What is an option pool and why do founders care?

Full Explanation

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.

When a Series A closes, the investors, founders, and advisors have equity, but the company needs to incentivise employees. The solution is an option pool — typically 10-20% of fully diluted capitalisation set aside for employee stock options. If a company has 1M fully diluted shares and reserves an option pool of 15%, that is 150K option shares available for employee grants. From a founder perspective, this is crucial: if the investors demand a 20% option pool at a £5M pre-money, and you were planning to hire 10 engineers at £50K in options each, you need to ensure the pool is large enough. Most VC-backed companies grant options at strike prices equal to the latest round's per-share valuation (or slightly lower), so a 4-year vest with 1-year cliff is typical. The option pool is usually established as part of the Series A but can be increased in future rounds (diluting both founders and investors). For founders, negotiating a modest option pool (12-15% rather than 20%) and ensuring grants vest over time (so you can replace early departures) are key.

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