Fundraising & Rounds
What is an option pool and why do VCs require one?
An option pool is a set of shares reserved for future employee equity grants. VCs require it to ensure there's enough equity to attract and retain talent after they invest.
An option pool (also called an employee stock option pool or ESOP) is a block of shares set aside for future grants to employees, advisors, and contractors.
Most VC term sheets require that an option pool be created or expanded before the investment closes — this is almost always done pre-money, which means it dilutes the founders before the VC comes in.
Here's why this matters (and why it's slightly sneaky): Pre-money option pool creation effectively reduces the founders' ownership before the VC calculates their ownership. Example: If your company is valued at $10M pre-money and the VC creates a 10% option pool from existing shares, founders effectively lose 10% of the company before the VC even invests.
Typical option pool sizes: 10-20% of the fully diluted cap table. VCs prefer larger pools because it means there's plenty of room to hire without coming back for another option pool top-up (which would dilute the VCs).
For founders: Negotiate the option pool size carefully. Only create as much as you actually need based on your hiring plan for the next 18-24 months. A larger option pool than you need is simply unnecessary founder dilution.
Vesting: Options typically vest over 4 years with a 1-year cliff (nothing for the first 12 months, then 1/48th per month after that). This incentivizes long-term commitment.
Related questions
What is a cap table?
A cap table (capitalization table) is a spreadsheet or document that shows who owns what percentage of a company — founders, employees, investors — accounting for all shares, options, and convertible instruments.
What is vesting and a cliff in startup equity?
Vesting is the schedule by which you earn your equity over time. A cliff is a minimum tenure required before any equity vests — typically 1 year.
What is a term sheet?
A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.