Option Pool

A block of shares set aside to grant stock options to employees, advisers and future hires.

Example

A pool of 1,000,000 shares representing 10% of a company's fully diluted equity.

Important

A pool counts toward fully diluted ownership even before options are granted, and its size affects existing holders' real valuation.

Related terms

  • Option Pool Shuffle — Requiring a new or enlarged option pool to be created within the pre-money valuation, so its cost falls on existing shareholders rather than the new investor.
  • Fully Diluted Shares — The total number of shares that would exist if all options, warrants and convertible instruments were converted into shares.
  • Vesting Schedule — The timetable over which employer contributions or equity become fully owned by an employee.

Lessons that explain it

  • Ownership at exit is ownership today multiplied by every round's dilution — An early investor's final ownership is their entry stake reduced by each later round and option pool increase. Modelling the chain shows what exit value is needed for a target return. (11 min)
  • A cap table is a list of who owns what, and it only ever gets longer — A capitalisation table records every share, option and convertible claim in a company. Ownership percentages depend on whether you count only issued shares or everything that could become shares. (9 min)
  • The option pool shuffle quietly lowers the founders' real price — Post-money equals pre-money plus the new investment. But when investors require an option pool to be created inside the pre-money valuation, the existing shareholders bear its full cost. (13 min)
  • What the cap table tells you that the founders did not — A cap table reveals founder motivation, past decisions and future obstacles. Low founder ownership, dead equity, unconverted instruments and messy structures are signals worth reading before investing. (10 min)
  • Vesting decides who keeps equity; the pool decides how much is left to give — Founder and employee shares are usually earned over time. Vesting protects the company from dead equity, and pool size determines whether it can hire without another dilutive top-up. (11 min)
  • Model the rounds between now and the exit, or your ownership estimate is fiction — Today's percentage is not what you will hold at an exit. Projecting future rounds and pool top-ups gives a realistic ownership figure and a much better sense of what an outcome would return. (12 min)

All 578 terms in the Investing glossary