Financial Glossary
Option Pool
An option pool is a block of authorized but unissued shares reserved by a company -- most commonly a venture-backed startup -- to be granted to employees, advisors, and consultants as equity compensation through stock option plans. The pool is expressed as a percentage of fully diluted shares outstanding and is typically established or refreshed prior to each funding round. The pool's existence dilutes existing shareholders, including founders, because investors generally require the pool to be carved out of pre-money valuation, meaning founders absorb the dilution rather than new investors.
Problem & Application
A startup with 8 million shares outstanding raises a Series A at a $10 million pre-money valuation. Investors require a 15 percent option pool on a fully diluted post-money basis. If the pool does not already exist, the company must issue approximately 1.41 million new shares to establish it before closing, diluting founders from 100 percent to roughly 85 percent before the investor's shares are even counted. A fractional CFO or startup finance advisor helps founders model this dilution and negotiate whether a smaller pool -- say 10 percent -- is defensible given existing offer letters and expected near-term hires, potentially preserving several percentage points of founder equity at no cost to the investor.
In Short
An option pool is an essential tool for startups to attract and retain talent, but companies must balance its size to avoid excessive dilution.