What it means
When starting or growing a business, cash flow is often tight. To attract skilled staff who might otherwise work for larger corporations, companies often offer share options.
These give employees the right to buy shares at a set price in the future, once the company has grown and the shares are worth more. To make this possible, the founders set aside a portion of the company equity before raising outside investment.
This reserved portion is the share option pool. Creating this pool is a standard requirement when raising money from venture capitalists or angel investors.
Investors want to know that key staff can be hired and rewarded without constantly diluting everyone else's ownership further down the line. Typically, this pool accounts for ten to twenty percent of the total company shares.
It is managed by the board of directors, who decide how many options to grant to incoming team members based on their role and seniority. In practice, these options do not get handed out all at once.
Instead, they are usually earned over time through a process called vesting. This means an employee must stay with the company for a certain period, such as four years, before they actually own the right to purchase the shares.
If they leave early, the unearned options return to the pool. This structure encourages loyalty and aligns the interests of the team with the long-term success of the business.
Managing the pool requires careful planning because issuing too many shares can dilute the founders' ownership too much. Conversely, making the pool too small might mean running out of incentives before key hires are made.
Finding the right balance is a crucial part of financial planning during funding rounds and strategic growth phases.
In practice
Real-world examples.
Example
TechStart founders set aside 15 percent of their total shares in an option pool before pitching to investors, ensuring they can hire senior developers over the next two years without renegotiating equity splits.
Example
GreenCafes reserves 10 percent of its shares to offer options to loyal branch managers, turning hourly staff into invested partners who actively work to reduce waste and boost local store profits.
Example
A biotech research firm creates a 20 percent option pool specifically to attract specialized scientists from academia, offering them a financial upside that matches the risk of joining an early-stage startup.
Think of it
“Think of a share option pool like a slice of cake kept in the fridge specifically for future guests. You bake the whole cake, but you explicitly label a few slices for people who will arrive later to help you finish the party.
Formula
Calculation
Pool Size Percentage = (Shares Reserved for Future Hires / Total Diluted Shares) * 100
Example: If a company has 800,000 shares owned by founders and reserves 200,000 shares for new staff, the total diluted shares equal 1,000,000.
(200,000 / 1,000,000) * 100 = 20 percent pool.Case study
Seen in the real world.
BrightWeb, a digital marketing agency, decided to hire a high-profile chief technology officer to scale their software platform. To secure the talent without breaking their modest cash budget, the founders agreed to create a 15 percent share option pool. At the time of creation, the company had 1,000,000 existing shares, meaning the new pool added 176,470 shares, bringing the total fully diluted share count to 1,176,470. The new chief technology officer received an option grant covering 5 percent of the company, vesting evenly over four years. Over the next three years, the platform grew rapidly, increasing the valuation of BrightWeb fivefold. Because the option pool was established correctly during the initial funding round, the founders did not need to scramble for extra equity when hiring subsequent key engineers, and the team was fully motivated to achieve the company targets.
Watch out
Common mistakes.
- Creating a pool that is too large, which unnecessarily reduces the ownership stake of the current founders.
- Failing to establish the pool before taking investment, leading to arguments with investors over who bears the dilution cost.
- Granting all options immediately upon hiring instead of using a vesting schedule tied to time or performance.
Questions
People also ask.
Who owns the shares in the option pool before they are given to employees?
Technically, the shares do not exist as issued stock yet; the pool represents authorized space to issue shares in the future. Until granted, that equity remains split among existing shareholders on paper.
What happens to unallocated options if the company is sold?
Any shares left in the pool that have not been granted to employees are usually cancelled, meaning the proceeds from the sale are distributed only to actual current shareholders based on their ownership percentages.
Do option pools dilute the founders or the investors?
Usually, investors require the option pool to be created out of the existing shares before they invest. This means the dilution falls entirely on the founders, which is why negotiating the exact pool size is critical during funding talks.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%