Option Pool
An option pool is the equity reserved for employee compensation, typically expanded during financings to hire and retain talent. Allocators evaluate option pool dynamics because repeated pool expansions shift dilution onto common shareholders and can materially change founder and employee incentives over time.
Option pools are central to venture-backed company building. They are also a recurring source of dilution and negotiation friction. Option pool increases are often included “pre-money” in rounds, meaning founders and existing shareholders bear the dilution rather than new investors.
From an allocator perspective, option pool policy affects:
- founder retention and incentives,
- hiring competitiveness,
- cap table health, and
- eventual exit distribution outcomes.
How allocators define option pool risk drivers
They assess:
- Size and frequency: how often pools are expanded and by how much
- Who bears dilution: pre-money vs post-money mechanics
- Hiring plan realism: whether the pool is justified by a credible plan
- Refresh cycles: option re-pricing and refresh impact
- Incentive integrity: whether teams remain motivated after dilution resets
Allocator framing:
“Does the company maintain talent incentives without repeatedly breaking founder and employee alignment?”
How option pools interact with venture outcomes
- insufficient pools can harm hiring
- excessive pools can demotivate founders and early employees
- repeated “pre-money” increases can create long-term misalignment
- option refreshes after down rounds can shift economics dramatically
How allocators evaluate VC managers
Conviction increases when managers:
- understand option pool trade-offs and negotiate rationally
- avoid pushing unnecessary dilution onto common
- model incentive health as part of governance
- report cap table changes transparently across the portfolio
- have experience managing talent incentives through down cycles
What slows allocator decision-making
- lack of transparency on dilution and pool expansions
- repeated resets that destroy early-team motivation
- unclear policies around refreshes after repricing
- misalignment between hiring plan and pool size
Common misconceptions
- “Option pools are just admin” → they are core economics and incentives.
- “Bigger pools are always better” → they can be misused and dilute alignment.
- “Only founders care” → employee incentives drive execution outcomes.
Key allocator questions
- How often do your companies expand pools and why?
- Who bears dilution in negotiated rounds?
- What happens to incentive alignment after a down round?
- How do you manage refresh and retention?
- What is the typical founder ownership trajectory after multiple rounds?
Key Takeaways
- Option pools are an incentive system and a dilution mechanism
- Pool expansions can materially shift ownership and alignment
- Strong managers manage pools as governance, not admin