The short answer
An option pool is a block of shares a startup reserves to grant as stock options to future employees, advisors and contractors. Investors often ask for the pool to be created or enlarged before their money comes in, which means founders bear the dilution.
- The pool is reserved equity for future hires.
- A pool created before the round dilutes existing holders, not new investors.
- Size the pool from a real hiring plan, not a round number.
- The pool appears on your fully diluted cap table.
How it works
The board approves a pool of shares under an equity incentive plan. When you hire, you grant options from the pool that vest over time. Unused options stay in the pool. In priced rounds, term sheets often say the pool must reach a certain percentage of the post-money fully diluted capitalization, and that it's counted in the pre-money valuation. That detail decides who pays for it.
Worked example (hypothetical)
An investor offers $2M at an $8M pre-money valuation and asks for a 15% post-money pool to be in the pre-money. Post-money is $10M, so the pool is worth $1.5M of "pre-money" value. Your effective pre-money for existing holders is closer to $6.5M ($8M minus the $1.5M pool). If your hiring plan only needs 10%, negotiating the pool down raises what your shares are worth.
Why it matters to a pre-seed or seed founder
Pool size is one of the quietest ways a valuation can shift. Bring a hiring plan for the next 18 to 24 months showing which roles need equity and roughly how much. That turns the pool from a negotiation into arithmetic. Track grants on your cap table and use standard vesting.
Frequently asked questions
Who pays for the option pool?
If the pool is created or enlarged in the pre-money, existing shareholders absorb the dilution. If it's in the post-money, new investors share it.
How big should the pool be?
Big enough to cover the hires you plan before the next round. Build it from a role-by-role plan rather than a rule of thumb.
Do advisors get options from the pool?
Usually yes. Advisor grants typically come from the same pool, with their own vesting schedule.