- What is an option pool? A guide for startup founders
- What is an option pool?
- Option pool vs. ESOP
- Why do I need an option pool?
- How an option pool works
- How to create an option pool
- How to size your employee option pool
- Bottoms-up
- Top-down
- How big should your option pool be?
- How an option pool affects dilution
- Pre-money option pools vs. post-money option pools
- The option pool shuffle
- Be realistic about your future hiring needs
- How option pool size impacts dilution
- How to manage your option pool over time
- Managing your option pool with Carta
- Frequently asked questions about option pools
What is an option pool?
An option pool, also called an employee stock option pool, is a block of shares set aside by a company specifically to grant equity to employees, contractors, advisors, and executives in the future. These reserved shares appear on your cap table as the portion of the company earmarked for future equity grants. The pool acts as a pre-approved reserve, so you can move quickly without going back to shareholders for approval on every grant. While it's called an “option” pool, the actual equity granted from the pool could be stock options or other types of equity grants like restricted stock awards (RSA) and restricted stock units (RSU).
Option pool vs. ESOP
You might hear “ESOP” used interchangeably with “option pool,” especially in international contexts. But these are not the same thing. ESOP stands for “employee stock ownership plan,” which is a company-funded retirement account that holds stock for employees with certain tax benefits. ESOPs are used across industries and by public or private companies. Most venture-backed startups use option pools, not ESOPs.
Why do I need an option pool?
When you're building a company, cash is often tight. Issuing equity ownership can help you attract and retain talent without bloating your cash burn rate. Many startups can't compete with large companies on salary alone, so equity gives early employees a stake in the company's success and aligns their incentives with yours.
Equity is now the industry standard in the startup world. In 71% of cases, an option pool was created or there was a top-up to the existing pool mentioned in the term sheet. That frequency reflects how central option pools are to startup hiring and fundraising.
An option pool can also be used as a budget planning tool to help plan your hiring while maintaining a strong investor relations strategy. By forecasting how much equity you need to reserve for new hires between each funding round, you'll help your investors understand exactly what percentage of your company they own and have more certainty around future dilution.
Venture capital (VC) investors often expect their portfolio companies to grant employees equity, so it's likely you'll create an option pool in connection with raising venture funding. An option pool signals to investors that you've planned ahead for team growth. If you're building a compensation strategy for your company, the option pool is a core component.
How an option pool works
An option pool is a reserve, not outstanding shares. Shares move from the pool to individuals only when you grant options, and those options become actual shares only when employees exercise them.
Here's how the mechanics break down:
Authorization and reservation: Your board authorizes a certain number of shares for the pool. These shares are set aside but not yet issued.
Grant with strike price: Each grant includes a strike price—the price an employee pays to buy shares later. This price comes from a 409A valuation of your company's fair market value (FMV). Under Section 409A's option pricing rules, the strike price must be at least the stock's fair market value on the grant date.
Vesting: Options vest over time according to vesting schedules—for example, over four years with a one-year cliff.
Exercise: When employees buy their shares by paying the strike price, they are exercising stock options.
How to create an option pool
Sometimes founders mistakenly think an employee's offer letter that details equity compensation is equivalent to granting options. While it's a good idea to have equity as part of an employment offer, stock options must be formally granted by the board to lock in the option's strike price and current fair market value.
To grant options, you'll also need an up-to-date 409A valuation, which is an independent appraisal of the FMV of your company's common stock. Creating an option pool involves five steps:
Assess your hiring plan: Estimate the roles you'll fill over the next 12–18 months and the equity each role requires.
Decide on pool size: Based on your hiring plan, determine what percentage to reserve. Avoid picking 10% by default. Your pool should reflect your actual hiring plan.
Adopt an equity incentive plan: Create an equity incentive plan that governs grants.
Get stakeholder and board approval: Your board approves the pool; shareholders typically approve the plan.
Track grants on your cap table: Track every grant, exercise, and cancellation so your cap table stays accurate.
How to size your employee option pool
Your pool needs to cover new hire grants and refresh grants for existing employees through your next funding round.
According to Carta data, among startups raising a Series A round in Q2 2025, the median interval since raising a seed round was 616 days, the equivalent of about 20 months, and more than two months longer than the median two years prior. Most companies will expand their equity pool as needed for headcount goals at each funding round.
The two main ways to size your option pool are top-down and bottoms-up. Employ both strategies: Start with the bottoms-up approach and determine your company's needs, then see how it compares to industry benchmarks from a top-down view, to make sure you're not way off-track.
Bottoms-up
With this method, you'll build your equity pool according to your company's compensation plan.
First, create a hiring plan based on your company's expansion needs and projected team growth until your next expected funding round. Then, assign planned equity grants to each role based on industry benchmarks related to company stage, function, and seniority. Finally, add up the total equity you'll need for this list of planned new hires, plus any equity you'll need for refresh grants, to determine the total size of your equity pool.
You can use Carta Total Compensation's New Hire Equity Forecast report to easily calculate the approximate number and value of shares you'll need for your hiring plan.
When building out your hiring plan, keep in mind:
You may need to offer early employees more equity since they're taking a bigger risk joining a relatively unproven company
If you anticipate hiring C-suite executives before your next fundraise, budget a larger equity percentage for those roles than you would for rank-and-file hires
The size of your equity pool will typically increase as your company hires and grows over time, which usually corresponds to when the company's valuation rises.
Top-down
This approach uses comparable company data to inform your own option pool. The common rule of thumb is that the equity pool should represent about 10% of company shares, but may vary based on which companies you select as your peers. You can look at companies that are in a similar fundraising stage or within the same industry, among many other factors.
