An option pool is a block of shares set aside in a company's cap table to be granted to employees, advisors, and contractors as equity compensation. When someone joins a startup and receives "stock options", they are receiving the right to buy shares from this pool at a fixed price, called the strike price or exercise price, after they have met a vesting schedule.
Option pools are one of the most important tools founders have for attracting and retaining the talent they cannot afford to pay at market rates in cash. They are also one of the most commonly misunderstood parts of startup finance, particularly around how they affect founder dilution and how they interact with each new funding round.
This guide covers how option pools are created, how they affect your cap table, what the option pool shuffle is, and how to think about pool size at each stage. For the broader context on how equity works in startups, cap table basics every founder should know is a good starting point.
How an Option Pool Works
When a company creates an option pool, it authorises a set number of shares to be reserved for future grants. These shares exist on the cap table but are not yet owned by anyone. When the company grants options to an employee, it allocates a portion of that reserved pool to that individual. The employee does not own the shares yet. They own the right to buy them at a fixed price once they have vested.
Strike price
The strike price is the price at which the employee can eventually buy the shares. For US companies, this is typically set at the fair market value of the common stock at the time of the grant, as determined by a 409A valuation. Early-stage strike prices are often very low, which means the options can become very valuable if the company grows.
Vesting schedules
Options vest over time according to a schedule that determines when the employee earns the right to exercise them. The standard structure is a four-year vesting period with a one-year cliff. This means the employee receives nothing for the first year, then receives 25% of their options on the one-year anniversary of their start date, and the remaining 75% vest monthly over the following three years. The vesting schedules explained for founders cover these mechanics in detail.
Exercising options
Once vested, options can be exercised, meaning the employee pays the strike price and receives actual shares. Most employees wait to exercise until there is a liquidity event such as an acquisition or IPO, where they can sell the shares at a profit. Exercising early carries risk because the shares are illiquid and you pay real money for them before you know what they are worth.
The Option Pool Shuffle
This is where option pools get complicated for founders, and understanding it before you negotiate a term sheet is important.
When a VC leads a new round, they almost always require the company to have a minimum option pool in place before the round closes. The catch is how they calculate dilution. Most investors calculate their ownership percentage based on the post-money, fully diluted cap table, which includes the new option pool. But they insist the option pool be created before the money comes in, which means it comes out of the pre-money valuation. The result is that founders are diluted by the size of the new option pool before the investors are diluted at all.
Here is a simple example. A company has a $10 million pre-money valuation. An investor puts in $2 million for 17% of the company, implying a $12 million post-money. But the investor also requires a 15% option pool be created. If that pool is created pre-money, it reduces the effective pre-money value of the founders' shares. If the option pool was previously 5%, the new 15% pool means the company issues 10% more shares before the investor comes in, diluting founders by that 10% before the investment dilutes them further.
The option pool shuffle is legal and standard. The way to manage it is to negotiate the size of the pool required and to argue for a smaller pool if your hiring plan does not require a large one. Investors sometimes ask for a 20% pool when a 10% pool would be sufficient for the next 18 months of hiring. Push back with a concrete hiring plan.
Option Pool Size by Stage
Article 4 — What Is an Option Pool?
Table: Option pool size by stage
| Stage |
Typical Pool Size |
Why This Size |
Key Consideration |
| Pre-seed |
5–10% |
Cover early hires before a priced round |
Often reserved informally before the ESOP is formalised |
| Seed |
10–15% |
Hire across engineering, product, and sales |
Investors typically require a refresh to 10–15% pre-money |
| Series A |
10–12% |
Sufficient for 18–24 months of hiring at this stage |
Option pool shuffle adds dilution before the round closes |
| Series B |
8–10% |
Smaller refresh; team is more established |
International hiring often requires separate equity plans |
| Series C+ |
5–8% |
Mostly for senior hires and retention grants |
Public-company-ready governance starts to matter here |
How the Option Pool Affects Founder Dilution
Option pool dilution works differently from round dilution because it is not visible as a transaction. When an investor buys shares, you can see the percentage change immediately. When an option is granted, nothing changes until it vests and is exercised. But the pool is on your fully diluted cap table from the moment it is authorised, and every investor calculates their ownership on a fully diluted basis.
This is why you should think about your option pool as real dilution, even when no options have been granted. A 15% option pool that sits unused is still 15% of your company that is reserved away from your current shareholders. Understanding how dilution works across funding rounds shows you how option pool dilution stacks with round dilution over time.
Who Gets Options and How Much
Option grants are not standardised, but there are rough norms by seniority and stage that most companies use as a starting point.
- Early employees (first 5-10 hires): 0.1% to 1%, depending on seniority and how early they joined
- VP or Director level: 0.1% to 0.5%
- C-suite (non-founder): 0.5% to 2%
- Advisors: 0.1% to 0.5%, typically with a two-year vest and no cliff
These ranges compress significantly as the company grows and the cap table becomes more complex. A senior hire at a $500 million valuation company will receive a much smaller percentage than the same role at a $5 million valuation, but the absolute value of the grant can still be meaningful if the company continues to grow.
Frequently Asked Questions
What happens to unvested options if an employee leaves?
Unvested options are returned to the pool when an employee leaves. Vested options typically remain exercisable for 90 days after departure, though some companies extend this window. If the employee does not exercise within that window, the options lapse and return to the pool.
Can founders receive options?
Founders typically own their shares directly, not through options. They may have founder vesting agreements, which are separate from the option pool, but the option pool is generally reserved for employees and advisors who join after the company is founded.
What is the difference between ISOs and NSOs?
Both are types of stock options in the US. ISOs (Incentive Stock Options) can only be granted to employees and carry more favourable tax treatment for the holder. NSOs (Non-Qualified Stock Options) can be granted to anyone, including contractors and advisors, but are taxed as ordinary income on exercise. Most employee option grants are ISOs for this reason.
How much equity is it reasonable to give to advisors?
The question of how much equity to give to advisors and investors is worth reading in full. For advisors specifically, standard grants run from 0.1% to 0.5%, with 0.25% being common for active advisors who engage monthly. Grants above 0.5% for advisors are unusual unless the advisor is contributing IP or serving a very active operational role.
