What Is a Stock Option Pool?
A stock option pool is a block of company shares set aside to grant to current and future employees, advisors and contractors.
How it works
Instead of issuing shares to each hire from scratch, the company reserves a pool, often when it incorporates or raises money. As it hires, it grants options from the pool: the right to buy shares at a set price later. Unused shares stay in the pool.
Investors often ask that the pool be created or enlarged before their money comes in. In that case the new shares dilute the existing owners, not the investor, which effectively lowers the founders' real valuation. This is called the option pool shuffle.
Example
For example, a company is valued at $8,000,000 pre-money, and the term sheet requires a pool equal to 10 percent of the post-round company. Because the pool is counted before the investment, the shares behind it reduce what the existing owners are credited for. The effective pre-money value for the founders is lower than $8,000,000, even though the headline number stayed the same.
Why founders care
The pool size should match your hiring plan for the next stage, not an arbitrary round number. Too small and you must top it up soon, diluting everyone. Too large and founders give up more than necessary. Always model the pool when you compare term sheets.
Common mistakes
- Agreeing to a large pool without a hiring plan to justify it.
- Ignoring that pool increases dilute founders first.
- Granting options without a current 409A valuation to set the exercise price.
Frequently asked questions
How big should an option pool be?
It depends on how many hires you plan, their seniority and your stage. Investors often propose a size, but you can negotiate it using a bottom-up hiring plan. A startup lawyer can help.
What is the option pool shuffle?
It is when the pool is included in the pre-money valuation, so existing owners absorb the dilution. It lowers the effective price founders receive, even if the headline valuation looks unchanged.
Related terms
Go deeper
- How to Split Equity Between Co-Founders (and Vesting) GuideHow to split equity between co-founders: factors to weigh, equal vs unequal splits, 4-year vesting with a 1-year cliff, and a worked example with round numbers.
- How to Value a Startup: Methods for Pre-Revenue Companies GuideHow to value a startup before it has revenue: common methods, pre-money vs post-money, and a worked dilution example with round numbers you can follow.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.