A reserved slice of equity set aside for future employee grants, typically 10-20% of the company. Created before fundraising, the dilution usually comes from founders, not investors.
option pool
noun — A block of authorized but unissued shares set aside in a company's cap table for future equity grants to employees, advisors, and service providers. Also called an employee stock option pool (ESOP) or equity incentive plan. The pool is created by increasing the authorized share count without issuing shares to any specific person.
Why it matters
The option pool is how you attract and retain talent with equity. Size it wrong and you either can't hire the people you need or you give away too much of the company. Understanding how it's created and who bears the dilution is essential for fundraising negotiations.
The most common negotiating trap founders fall into is agreeing to a large option pool increase without understanding how it affects their effective ownership. An investor who says "we're investing at a $10M pre-money" while also requiring a 20% option pool refresh is setting your effective pre-money valuation much lower, because the option pool is carved out of your side of the cap table.
Option pools also affect your 409A valuation. The larger the option pool as a percentage of fully diluted shares, the lower the common stock valuation tends to be, which means employees pay less for their options. This is generally a feature, not a bug — but it is something to be aware of when modeling dilution scenarios. See our guide on what investors look for in cap tables for more.
How it works
A typical option pool is 10-20% of fully diluted shares, created at or before a funding round. Investors usually require the pool to be created pre-money, meaning the dilution comes from existing shareholders (founders), not from the new investment. Unallocated shares in the pool count toward the fully diluted share count even though nobody holds them yet.
As you make grants, the unallocated portion shrinks and may need to be refreshed at the next round. For example, if you create a 15% pool and grant 10% to employees, you have 5% remaining for future hires. When employees leave and their unvested options are forfeited, those options typically return to the pool for future grants.
When negotiating with investors, push back on oversized pool requests. Ask for a hiring plan analysis: how many hires do you realistically need in the next 18 months, and what equity will each require? A targeted analysis usually shows that a smaller pool is sufficient, and a smaller pool means less dilution for founders at each round.
| Stage | Typical pool size | Notes |
|---|---|---|
| Pre-seed | 5-10% | Often for early key hires and advisors only |
| Seed | 10-15% | Standard; investors typically require pre-money creation |
| Series A | 15-20% | Pool often refreshed to cover 18-24 months of hiring |
| Series B+ | 10-15% | Smaller refreshes as company scales and equity value rises |
History and origin
Option pools emerged alongside stock options in Silicon Valley in the 1970s and 1980s. Early technology companies like Intel and Apple began using stock options to attract engineers who would accept below-market salaries in exchange for upside potential. The option pool formalized this practice by reserving a set percentage of equity for future grants rather than issuing shares on an ad-hoc basis.
By the 1990s, venture capital term sheets routinely included option pool requirements as a condition of investment. Firms recognized that the quality of future hires would determine a company's success, and a properly sized option pool made recruiting easier. The pre-money pool requirement — where founders, not investors, bear the dilution — became standard practice as investors sought to protect their ownership percentages.
Today, the "option pool shuffle" — the practice of requiring a large pre-money pool to effectively lower founders' ownership before calculating investor percentages — has been widely written about and critiqued. Y Combinator's post-money SAFE structure was partly designed to make dilution math cleaner and reduce some of these negotiating complexities. Despite these critiques, the pre-money pool requirement remains standard in virtually every venture term sheet.
Frequently asked questions
What is an option pool?
An option pool is a block of equity reserved for future grants to employees, advisors, and contractors. It is typically set at 10-20% of the fully diluted share count and is created before a funding round so investors are not diluted by future grants.
Why is the option pool created before a funding round?
Investors require the option pool to be created pre-money so that the dilution comes out of existing shareholders (founders) rather than from the new investment. This effectively lowers the pre-money valuation for founders even though the headline number may look the same. Learn more in our cap table explainer.
How big should an option pool be?
The right size depends on your hiring plans. Most early-stage companies target 10-15% at seed and may need to refresh to 15-20% at Series A. Size the pool based on your realistic 12-18 month hiring plan, not the maximum you might ever need, to avoid excessive founder dilution.
Who bears the dilution from the option pool?
The founders and existing shareholders bear the dilution from the option pool, since it is created before the investment is counted. The investor's ownership percentage is calculated on the post-money cap table, which already includes the full option pool, whether or not any of those options have been granted.
What happens to unallocated options in the pool?
Unallocated options remain reserved but do not vest or belong to anyone. They count toward the fully diluted share count, which affects ownership percentages and 409A valuations. When an employee's options are forfeited or expire, those shares typically return to the pool for re-grant.
Can the option pool be refreshed?
Yes. When the pool runs low, the company can increase it through a board vote and shareholder approval. This is commonly done at each new funding round. Each refresh dilutes all existing shareholders, so founders should negotiate the pool size carefully in term sheets.
Is the option pool the same as an ESOP?
In startup context, option pool and ESOP (Employee Stock Ownership Plan) are often used interchangeably to describe reserved equity for employees. Technically, a formal ESOP is a qualified retirement benefit plan governed by ERISA, which is different from a startup option pool. Most startups use a simple stock option plan, not a formal ESOP.
Learn more
- Employee equity benchmarks: how much to give at each stage
- What is a cap table?
- How to build a startup cap table
- What investors look for in cap tables
- Types of startup equity explained
Related terms
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