $2M investment, 15% pool
- Pool value: $1.5M
- Effective pre-money: $10M - $2M - $1.5M = $6.5M
Definition
What is an Option Pool?
An option pool is a percentage of company shares set aside for employee equity compensation. It's created to attract and retain talent without requiring board approval for each individual grant.
Option Pool Shuffle
Investors typically require founders to create or expand the option pool from the pre-money valuation, which dilutes existing shareholders (mainly founders) before the investment. A 10-20% pool is common.
Right-Sizing the Pool
Calculate actual hiring needs for 18-24 months. Don't accept an oversized pool that dilutes you unnecessarily. Unused options benefit investors at exit if they're never granted.
Example
Term sheet: $5M at $15M post-money, 20% option pool.
Founder math without pool: $15M - $5M = $10M pre-money.
Reality: Pool is $3M (20% of $15M), taken from pre-money.
Effective pre-money: $10M - $3M = $7M
Founders are selling at $7M, not $10M.
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