An option pool is the block of company shares set aside to grant as equity to employees, advisors, and other service providers, usually through stock options. It is how a startup pays people in ownership.

Founders care about the option pool for two reasons: hiring and dilution. A healthy pool lets you recruit and retain talent with meaningful equity. But the size and timing of the pool directly affect how much of the company the founders keep.

The option pool shuffle

Here is the part that surprises founders. In a priced round, investors usually require the option pool to be created or topped up before the money comes in, and they size it off the pre-money valuation. That means the dilution from the new pool falls on the existing shareholders, mostly the founders, not on the new investors. This is often called the option pool shuffle.

Right-sizing the pool

The lever is the size of the pool. A larger pool means more dilution to founders at the round. Right-sizing the pool to an actual hiring plan, rather than a round-number percentage, is one of the more valuable negotiations in a term sheet.

Where the pool lives

The pool sits on the cap table and interacts with vesting and equity compensation. Grants from it are typically governed by an equity incentive plan and individual award agreements. This is a general explanation, not legal advice.