Option Pool Explained: Size, Pre-Money Effect, Top-Ups
Option pool explained for founders: size it from a hiring plan, see what a pre-money pool does to your stake, and learn how a pool is topped up at each round.
An option pool is a block of shares set aside by the company to give to future employees, advisors and other hires as options. The shares exist on paper, but nobody owns them yet. They sit in reserve until the board grants them.
The pool matters to founders for one reason above all. When a new investor asks for a pool, the shares usually come out of the founders’ side of the deal before the investment is priced. This guide explains what a pool is, how to size it from a real hiring plan, how the pre-money pool effect works with numbers, and how a pool is topped up.
Option pool explained: what it is and why companies have one
An option is the right to buy a share at a fixed price, called the strike price, after it has vested. Giving options to employees lets a young company offer a share of its future value when it cannot pay market salaries. The pool is the reserve of shares that those options will be made from.
A pool has three parts at any moment.
- Granted and exercised. Options turned into real shares by the employee.
- Granted and outstanding. Options given to people, not yet exercised. They may still be vesting. For how vesting works, see vesting schedule explained.
- Unallocated. Shares still in reserve for future hires. When investors talk about the size of the pool, they usually mean this part.
The pool appears on your cap table. Investors count it as if it were already issued, because they know it will be used. That is why a pool lowers the founders’ percentage even before a single option is granted.
How to choose the size from a hiring plan
A generic percentage such as 10% is a starting point for a conversation, not an answer. A better way is to build the pool from the people you plan to hire in the next 12 to 18 months, which is a common horizon for sizing a pool. One startup resource suggests exactly this: give each planned role an equity range, then add the ranges up.
Example: a seed-stage company plans these hires over 18 months. The percentages are illustrative, not benchmarks.
| Role | Hires | Equity each | Total |
|---|---|---|---|
| Chief technology officer | 1 | 1.50% | 1.50% |
| Engineers | 4 | 0.25% | 1.00% |
| Head of sales | 1 | 1.00% | 1.00% |
| Designer | 1 | 0.30% | 0.30% |
| Operations and support | 3 | 0.15% | 0.45% |
| Plan total | 4.25% |
The arithmetic: 1.50 + (4 x 0.25) + 1.00 + 0.30 + (3 x 0.15) = 1.50 + 1.00 + 1.00 + 0.30 + 0.45 = 4.25%. Add a buffer for people you did not plan for, say 1.5 points, and the company can justify a pool of about 6% of the company after the round.
That is a useful position in a negotiation. If an investor asks for 10% and your plan supports 6%, you can show the list and ask them to explain the gap. Investors often have a target in mind, so it helps to arrive with your own numbers.
Three things push the right size up or down.
- Seniority of the hires. Senior leaders receive far larger grants than junior staff.
- Pool already left over. Unused options from the last round count toward the target.
- Time until the next round. The next round usually brings a refresh, so you only need to cover the period until then.
The pre-money pool effect, with numbers
Investors usually want the pool to be sized in the round and counted inside the pre-money valuation. That means the pool shares are created before the new money comes in, so only the existing shareholders are diluted by them. The new investor is not. People sometimes call this the option pool shuffle. A startup resource describes the standard term-sheet position the same way: the top-up sits inside the pre-money, existing shareholders absorb it, and putting it after the investment is rare.
Example: the founders own 100% of 10,000,000 shares. An investor offers EUR 2,000,000 at a pre-money valuation of EUR 8,000,000, and asks for an unallocated pool of 10% of the company after the round.
- Post-money valuation: EUR 8,000,000 + EUR 2,000,000 = EUR 10,000,000.
- Investor share: 2,000,000 / 10,000,000 = 20%.
- Pool: 10%.
- Founders get what is left: 100% - 20% - 10% = 70%.
- Total shares after the round: 10,000,000 / 70% = 14,285,714 (rounded). Investor shares: 20% = 2,857,143. Pool shares: 10% = 1,428,571.
- Price per share: EUR 2,000,000 / 2,857,143 = EUR 0.70.
The headline pre-money is EUR 8,000,000, but founders hold 10,000,000 shares at EUR 0.70, which is EUR 7,000,000. The pool of 1,428,571 shares at EUR 0.70 is about EUR 1,000,000 of the headline pre-money. So the founders’ effective pre-money is EUR 7,000,000.
| Pool inside the pre-money | Pool after the investment | |
|---|---|---|
| Founders | 70% | 72% |
| Investor | 20% | 18% |
| Unallocated pool | 10% | 10% |
The right-hand column works like this. Without the pool, founders hold 80% and the investor 20%. A pool of 10% after the round shrinks both: 80% x 90% = 72% and 20% x 90% = 18%. In this example the difference to the founders is two points. It grows with a bigger pool, a bigger round or a lower valuation. Investors are rarely willing to take the right-hand version, so most founders put their effort into a smaller pool, or a higher headline valuation, rather than a different placement.
For a general explanation of why every new share lowers existing percentages, read what is equity dilution.
How an option pool is topped up
A pool does not stay full. Each grant uses shares, and each priced round usually brings a request to restore the pool to a target. This is the top-up, also called a refresh.
The steps are the same each time.
- The new investor names a target size for the unallocated pool after the round, for example 10%.
- The company works out how many new shares are needed to reach it, after counting what is left unallocated.
- The board and the shareholders approve the increase, and the new shares are reserved.
- In most term sheets, the top-up is created before the round and counts in the pre-money, as in the example above.
Example: before a new round, the pool holds 3% unallocated. The investor asks for 8% after the round. The company needs to add 5 percentage points of the post-round company. Because the share count grows when the pool grows, the new shares must be calculated on the final total, as in the example above, and not on today’s total.
A smaller top-up with a second, board-approved increase later is another way to spread the cost. Pools are refreshed at most priced rounds, so the cost to founders repeats. A convertible instrument can also affect the maths. When a SAFE converts, its holders may be counted in the pre-money share count, which changes the founders’ result. The details are in SAFE notes explained.
Employees care about the pool too, even if they never see it. A pool that is too small means the company cannot offer equity to the people it needs. A pool that is too large means the founders carry extra dilution for shares that may never be used. The aim is a pool that covers the hiring plan and not much more.
What to do before you sign
- Write the hiring plan role by role, with an equity range for each.
- Count the unallocated shares you already have, because they reduce the top-up.
- Ask for the pool target as a number of shares and as a percentage, and check both.
- Compare offers on effective pre-money, not on the headline valuation.
- Check that the pool will last until the next round, then stop.
Frequently asked questions
How big should an option pool be?
Size it from your hiring plan for the next 12 to 18 months, plus a buffer. An investor may name a target percentage, but you should check that number against your own list of roles. A pool bigger than you need costs the founders ownership.
Who owns the shares in the pool?
The company holds them until the board grants options. Unallocated pool shares generally carry no ownership rights for anyone yet. They still count in investors’ maths about the company’s total shares.
What happens to unused options?
Unvested options of someone who leaves usually go back into the pool and can be granted again. Unallocated shares at the end of a round carry forward, and they reduce the next top-up.
Does the option pool dilute investors?
When the pool sits in the pre-money, it dilutes only existing shareholders at that round. Later on, when the pool is used or topped up after investors have come in, everyone is diluted.
Is an option pool the same as a vesting schedule?
No. The pool is the reserve of shares. The vesting schedule is the timetable that decides when an individual’s options become usable.
This is general education, not legal or tax advice. Instrument names, tax treatment of equity and the formalities of issuing shares differ by country. Check the details with a lawyer where your company is registered.
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