The Option Pool Shuffle: Who Pays for Startup Hiring?

The lead investor wants the company to have enough options for the next 18 months of hiring. You want the same thing. A growing company without equity for employees is a motivational poster with payroll.

Then the term sheet says the unallocated pool must equal 10% of the fully diluted capitalization after closing, with the increase included in the pre-money valuation.

That sentence combines a hiring budget with a lower effective price for the new investor. Everyone agrees the company needs talent, so the meeting can spend twenty minutes admiring the hiring plan and four seconds choosing who funds it.

An option pool is a reserve of shares available for grants under the company's equity plan. Investors commonly include the reserved pool when calculating fully diluted pre-money shares. Orrick's financing guidance describes that denominator as outstanding common and preferred shares, options, warrants, convertibles, and shares reserved under equity plans.²

This guide uses a simplified US priced-round example. It is educational, not legal, tax, compensation, or investment advice. The term sheet, charter, plan, approvals, securities, and capitalization definition control the actual result.

Assume:

• existing holders own 10 million fully diluted shares
• founders own 80% of those shares
• existing investors own 20%
• the company has no unallocated pool
• the pre-money valuation is $10 million
• a new investor puts in $2.5 million for 20% post-close
• the investor also requires a 10% unallocated pool after closing

If the company simply creates a 10% pool before the investment, the round dilutes that pool too. It ends at 8% after the investor buys 20%. A term sheet requiring 10% available after closing needs the pre-money pool to be larger.

In this example, the company must add approximately 1,428,571 pool shares to the existing 10 million. The pre-money fully diluted total becomes about 11,428,571 shares. The $10 million pre-money valuation produces a price of about $0.875 per share. The investor's $2.5 million buys about 2,857,143 shares.

The post-close cap table is:

No employee received a grant in this transaction. The pool still moved 10% of the post-close company away from prior holders because it was included in the pre-money share count used to set the investor's price.

This is the shuffle. The pool is described as future employee equity, which it is. Its position in the formula decides who pays for it now.

Compare a second structure using the same valuation and investment. The investor buys 20% first. The company then creates a pool equal to 10% of the resulting capitalization, so every holder is diluted by the pool.

The simplified post-close ownership becomes:

The post-money pool makes the investor bear some of the dilution. The pre-money pool preserves the investor's 20% and allocates the difference to existing holders.

Orrick explains the same commercial distinction: a pre-money increase dilutes founders and existing shareholders, while a post-money increase also dilutes the new investor.³ Neither structure creates more or less hiring capacity in this example. The timing reallocates its price.

This is how a higher valuation can coexist with disappointing founder ownership. An investor can improve the pre-money number while requiring a larger pre-money pool. Founders hear the better valuation immediately. The pool cost waits for the ownership model, where applause is less common.

Evaluate both together:

effective financing economics = valuation + investment size + fully diluted share definition + pool treatment

If the founder update mentions only the first item, it is a brand campaign.

A company may genuinely need 10%, 15%, or more. The credible number comes from a grant budget.

Start with every hire and refresh grant expected before the next financing:

Fill the ranges using current compensation data, recruiter input, geography, company stage, and the candidate profile. Add grants already promised in signed offers. Subtract the unallocated shares currently available. Include a sensible buffer for negotiation and attrition.

The pool request should answer:

• Which roles must be filled before the next likely round?
• Which grants are new-hire grants, promotions, or refreshes?
• How much of the existing pool is already committed?
• How long must the reserve last?
• Which hires disappear from the plan if the company misses revenue?
• Does the model assume a director or adviser grant?

Orrick recommends connecting early-stage pool size to hiring needs over the following 12 to 18 months and notes that investors often seek a pre-money top-up.⁴ The time horizon matters. A three-year pool can make the new investor wonderfully protected against a financing that will probably happen in 14 months.

“Ten percent is standard” skips the operating plan and saves the person requesting 10% from explaining why the company needs exactly 10%. That is efficient for the meeting and unusually expensive for one side of the cap table.

