Glossary · Equity and dilution · Updated
The option pool is the reserve of shares set aside for employees. Its size and the moment it is created are two separate negotiation points, and the second usually costs founders more than the first.
The pool exists to hire. A startup cannot match market salaries, so it compensates by sharing future value. Investors require a sufficient pool before the round, because they know the money they bring will be spent hiring and those hires will need grants.
Size should be derived from the hiring plan, not from an abstract percentage. Ten percent is a common order of magnitude at seed, but the right calculation lists the roles to fill over eighteen months and the typical grant for each, then works back to the reserve needed.
Timing is where the real money is. A pool created before the investor arrives, called pre-money, is funded by founders alone. The same pool created afterwards, post-money, is funded by everyone. The difference is worth points of equity, while appearing nowhere in the headline valuation.
Example: what a pool costs depending on when it is created
Two founders hold 900,000 shares. They raise a round giving the investor 20%, with a 10% pool.
| Founder shares before the round | 900,000 |
|---|---|
| Pool size | 10% of the company |
| Shares created for the pool | 100,000 |
| Total before the investor comes in | 1,000,000 shares |
| Pre-money pool: founder stake before the round | 90% |
| Pre-money pool: founder stake after a 20% round | 72% |
| Post-money pool: founder stake after the round | about 74% |
| Difference for the founders | about 2 points of equity |
Two points of equity for one word in the term sheet. On a €50M exit that is a million euros, and the investor almost never raises the subject unprompted.
The common mistake
Accepting an oversized pre-money pool in exchange for a higher headline valuation. The two offset exactly, and you alone fund a reserve the investor benefits from just as much as you do when hiring.
Frequently asked questions
How big should an option pool be?+
Eight to twelve percent of the company is common at seed, but the right figure comes from the next eighteen months of hiring plans and the grant expected for each role, rather than a percentage applied out of habit.
Why does a pre-money pool cost founders more?+
Because it is created before the investor arrives, so it dilutes only existing shareholders, meaning the founders. Created after the round, it would dilute everyone pro rata including the investor, spreading the cost.
Related terms
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