Option Pool
Shares reserved for future employee equity grants, typically created or expanded as part of a financing round.
An option pool is a block of company shares set aside specifically for equity compensation to employees, advisors, and sometimes new hires, rather than issued directly to founders or investors. Investors typically require the pool to be sized (commonly 10-20% of fully diluted shares) and created before the new money comes in.
Because the pool is almost always carved out of the pre-money valuation, expanding it dilutes existing shareholders — mostly founders — before the new investors' money is even counted, which is why the 'option pool shuffle' is one of the most common places founders lose ownership percentage without realizing it in negotiation.
Pool sizing should be based on an actual hiring plan through the next round, not a round number pulled from a template — an oversized pool dilutes founders for no benefit, while an undersized one forces an awkward mid-cycle top-up that dilutes everyone again.
Negotiating the pool is negotiating valuation by another name. The headline pre-money stays the same while the effective price per share for existing holders drops, because a bigger pool means more shares outstanding before the investor's money is counted. Accepting a larger pre-money pool than your hiring plan needs is a valuation discount dressed up as generosity to future hires.
Unissued pool shares effectively disappear at exit — unallocated options are cancelled and everyone else's ownership rises proportionally. That's worth remembering when an investor insists on a large pool 'for future hires': if the company sells before the pool is used, the extra dilution bought nothing.
Size the pool from the bottom up: list the roles you'll actually hire before the next round, apply your equity bands to each, and add a modest buffer. That number is your negotiating anchor.
A company negotiates an $8M pre-money valuation and investors require a new 15% option pool created pre-money. The effective valuation founders are diluted against is really $8M including that pool, not $8M plus a separate pool — shrinking founders' real ownership more than the headline number suggests.
Negotiate the option pool size based on your actual 18-24 month hiring plan, and push to have it counted post-money (or split the dilution) rather than accepting a large pre-money pool without question — it's genuine, quantifiable dilution.
Who pays for the option pool expansion in a financing?
Existing shareholders, primarily founders, since the pool is typically carved out of the pre-money valuation before new investor money is counted — it's a real, often underappreciated source of founder dilution.
Should the option pool be sized pre-money or post-money?
Investors almost always ask for pre-money, which puts the dilution on existing holders. Founders can push for post-money sizing, where the new investor shares the dilution, or split the difference. At minimum, size the pool from a hiring plan instead of accepting a round number.
What happens to unissued option pool shares in an acquisition?
They're typically cancelled, so they don't share in the proceeds, and everyone else's ownership rises proportionally. An oversized pool that's never granted simply diluted founders for nothing.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.