Pool discussions become confused when every option-related number is called “the pool.” Keep these categories separate:

• Plan reserve: shares authorized for awards under the plan
• Granted options: awards promised to specific recipients
• Vested options: the earned portion of granted awards
• Exercised options: options used to purchase outstanding shares
• Unallocated pool: reserve still available for future grants
• Committed grants: offers or approvals expected to consume reserve but not yet reflected as grants

The investor usually cares about unallocated capacity after closing. Employees care about actual grants. The financing model cares about the fully diluted denominator. Stockholder voting generally cares about outstanding voting shares.

An unallocated pool can dilute fully diluted ownership without casting a vote because nobody holds those shares yet. Once options are exercised into voting stock, the charter and applicable law determine the rights. Delaware's default is one vote per share unless the certificate provides otherwise.⁵

Do not use one cap-table percentage for compensation, financing, and voting analysis. The numbers may reconcile. Their legal jobs do not.

An investor requesting a pre-money pool is pursuing understandable goals. They want the company funded for its operating plan and prefer their new ownership to remain intact while the reserve is created.

The founder has several legitimate responses:

1. Reduce the pool to the hiring model. Replace a round percentage with grants by role and timing.
2. Credit existing capacity. Count genuinely unallocated shares and remove duplicate buffers.
3. Update the hiring horizon. Size to the next financing instead of an arbitrary period.
4. Share the dilution. Propose some or all of the increase after the investment.
5. Stage the increase. Approve enough now and revisit additional capacity when the board approves the hires.
6. Trade explicitly. If the investor insists on the pool, evaluate it with valuation and the rest of the economics.

The investor may decline. Negotiation is not a ceremonial opportunity for both sides to demonstrate financial literacy. Leverage still decides. A model at least tells you what concession was made.

Ask for the capitalization spreadsheet behind the term sheet. Verify:

• the exact pre-money fully diluted shares
• the current granted and unallocated pool
• the number of new pool shares
• the pool percentage immediately after closing
• treatment of SAFEs, notes, and warrants
• price per share and rounding
• ownership for every holder group

The NVCA publishes internally consistent model financing documents, including the certificate, stock purchase agreement, investors' rights agreement, and voting agreement.¹ That document stack implements the deal. The pool cost should be settled while the term sheet can still express it in one sentence.

Before approving the financing, give the board two side-by-side models:

• the investor's requested pre-money pool
• the same reserve created post-money or at a smaller hiring-based size

For each, show price per share, new shares, founder ownership, investor ownership, existing grants, unallocated capacity, and expected use by role. Link the dilution calculator for a first pass, then reconcile the final output to the financing documents.

After closing, report pool usage like any other budget:

• opening unallocated reserve
• grants approved
• grants cancelled and returned
• committed offers
• remaining capacity
• forecast through the next financing

The company should replenish the pool when the hiring plan needs it. A shrinking percentage can mean the equity budget is working. Automatically restoring it to a round number turns successful hiring into a recurring transfer from stockholders.

Track the portion that never gets granted with the same attention. It does not simply come back to the founders at a sale. What happens to the unused option pool when the company is acquired follows this cap table through to an exit, where the ungranted reserve receives nothing and the extra shares it priced are still outstanding.

Employees deserve meaningful equity. Build the grants by role, compare pre-money and post-money timing, and put the effective dilution beside the valuation before the term sheet is signed. “For hiring” begins the calculation. It does not grant the investor a complimentary answer.

No percentage is normal without stage, geography, hiring plan, current grants, and time to the next financing. Build the requirement by role and grant range. Market data can test those assumptions. It cannot replace them. A round number without a grant budget is a negotiating position.

The new investment dilutes pre-money holders, including a pool created before closing. If the investor buys 20% post-close, a pool equal to 10% immediately before the investment would fall to 8%. The pre-money pool must be larger if it must remain 10% after the new shares are issued.

Reserved, unissued shares do not have a holder casting votes. The pool can still be included in a fully diluted financing denominator. Granted and exercised shares have different treatment under the plan, charter, and law. Keep the voting cap table separate from the fully diluted financing model.

The investor may require it, the company may need the capacity, and the overall financing may still be attractive. Founders can trade across valuation, pool size, timing, governance, and other terms. Acceptance is a business decision. The avoidable mistake is pricing the decision as though reserved employee equity appeared for free.

Review it with the hiring plan, before a financing, and before material executive or refresh grants. Track committed offers and cancelled options as well as completed grants. Replenish from forecast need. A target percentage should not become an automatic refill instruction.