Glossary

Option Pool

An option pool is a reserved block of shares the company sets aside to grant to employees, advisors, and future hires through stock options.

Plain definition

What it means.

An option pool is a defined block of shares set aside on the cap table for grants to employees, advisors, and future hires. The pool is approved by the board and shareholders and lives separately from common stock until options are granted, vested, and exercised.

The size of the pool is the most consequential negotiation in a financing round outside the valuation itself. Investors usually require the pool to be expanded before the round closes, which means the new shares come out of pre-money valuation and dilute existing shareholders. The same expansion done after closing would dilute the new investor as well.

The size and timing of the option pool decide who actually pays for it. Pre-money expansion means founders pay. Post-money expansion would mean investors pay too.

What goes wrong

The failure pattern this term exists to prevent.

The pre-money pool refill

Investors require the pool to be expanded to a target percentage before closing. The expansion happens pre-money, which means existing shareholders absorb the dilution. The new investor enters with their full target percentage already protected against future hire dilution.

The pool expansion that nobody re-modeled

A founder agrees to a 10 percent pool target without recalculating what 10 percent post-expansion actually means in dollars and shares. The shift in pool size between term sheet and signed documents can move several percentage points of founder equity.

The unallocated overhang

A pool sits at 12 percent but only 4 percent has been granted. The remaining 8 percent sits as overhang on the cap table. It dilutes valuation in the next round, even though no employee holds those shares yet. Investors price the company assuming the overhang will be granted.

The pool that runs out at the wrong time

The pool was sized for hiring through the next eighteen months. Hiring accelerates. The pool exhausts six months early. The next pool expansion lands inside the next financing round, which means investors negotiate the refill terms.

Founder questions

The questions people actually ask.

What is a pre-money option pool refresh? It is the requirement to expand the option pool to a defined size before a financing round closes. The new shares come out of pre-money valuation, which means existing shareholders absorb the dilution. The new investor enters the cap table with their target percentage already in place.

How big should an option pool be? It depends on the hiring plan and the round size. Investors typically push for a pool large enough to cover the next 18 to 24 months of hiring. Founders push to size the pool tightly so unused shares do not dilute the cap table unnecessarily. The negotiation is over the exact target percentage and what assumptions back it.

What happens to unused options in the pool? Unused options remain authorized but unissued. They stay on the cap table as overhang. They can be granted to future hires, returned to the pool when employees leave with unvested options, or expire under the plan terms. Investors generally treat the overhang as already issued for valuation modeling.

Can the option pool be expanded after a round closes? Yes, but the dilution then falls on all shareholders including the new investor. That is why investors prefer the expansion to happen pre-money. A post-closing expansion is sometimes negotiated as part of the deal terms to share the dilution more equitably, but it is the less common path.

Bigger picture

Where this fits in the structure.

Related structure Founder Vesting

Founder vesting and option pool sizing decide together how much equity is actually available to keep operators committed.

Anti-dilution adjusts conversion price after the fact. Pre-money pool expansion does the same job for investors before the round closes.

The case pattern of cap-table mechanics compounding against founder equity inside a real founder-led company.

Related reading

Read the operating version next.

Related reading

If a pre-money pool expansion is sitting on a term sheet you are about to sign, that is a different conversation.

Bring the cap table, the proposed pool target, and the next eighteen months of hiring assumptions.

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