Option Pool

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An option pool is a portion of a company's shares set aside to grant stock options or other equity awards to current and future employees, advisers and directors.

Start-ups use equity to attract and retain talented people, especially when they cannot afford high salaries. The option pool reserves shares for this purpose, so that the company can grant options without needing new approval each time.

Option pools are often sized at around 10% to 20% of the company's shares, depending on the company's stage and hiring plans.

For example, before a new funding round, investors may require the company to create or enlarge its option pool to 15% of the post-investment shares. Usually, the pool is counted in the pre-money valuation, which means existing shareholders, typically founders, bear the dilution rather than the new investors.

This option pool shuffle can significantly affect founders' ownership, so the size of the pool and whether it is included before or after the investment are important negotiation points. Unused options in the pool remain available for future grants.

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