Peer benchmarks are useful for a sanity check, but not precise enough to use as your primary sizing input. There's a reason why there's such a large range in the typical percentage founders set aside, and every company is different. Some companies are more cash-intensive than others, and some require more (or less) headcount.
How big should your option pool be?
According to HSBC Innovation Banking's 2026 Term Sheet Guide, the most common size for an option pool is between 10% and 15% of company equity, with 10% being the most frequent choice.
But the right size for your pool isn't a standard percentage—it's the amount you need to hire the team that gets you to your next milestone. A pool that's too big over-dilutes you. A pool that's too small forces you to request a top-up before you've gained leverage.
Start with your hiring plan. Estimate the roles you'll add, research how much equity to give employees at each level, and add a buffer for unexpected hires or retention grants. Use Carta's option pool calculator to model scenarios and find the right number.
Your company's stock option plan includes information about how many shares will be reserved in the option pool. Under Rule 701 under the Securities Act of 1933, a private company needs a formal stock option plan (which typically lasts for 10 years) to issue any securities to service providers under this exemption. While you'll want to work with your law firm to create your stock option plan, Carta’s sample documents can help you get started.
Once you have a plan in place, you can simply make amendments to increase the number of shares in the option pool on an as-needed basis. The initial plan and any expansions must be approved by your board of directors and then by shareholders.
How an option pool affects dilution
When investors give you a pre-money valuation in a term sheet, they usually include a target option pool percentage as a core pricing term. The option pool increase is typically counted in the "pre-money shares" and thus will not dilute investors. As a result, the bigger the option pool increase is, the lower the price per share will be, and the higher your investors' ownership will be. Any additional option pool increases after the financing round will equally dilute all stockholders, including the investors.
Pre-money option pools vs. post-money option pools
Where the pool is created in relation to new investment matters for share dilution.
Pre-money option pool: The pool is included in the pre-money valuation, meaning it dilutes existing shareholders (primarily founders) before the new investor's money comes in.
Post-money option pool: The pool is created after the investment, spreading dilution across all shareholders including the new investor.
Founder impact: Pre-money pools shift more dilution to founders; post-money pools share dilution with incoming investors.
Many VC term sheets require a pre-money pool, which shifts more dilution to founders. Understanding pre-money and post-money valuations is essential before signing any term sheet.
The option pool shuffle
The “option pool shuffle” refers to how investors can effectively lower your true valuation by requiring a larger pre-money option pool.
Here's how it works. An investor offers a $10 million pre-money valuation but requires you to expand your pool from 5% to 15% before closing. That 10% increase comes out of existing shareholders, primarily you. The investor's money buys the same percentage of the company, but your slice shrinks more than the headline valuation suggests.
A bigger required pool isn't necessarily bad;you may need those shares. But term sheet negotiations can be stressful, and dilution surprises are easy to miss. Know the true impact before signing by modeling dilution with a pro forma cap table to compare scenarios and avoid surprises. If you don't understand the pool's effect, a round that looks good on paper could feel closer to a down round in practice.
Be realistic about your future hiring needs
Investors sometimes prefer larger option pools up front during the financing, because that usually means your option pool will last longer, reducing their future dilution. This is where your hiring plan comes in. By thoughtfully mapping out your key hires over the next year or two and how much equity they need, you can show investors how you came to your number and may be able to negotiate a smaller, more realistic pool.
The goal is a pool large enough to attract the hires you need, without giving up more ownership than necessary.
How option pool size impacts dilution
Every time you create or expand a pool, existing shareholders are diluted. For your first pool, that's usually just your founder’s shares.
For example, if a founder owns 10,000 shares (100% of the company) and creates an option pool of 1,500 shares, there are now 11,500 shares of company stock. The founder now owns 87% of the company (10,000/11,500), not 100%.
How to manage your option pool over time
Your option pool isn't static. It changes as you make grants, employees leave, and you raise new rounds.
When employees leave before fully vesting, their unvested options typically return to the pool. This recycling keeps the pool available for future hires. When you raise additional rounds, investors often require you to top up the pool to maintain a certain percentage.
Keeping accurate records is essential. Every grant, exercise, cancellation, and expiration affects your cap table and the pool's remaining balance. Using cap table management software keeps these records accurate and audit-ready.
For real examples, see how 1up manages its equity on Carta, including SAFEs and 409A valuations, and how RADAR approached early exercise and QSBS optimization.
Managing your option pool with Carta
Your option pool directly affects both your ability to hire and your ownership stake. Sizing it well requires a real hiring plan. Managing it requires accurate tracking of every grant, exercise, and cancellation.
Carta's equity management platform keeps your option pool, cap table, 409A valuations, and grant tracking in one place. Model scenarios, issue grants, and stay investor-ready without spreadsheets.
Whether you're creating your first pool or managing complex equity across multiple rounds, Carta provides equity management for at every stage. Request a demo to see how it works.
Frequently asked questions about option pools
What percentage should an option pool be?
Most option pools range from 10% to 15% of company equity, with 10% most common, but your pool should match your actual hiring plan for the next 12–18 months rather than a generic benchmark. Use Carta's option pool calculator to find the right size for your company.
Do option pools get diluted?
Yes. Later funding rounds and pool top-ups dilute existing holders, and unallocated shares still count toward the fully diluted share count.
What happens to unused options in the pool?
Unallocated shares typically roll into a new or expanded pool at the next funding round, or they return to the company for reallocation.
How do I set up and track an option pool?
Adopt a written equity incentive plan, get board and shareholder approval, then track grants and vesting on a live cap table. Request a cap table demo to explore how Carta manages option pools.
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