Option Pool
Also known as Employee Option Pool, Stock Option Pool, Equity Incentive Plan, ESOP
An option pool is a block of common stock the company reserves for future grants to employees, advisors, and contractors. It is created via the equity incentive plan and is included in the fully diluted cap table even though the underlying options have not yet been granted. Pool sizing at a priced round is one of the most consequential term-sheet negotiations because investors typically require the pool to be inflated into the pre-money valuation, which dilutes only common holders.
Formula
Effective Pre-Money = Stated Pre-Money - (Post-Money × Pool % Target)- Stated Pre-Money
- Pre-money valuation in the term sheet
- Post-Money
- Stated Pre-Money + Investment Amount
- Pool % Target
- Required option pool as a percentage of fully diluted post-money capitalization
In depth
The option pool sits inside the equity incentive plan, which the board adopts and stockholders approve. The plan authorizes a fixed number of shares; until a grant is made, those shares are "reserved" rather than outstanding. The fully diluted cap table includes both granted-but-unvested options and unallocated reserves, because both will ultimately dilute existing holders when exercised.
The pre-money vs. post-money distinction is the key economic move. A term sheet that says "the pool will be increased to 10% of the post-money fully diluted capitalization, with the increase included in the pre-money" is telling founders they will absorb the entire new-pool dilution. Investors arrive at the negotiated price without dilution from the pool because the pool was sized as part of the pre-money. From the founder's perspective, the effective pre-money is the stated number minus the dollar value of the new pool shares.
Why it matters
The option pool is where seemingly minor term-sheet language can cost founders 3-5 percentage points of fully diluted ownership. On a Series A round, that gap is worth millions at later exit valuations. The math is non-obvious because the pool percentage is expressed against post-money but allocated from pre-money, which exaggerates the founder cost.
The compounding effect across multiple rounds is the bigger issue. A 10% pool inflated into the pre-money at the Series A, refreshed by 5% at the Series B, and topped up again at the Series C can transfer 15-20% of fully diluted equity from founders to employees, on top of normal price-based dilution. The remedy is to build a hiring plan, size the pool to the actual need, and negotiate the pool inclusion explicitly rather than accept the default 10-15% number.
Worked example
Series A term sheet: $20M pre-money, $5M raise, $25M post-money. Required option pool: 12% post-money, included in pre-money. Existing fully diluted cap table: 8,000,000 shares (founders 7,000,000 common + 1,000,000 existing pool).
Step 1: target post-money fully diluted shares (FD). The investor will hold $5M / $25M = 20% post-money.
Post-money fully diluted shares (X):
Investor shares = 0.20 × X
Option pool needed = 0.12 × X
Existing common + existing pool = 8,000,000
8,000,000 + (0.12 × X - 1,000,000) + 0.20 × X = X
7,000,000 + 0.32 × X = X
X = 7,000,000 / 0.68 = 10,294,118
Step 2: new option pool size = 0.12 × 10,294,118 = 1,235,294 shares. Increase over existing pool: 235,294 shares come from the pre-money (founder dilution).
Founder fully diluted ownership before round: 7,000,000 / 8,000,000 = 87.5%
Founder fully diluted ownership after round: 7,000,000 / 10,294,118 = 68.0%
Pool dilution component (new pool shares): 235,294 / 10,294,118 = 2.3%
Investor dilution component: 2,058,823 / 10,294,118 = 20.0%
The headline "20% dilution from the round" understates it. The pool refresh added another ~2 points; if the round had required a 15% pool (post-money) rather than 12%, founders would have lost roughly 3.5 additional points of fully diluted ownership.
Frequently asked
What is the option pool shuffle?
The convention that requires the option pool to be created or topped up before the round closes, with the new pool sized as a percentage of post-money but allocated from the pre-money. Founders absorb 100% of that pool dilution; investors take none. A 10% pool created in the pre-money on a $20M pre / $5M raise is closer to a 5-6 point reduction in the founder's effective ownership versus what a naive read of the term sheet would suggest.
What is a typical option pool size by stage?
Seed: 10-15% commonly. Series A: refreshed to 10-15% post-financing, sometimes higher when an executive hire is imminent. Series B and beyond: smaller incremental top-ups, often 3-5%. Carta's data shows seed-stage median around 11-12% and Series A pools typically refreshed to 10-20% range. The right size for any given company is bottom-up from the hiring plan, not a market default.
How can founders push back on a pre-money option pool?
Build a 12-18 month hiring plan with named hires and target grant sizes. Show that the actual pool need is materially smaller than the investor's headline 10-15% percentage. Cooley GO and other sources recommend this exercise, which frequently yields a credible pool of 5-8% rather than the abstract 10-15%, and meaningfully reduces founder dilution.
What happens to unused options at the next round?
They roll forward. The new investor will ask for a refresh to bring the pool back up to the new target percentage post-financing, but unused options from the prior pool count toward that target. Most startups only use 60-70% of any given pool before the next round, which means oversizing a pool now is permanent founder dilution that may never get granted.