Option Pool
Definition
A block of shares reserved for future employee stock option grants. The option pool is created from authorized but unissued shares and typically represents 10-20% of the company on a fully diluted basis. Option pool size is negotiated between the company and investors during fundraising rounds.
Real-World Example
Before a Series A, investors require the company to create a 15% option pool. This is carved out of the pre-money valuation, meaning existing shareholders (founders) bear the dilution, not the new investors. The pool is used to attract and retain employees with equity grants.
Common Mistake
Not considering the option pool when evaluating ownership. A company with a large unallocated option pool has significant dilution already built in. If the pool is 15% and only 5% is granted, that remaining 10% will dilute everyone (including you) as it is granted to future hires.
Why It Matters
The option pool directly affects your ownership percentage both now and in the future. Understanding its size and how much is allocated vs. unallocated helps you predict future dilution.
Related Terms
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