An option pool is a block of company shares set aside for future equity grants to employees, advisors, and consultants. Investors typically require the pool to be expanded to a target size right before a priced round closes, and the dilution from that expansion is absorbed by existing shareholders, mainly the founders, rather than by the incoming investor. The pool's size is negotiated as part of the term sheet and should be sized to cover the hires you actually plan to make before your next round.
The pool is how you attract talent with equity when you cannot yet pay market-rate cash salaries. Because investors want a fixed post-round pool size, the expansion that creates the pool comes entirely out of the pre-round shareholders' ownership, which is almost always the founders.
Before a round, you and the lead investor agree on a target pool size, expressed as a percentage of the fully diluted post-money cap table. The company then issues new shares into the pool before the new investor's money comes in, so the expansion dilutes only the existing shareholders and not the new investor.
Say your pre-round option pool sits at 8% of the cap table, but the lead investor requires a 15% pool post-round to cover the hiring plan you presented. The company issues new shares to grow the pool from 8% to 15%, a 7-percentage-point expansion. That entire 7 points comes out of the founders' pre-round ownership, effectively lowering the real price the investor pays relative to the pre-money valuation on the term sheet.
Seed rounds typically target a 10% to 15% pool as a percentage of the post-round cap table. Series A rounds typically target 15% to 20%, reflecting a larger hiring plan. The right size for your company depends on how many roles you plan to fill before the following round, so build a real hiring plan rather than accepting a round number.
Accepting whatever pool size the investor proposes without checking it against an actual hiring plan, which either overdilutes founders with an oversized pool or forces a painful top-up before the next round if the pool is undersized.
Not realizing that pool expansion is negotiable: you can push back on the size, or ask that the expansion happen partly after the round closes so some of the dilution is shared with the new investor instead of falling entirely on founders.
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