The Employee Option Pool: How It Really Affects Founder Ownership
Written By Haley Kopp
Imagine this situation: Your company has an employee option pool of reserved shares ready to grant to your key employees to allow them the opportunity to become minority shareholders.
Then your company starts its first venture capital raise, and the investors are asking the company to “increase the option pool” in the term sheet. At first glance, this seems reasonable. Employees are critical, and startups need stock options to attract and retain talent.
But here’s the catch: when and how the employee option pool gets created can shift significant dilution onto the founders.
Pre-Money vs. Post-Money Option Pools
The key distinction is whether the option pool increase happens pre-money or post-money:
Pre-money option pool: The increase happens before the investor’s money comes in. This means the dilution is absorbed by the founders and existing stockholders.
Post-money option pool: The increase happens after the investor’s money comes in. In this case, both founders and investors share the dilution.
Investors usually push for a pre-money pool, because it preserves their percentage ownership. But that approach comes at a cost to the founders.
An Example
Imagine your company is raising $5 million at a $20 million pre-money valuation (so $25M post-money).
Without an option pool increase, the investors will own 20% ($5M ÷ $25M), and the founders will keep 80%.
Now suppose the investors require a 10% option pool pre-money. The $20M pre-money valuation now includes the option pool, which means the founders are diluted down further. Investors still get their full 20%, but the founders end up with only 70%.
The difference may not sound huge at first, but over multiple rounds of financing, these points add up.
Negotiating the Pool
Smart founders don’t just accept whatever pool size investors suggest. Instead, they:
Model realistic hiring needs. If you only need to hire a few key roles, you probably don’t need a massive pool right now.
Push for post-money adjustments. If investors believe in the team, they should share in the cost of incentivizing employees.
Understand the math. The difference between pre- and post-money structures can mean millions of dollars of value the founding team can maintain or lose.
Takeway
The option pool is one of those hidden levers in financing negotiations. If you as a founder don’t pay attention, you can lose more ownership than you expect while your investors walk away untouched.
Lesson for founders: Always be aware of whether the option pool is being counted pre-money or post-money, then negotiate an option pool size that makes sense for your company’s actual hiring plan.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
