Option Pools

What are options?

An option is the right, not the obligation, to buy a share at a set price. Companies grant them to employees as compensation: come help build the company, get the right to buy in at today's value, and (the hope) sell later at a much higher one.

That set price is the strike price, pegged to the value of the company when the option is granted. The gap between the strike price and what the shares end up worth is the employee's upside.

To grant options, a company first reserves shares to back them. That block of reserved shares is the option pool, also called the employee stock option pool or ESOP, usually sized as a percentage of the company and created or topped up around financing rounds.

Options aren't the only way to give employees upside. Restricted stock, phantom stock, and other structures fit different situations, covered below.

For how employees should think about their own options, including exercising and taxes, Compound's Everything you need to know about startup stock options is a good read.

How options impact cap tables

Creating an option pool creates new options, which raises the company's fully-diluted share count and dilutes everyone who already owns a piece of it. Every authorized option counts toward fully-diluted shares whether or not it has been granted, because authorizing an option means reserving a share to back it.

Options usually get their own column on the cap table, kept apart from common. The financial rights are the same, but the voting and control rights are not, so it's worth seeing them separately.

Vesting schedules matter for tracking who actually controls what, but they don't change the fully-diluted cap table. A granted option counts the same whether it's 10% vested or fully vested.

Premoney and postmoney option pools

"Premoney" and "postmoney" option pools describe how a pool is mechanically created in a round, and which shareholders absorb the dilution.

• A premoney option pool, the investor-friendly option, comes out of the premoney valuation. The new options go into the share-price denominator, so existing shareholders bear the dilution.
• A postmoney option pool, the founder-friendly option, sits outside that denominator, so the dilution is shared across everyone, new investors included.

The premoney pool is the more common ask. Both can land in the same place if the premoney valuation is adjusted to account for the dilution, and that adjustment is the heart of the negotiation.

Background: Basics of pre- and post-money option pools.

Companies routinely misjudge what a new pool does to their effective valuation. It happens often enough to have a name, the "option pool shuffle": a pool created premoney quietly lowers the real price the founders are getting. The fix isn't complicated, it's just attention. Be explicit about how the pool is created when you and the investors settle on a valuation.

What's the right size for an option pool?

Pool size is negotiated among founders, investors, and the board. Since the point of a pool is to fund equity grants for the hires that grow the company, the size should trace back to a hiring plan. That gives the number a rationale instead of a vibe.

In practice, pools after a financing tend to run 10-20% of the company's postmoney capitalization, and both the outstanding pool and each new top-up tend to shrink as a percentage with every later round. Founders are right to authorize only what they need to reach the next round: any pool you create now dilutes you now, and anything left ungranted simply carries into the next round's pool anyway.

Watch the base the percentage is measured against. Legal docs define pool size against different denominators, sometimes postmoney fully-diluted shares, sometimes common stock outstanding at closing, sometimes total capital stock. Same headline percentage, very different actual share count.

How an option pool changes over time

The rough lifecycle of a pool:

• A pool is created by reserving authorized shares for it. Issued shares don't change; the shares are set aside for when options get exercised.
• Options can be granted up to the number of shares available in the pool.
• Grants usually vest over time, on a schedule tied to staying with the company.
• Once vested, options can be exercised, at which point they convert into actual shares.
• The company can cancel options by agreement or for cause, and employees often let options expire unexercised, frequently because exercising costs real money at an awkward time after leaving.
• Cancelled and expired options return to the pool and can be granted again.

A pool also gets expanded over time, usually at financing rounds, to refill the shares available to grant. The available pool shrinks as grants go out, but whatever is left ungranted rolls into the pool at the next raise.

Sizing the pool to a target post-close availability

The most common practical question is "we need a 10% pool available after closing." That is not the same as "create a 10% pool today." Grants happen between rounds, so the pool that exists today is bigger than what is left for new hires.

The math goes the other way. Start from the desired post-close available pool, work back to the gross pool to authorize.

Gross pool to authorize = Outstanding grants today + Target available pool % * Postmoney fully-diluted shares

The complication: the postmoney share count depends on the pool size, and the pool size depends on the postmoney share count. That is a circular reference. Turn on iterative calculations and let it solve, or use Goal Seek targeting the available pool percentage.

Pool sizing is a negotiation, not a formula. The 10% number is convention for a Series A; the right number depends on the hiring plan, current grants outstanding, and how long the pool needs to last to the next round. Make the assumption explicit: the pool is sized for X hires over Y months at Z grant size, post-close.

The Cap Table and Exit Waterfall Tool handles this on the option pool sheet by exposing both the gross authorized pool and the available-after-grants figure. Set the target available pool, turn on iterative calculations, and the gross pool back-solves.

Option pools in premoney vs postmoney SAFEs

All existing options go into the company share count used to price the round, including vested, granted-but-unvested, and authorized-but-ungranted options.

A new option pool created during a funding round is not counted in the share-price calculation for a postmoney SAFE, but is counted for a premoney SAFE.

Why the difference? The postmoney SAFE is modeled as "convert first, then issue new equity," which effectively treats the SAFE as its own round. Any option pool created as part of the equity round happens after that, so it isn't part of the SAFE's conversion.

For how the calculations run, see the Cap Table and Exit Waterfall Tool.

Options aren't the only tool

Options are the most common way to give employees equity upside, but not the only one.

Restricted stock units (RSUs) are a promise to deliver a set number of shares, subject to a vesting schedule tied to continued employment and sometimes to performance goals. Like options, they carry no voting rights. Unlike options, they have no strike price, so they have value the moment they vest. On a cap table, restricted stock shows up and is treated much like options, minus the strike price.

Phantom stock, also called shadow stock, is a contract to pay cash in the future if certain events happen. It isn't ownership, so it never appears on the cap table; it's carried as a deferred-compensation liability. It's flexible and cheap to set up, and it works for companies without a formal stock plan, though it can't be handed out as broadly as an ESOP.

The exit waterfall is where this distinction earns its keep. Restricted stock takes proceeds like any other shareholder, with no strike price to net out. Phantom stock never touches the cap table, but if a payout is tied to an exit, the waterfall still has to account for that cash.

Glossary

Term	Definition
Option Pool	A reserve of shares set aside to grant to employees as compensation, also called the ESOP. Sized as a percentage of the company, created and amended around financing rounds
Strike Price	The price an option holder pays to buy a share, pegged to the company's value when the option is granted
Authorized Options	Options the company is allowed to issue
Granted Options	Options already granted to option holders
Vested Options	Granted options the holder has earned under their vesting schedule
Options Available for Granting	Authorized options less granted options
Issued and Outstanding Shares	Shares issued and currently held by shareholders. Less than authorized shares
Fully Diluted Shares	Issued and outstanding shares plus shares reserved for authorized options, assuming all authorized options are eventually granted and exercised
Premoney Option Pool	The investor-friendly option. Reduces the premoney valuation by the value of the options created, putting the dilution on existing shareholders
Postmoney Option Pool	The founder-friendly option. Shares the dilution across all shareholders, new investors included
Investor Friendly	A method of issuing options or converting shares where the dilution is borne entirely by existing shareholders, not new equity investors
Founder Friendly	A method where the dilution is shared across all shareholders, including new equity investors

Where this lives in your legal docs

Pool size and authorized share count are governed by the Certificate of Incorporation and the Equity Incentive Plan. Individual grants are issued under board consent referencing the Plan, with grant terms (vesting, strike, expiration) in each option agreement. The NVCA model documents include a model Equity Incentive Plan; most companies adapt it.