Option Pool

A company that has just raised money can't win hires with cash. It cannot match the salary a large company offers, so it promises a share of what the company becomes instead, and shares are the raw material of that promise. Paying people this way is called equity compensation.

The hard part was always where those shares come from. When a candidate asked for one percent, the founder couldn't answer in the room. Whether it came out of the founders' holding or out of newly issued stock, and how far the investors' percentage would drop if new stock were issued, was a fresh calculation every time — and after the calculation came another board approval. Candidates took other offers while they waited.

Investors had the same problem from the other side. A company that hires two executives the month after a round closes and issues new shares to pay them has quietly moved the percentage the investor just bought. So investment agreements started to require that the shares for future hires be sized and placed on the table up front. The option pool is where that requirement settled. Set aside what you expect to need, write it down, and hiring stops moving everyone's percentage — and the percentages that remain become honest.

An option pool is created by deciding what share of the company to reserve and then putting that reservation on the cap table as a single line. The line belongs to nobody yet, and it already counts in the total share number.

Setting one up has four steps.

1. Size it. The disciplined way is to lay out the next eighteen to twenty-four months of hiring, add up what each role would be granted, and work backward from that total. In practice many companies land on 10 to 15 percent of the company.
2. Record it as unallocated. On a fully diluted basis — counting as though every share the company could issue has been issued — this line is treated like anyone else's holding.
3. Hand pieces of it to people. The contract that pulls shares out of the pool and attaches them to one person is a stock option: the right to buy a set number of shares at a set price, almost always with a vesting schedule so the right is earned across years of employment rather than all at once.
4. Watch the remainder. Shares granted to someone who leaves without exercising return to the pool and go to the next hire.

Pagedeck's table makes it concrete. Fully diluted, the company has 1,000,000 shares, and 120,000 of them are the pool. Grants to 30 people so far account for 70,000, leaving 50,000 unallocated, or 5 percent of the company. Bringing in a new engineering lead at one percent takes 10,000 shares out and leaves 40,000.

What the pool does to the arithmetic is the part worth slowing down for. Two founders holding 600,000 shares of common stock look like they own 68 percent of the company if the pool isn't counted. Count the 120,000 reserved shares, so the denominator is 1,000,000, and the same holding is 60 percent. Those 8 points didn't disappear; counting a block that hasn't reached anyone yet as though it already had is what makes the number honest. Believe the 68 and the math starts breaking in the first month of hiring.

The pool becomes something people negotiate over in three situations.

1. Setting investment terms. What a term sheet usually says is that a pool of some size must exist after the round closes. Create that pool inside the pre-money valuation and the new dilution falls entirely on existing shareholders. Create it out of the post-round total and the investor absorbs a share of it too. For a company raising $375,000 at a $1.5 million pre-money valuation, putting a 12 percent pool on the front side costs the founders roughly two additional points.
2. Planning hiring. The unallocated remainder is the hiring budget. A company with 1.2 percent left can bring in one executive and then nothing until the next round, which is why the hiring plan and the pool balance belong in the same view.
3. Approaching the next round. A pool that is nearly empty gets topped up alongside the new investment. That top-up is an issuance too, so everyone dilutes once more at that moment.

"We've got 1.2 percent left in the pool. Hiring an engineering lead means topping it up before the round."

The remaining block covers one hire and no more.

"Is that 12 percent pool pre-money or post-money?"

Asking whether existing shareholders absorb the dilution alone or the investor shares it.

"Unexercised shares from people who left came back, so the balance ticked up."

Granted stock that was never exercised has been recovered and is available for the next hire.

Pagedeck sized its pool at 12 percent while closing its Series A. The investor wanted it created inside the pre-money valuation; Grace argued for splitting it. The gap between the two positions was about two points of founder ownership, and it settled at 8 percent on the front side and 4 percent on the back.

Since then Grace keeps the pool balance in a column next to the hiring plan. Answering a candidate's question in the room requires knowing what is left.

The most common misreading is that a pool removes dilution from hiring. Percentages genuinely don't move in the month someone is hired, so it looks that way. But the dilution didn't vanish; it was pulled forward to the day the pool was created. The moment the count goes fully diluted, that ownerless 12 percent is in the denominator and everyone's percentage has already dropped. Miss the ordering and it's easy to wave through the pool size during negotiations and then fail to explain why your own stake came out lower than expected.

The other error is reading a large pool as good news for employees. It sounds like more to go around. But pool size isn't connected to what any one person receives — individual grants are set by role and joining date, and the pool is only the container their sum has to fit in. A container built larger than the plan requires, on the front side of the round, dilutes founders and existing shareholders early and then sits unused for years. So when an investor pushes for a bigger pool, the first thing to check is whether the number came out of a hiring plan.