What is an Option Pool?
The Option Pool is a specific block of company stock—usually 10% to 20% of the company's total equity—that is reserved for issuing stock options to future employees, advisors, and directors. It is the primary tool used to attract and retain high-quality talent in the startup world.
The Pre-Money Trap The most critical thing founders must understand is the timing of the Option Pool's creation:
- Investor Demand: Investors typically demand that the Option Pool be created and factored into the Cap Table before their money is wired.
- Founder Dilution: This means the dilution effect of the pool is applied only to the existing founders and shareholders. New investors buy their stake based on the smaller, post-pool valuation, shielding them from the initial hit.
If a founder owns 80% before the Seed Round, and the investor demands a 15% Option Pool, the founder's ownership immediately shrinks to 65% before the new investor buys their shares.
Why it's Necessary Despite the dilution, the Option Pool is essential. Top talent will not join a high-risk startup unless they are compensated with meaningful equity. Investors know that without a sufficient pool, the company won't be able to hire the people needed for hyper-growth, undermining the entire investment thesis.
Key Takeaway: An Option Pool is a non-negotiable cost of doing business. It's the currency you use to hire top-tier talent who will drive your company toward a successful exit.
