Option Pool

The ownership stake held by a company's founders, typically established at incorporation and subject to dilution through subsequent funding rounds. Founders' equity is usually subject to vesting schedules and may carry different rights from investor shares, reflecting the intangible contribution of the founding team's vision and early-stage effort.

The process by which an employee or founder earns full ownership of equity over time, typically over a 3-4 year schedule. Vesting aligns long-term incentives with commitment and usually includes a cliff period (often 12 months) before any equity vests.

The reduction in existing shareholders' ownership percentage when a company issues new shares, typically during a fundraising round. Dilution is an expected part of growth financing, but founders and early investors monitor it closely to protect their economic interest.

The contractual right of existing shareholders to participate in future funding rounds on a pro-rata basis, maintaining their ownership percentage. Pre-emption rights protect early investors from dilution and are a standard provision in shareholders' agreements.

Sequential rounds of venture capital financing that follow the seed stage. Series A typically funds scaling after product-market fit; Series B accelerates growth and market expansion; Series C and beyond fund further scaling, internationalisation, or pre-IPO preparation.

A valuation technique that applies financial options pricing theory to evaluate the flexibility embedded in strategic investments, such as the option to expand, delay, or abandon a project. Real options analysis is particularly valuable for intangible-intensive investments where uncertainty is high and future decision points create significant embedded value.

The earliest formal round of equity financing, typically used to fund product development, initial hiring, and market validation. Seed rounds are usually raised from angel investors, seed funds, or accelerators, with investment sizes ranging from tens of thousands to several million pounds.

A form of debt financing available to venture-backed startups that supplements equity financing without requiring the dilution of additional equity rounds. Venture debt is typically structured as term loans with warrants giving the lender the right to purchase equity, and is used to extend runway, finance equipment, or bridge between funding rounds.

What is an option pool and why do founders care?

An option pool is a reserved block of shares (typically 10-20% of fully diluted equity) set aside for employee options. The size of the pool affects how much founders must dilute to hire team members.

What is the Cap Table and why does it matter?

A cap table (capitalisation table) lists all of a company's shares, options, and convertible securities, showing who owns what percentage of the company — it is essential for fundraising, dilution analysis, and exit planning.

What is the option pool shuffle and why is it controversial?

The option pool shuffle is a practice where founders and investors increase the option pool immediately before a Series A, diluting the founder's equity by distributing free options to new investors and the founder.