A stock option pool is a designated percentage of a company's equity, typically between 10-20%, set aside specifically for granting stock options to employees, advisors, and consultants over time. This pool allows startups to compensate talent with equity ownership without diluting existing shareholders with each new hire, as the dilution is accounted for upfront during fundraising rounds.
Why It Matters
The size and timing of establishing an option pool directly impacts founder and investor ownership percentages. Investors typically require companies to create or expand the option pool before their investment, meaning founders absorb the dilution rather than sharing it with new investors. A company raising a Series A might need to set aside 15% for future hires, reducing founder stakes before the investment dollars arrive. Understanding this mechanism helps founders negotiate better terms and plan for multiple funding rounds without excessive dilution.
Example
Consider a startup where founders own 100% of 10 million shares. An angel investor offers $2 million for 20% of the company but requires a 15% option pool first. The company creates 1.76 million new shares for the pool, diluting founders to 85% ownership (10M ÷ 11.76M). Then the investor receives 2.94 million shares for their 20% stake. After both transactions, founders hold 67%, the investor holds 20%, and the option pool represents 13% of the fully-diluted capitalization. Over the next two years, the company grants options from this pool to hire a CTO, three engineers, and two advisors. When the pool runs low before the Series B, investors again request expanding it to 18%, and the cycle repeats with founders experiencing additional dilution.
Related Terms
Pre-Money Valuation
Fully-Diluted Capitalization
Vesting Schedule