The investor’s field guide · O
Option pool
Shares set aside, usually at a funding round, to grant to future employees as options.
Explained by the editorial team
An option pool is a block of shares a company reserves, separately from any individual's holding, to grant to employees over time as options. Investors in a funding round commonly ask for the pool to be created or topped up as a condition of the deal, sized to the hiring plan the company expects to fund with the new money.
A worked example
A company agrees a round with a 20% stake for the new investor and a 10% option pool, both measured on a post-money, fully diluted basis. If the pool is created inside the pre-money valuation, as is standard in many venture rounds, its cost falls on the existing shareholders rather than the new investor: existing holders end up with 70% instead of the 80% a simple round without a pool would have left them, while the investor's 20% is unaffected either way.
What to examine
Check whether the pool sits inside the pre-money or the post-money figure, since that decides who pays for it. Compare the pool's size with the company's actual hiring plan rather than accepting a round number because it is customary. Unallocated shares sitting in an oversized pool are still dilution, even before anyone is granted an option.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.