What is an Option Pool?

An option pool is a specific amount of a company’s stock reserved for future employees and advisors.

It is often referred to as an employee stock option pool or ESOP.

Think of your company as a pie. You and your co-founders own the majority of the slices. Investors buy their own slices. The option pool is a slice you set aside in the fridge for guests that have not arrived yet.

It sits on the capitalization table, or cap table, as a distinct line item. It represents shares that have been authorized by the board of directors but not yet issued to anyone.

When you hire a new engineer or a sales director, you grant them options from this pool.

Cash is scarce in the early days of a company.

Startups compete for talent against massive corporations that can pay significantly higher salaries. To bridge this gap, startups offer equity.

The promise is that while the cash compensation might be lower today, the stock options will be worth a significant amount if the company succeeds.

The option pool is the bank account from which you pay this equity compensation.

Creating an option pool has a direct mathematical impact on your ownership.

When you set aside 10 percent or 20 percent of the company for future hires, that percentage has to come from somewhere. In the earliest stages, it comes entirely from the founders.

This usually happens during a funding round.

Investors will typically require you to create or top up the option pool before their investment creates the post-money valuation.

This is known as putting the pool in the “pre-money.”

It means the dilution caused by creating the pool is suffered by the existing shareholders, not the new investors. This is a standard negotiation point but one that catches many first-time founders off guard.

One of the most common questions is how big the pool should be.

If the pool is too small, you will run out of shares to offer key hires. You will then have to go back to the board and the investors to authorize more shares, which is a complex administrative process.

If the pool is too big, you have diluted yourself more than necessary.

Standard sizes often range from 10 percent to 20 percent of the fully diluted capitalization. However, relying on standards can be dangerous.

The scientific approach is to build a hiring plan.

Look at exactly who you need to hire over the next 12 to 18 months until your next fundraising event. Estimate the equity require for each role. Sum it up. Add a small buffer.

That is your number.

Treat the option pool like a budget.

Every time you make a hire, you are spending from that budget. You need to track how much remains so you do not overspend.

It forces you to be disciplined about how much equity you give away. It ensures that you are saving enough stock for the critical senior hires you might need down the road.

It is a tool for planning, not just a legal requirement.