An employee option pool is a block of company equity set aside specifically to grant to future employees as compensation, separate from what founders and existing investors hold. Most startups carve out somewhere between 10% and 20% of total equity for this pool, typically before closing a priced funding round.

Why the pool gets created before a funding round

Investors typically require a company to establish or expand its option pool before they invest, and the dilution from creating that pool usually comes out of the existing founders’ and early shareholders’ ownership, not the new investor’s stake. This is a common point of negotiation, since a larger pool means more dilution for the people who already own the company.

How the pool actually gets used

As the company hires, it grants pieces of this pool to new employees as part of their compensation package, typically subject to a standard vesting schedule with a one-year cliff. If the pool runs low, the board has to approve creating more, which again dilutes existing shareholders at that point.

Why the size matters so much upfront

A pool that’s too small means the company will need to expand it later, causing another round of dilution right when the company might be trying to preserve ownership for a future raise. A pool that’s too large unnecessarily dilutes founders upfront for hires that might not happen for years. Getting the size roughly right at each funding stage is a real, recurring negotiation between founders and investors.

Frequently asked questions

Who pays for the dilution when an option pool is created?

Typically existing shareholders, especially founders, since the pool is usually carved out of the pre-money valuation before new investors come in.

How big is a typical startup option pool?

Most commonly between 10% and 20% of total company equity, depending on hiring plans and investor expectations.

What happens if the option pool runs out?

The board needs to approve creating additional pool equity, which dilutes existing shareholders at that point.

For more startup fundamentals, see Talmyn’s Business & Economics desk.