The option pool: the dilution that is only yours

I price private companies for a living. I have priced more than a thousand of them and worked on deals up to roughly $26 billion, and if you asked me to name the line on a term sheet that costs founders the most money relative to the time they spend arguing about it, I would not say the valuation. I would say the option pool. Every other kind of dilution on a cap table is shared: a new investor buys in, new shares get issued, and everyone's percentage falls together. The option pool is different. When it sits inside the pre-money, it is carved out of the people already on the cap table and the investor writing the check absorbs none of it. It is the only dilution on the page that is yours alone.

None of this is a secret, and none of it is improper. It is standard, it appears in almost every priced round, and it has been documented since Nivi and Naval Ravikant named it the "option pool shuffle" on Venture Hacks in April 2007. What makes it expensive is presentation. The pool arrives as four or five words buried inside a sentence about the pre-money valuation, while the valuation itself gets its own line, its own paragraph, and weeks of negotiation. Founders fight over the headline number and sign the pool in an afternoon. The pool usually moves more money. Here is the whole mechanism, what it costs in dollars, and how to negotiate it.

What the pool actually is, and why you want one

An option pool is a block of authorized but unissued shares reserved for grants to employees, advisors, and the executives you have not hired yet. It exists because an early company pays in equity what it cannot pay in cash, and the equity has to come from somewhere agreed in advance rather than negotiated share by share in the middle of a hiring process. A real pool is not a courtesy to investors. It is your hiring budget, denominated in ownership.

It also has to be big enough to matter, because early grants are not small. Carta's Winter 2025 State of Seed, drawn from roughly 50,000 startups, puts the median first-employee grant at 1.5 percent, the second at 0.85 percent, the third at 0.50 percent, and the fifth at 0.33 percent. Five hires and you are through more than three points of the company before you have hired a single executive. So the argument is never whether to have a pool. The argument is how big it is, and out of whose ownership it comes. Founders reliably win the first argument and lose the second, mostly by not noticing it happened.

The shuffle: where the pool is carved from

Read a priced term sheet and you will find a sentence shaped like this: the pre-money valuation assumes a fully diluted capitalization that includes an option pool equal to 15 percent of the post-closing fully diluted shares. That sentence is the shuffle. It says the pool is counted as if it already existed before the money arrives, which means the new shares reserved for it are added to the pre-money share count. The investor's ownership is then calculated on the post-closing total, pool included. The pool is inside the pre-money, so the pre-money holders pay for all of it.

The alternative is not exotic. A pool created post-money, after the round closes, dilutes every holder in proportion to their ownership: founders, prior investors, and the new lead alike. Same pool, same percentage, same hiring plan, completely different bill. And in the term sheet the two versions differ by about three words, which is precisely why the pre-money version is the default ask and the post-money version is something you have to raise yourself.

What it costs, in dollars

Numbers make this concrete, so here is a clean illustrative round. Round numbers, chosen to make the arithmetic visible, not a real company. You have 8,000,000 fully diluted shares. An investor offers $2.5 million on a $10 million pre-money, so a $12.5 million post-money and 20 percent of the company. With no new pool, the price per share is $10 million over 8,000,000 shares, or $1.25, and you and your existing holders keep 80 percent.

Now add the standard sentence: a 15 percent post-closing pool, created pre-money. The math has to solve so that after the round the pool is 15 percent and the investor is 20 percent, which leaves existing holders at 65 percent. Your 8,000,000 shares are now 65 percent of 12,307,692 shares. The pool is 1,846,154 shares and the investor buys 2,461,538. Divide the investment by the investor's shares and the price is $1.0156, not $1.25. The headline pre-money said $10 million. The value actually attributed to your existing shares is 8,000,000 times $1.0156, or $8.125 million. The missing $1.875 million did not go to the investor and it did not go to you. It went into a pool you funded by yourself.

Then run it again at a 10 percent pool, the size an honest hiring plan might support. Existing holders now sit at 70 percent, the price per share is $1.09, and the effective pre-money is $8.75 million. Five points of pool is five points of the company, and on a $12.5 million post-money that is $625,000. Here is the comparison that should change how you spend your negotiating energy: to win back that $625,000 by arguing the headline instead, you would have to push the pre-money from $10 million to roughly $10.74 million. Cutting the pool by five points is worth more than talking the valuation up by three quarters of a million dollars, and it is a far easier argument to win, because you can support it with a document and the valuation is just two parties disagreeing about the future.

Nivi's original example in 2007 ran the same trick on a claimed $8 million pre-money with a 20 percent pool and showed the price per share falling from $1.33 to $1.00. Nineteen years later, the arithmetic is identical. That is worth sitting with. This is not a market condition that will pass. It is a structural feature of how priced rounds are built, and the only variable is whether you priced it in.

Size it to a plan, not to a convention

The reason pools get oversized is that nobody brings a number of their own. The investor says 15 percent, the founder has no basis to say otherwise, and 15 percent it is. Carta's equity data has put the median seed-stage pool in the low teens of percent, above the old 10 percent convention, and that median gets quoted at founders as though it were a rule. A median is not a plan. It is the average outcome of a negotiation most founders did not prepare for.

So prepare for it. Write the hiring plan for the 12 to 18 months the round is meant to fund, role by role, with a grant range attached to each role and a line for refresh grants to the people you already have. Total it, add a modest buffer you can explain, and bring that document to the meeting. Two things happen. The number stops being arbitrary, which means the conversation becomes about your plan rather than the investor's convention. And you find out something useful about your own company, because a pool that a real plan cannot fill is a pool you are giving away, and a pool a real plan overruns is a warning that your hiring is ahead of your capital. Whoever brings the written plan sets the pool. Usually nobody does, which is why the default wins.

The top-up is coming, every round

Founders tend to treat the pool as a one-time event at the seed. It is not. Options get granted, the unallocated portion shrinks, and at the next priced round the incoming lead requires the pool to be topped back up to a target percentage, almost always pre-money again. Every round, the same carve, out of the same people, and by then those people include the seed investor who was on the other side of it last time.

This is a real part of why founder ownership falls as fast as it does. Carta's Winter 2025 State of Seed puts median founder ownership at 56.2 percent after seed, 36.1 percent after Series A, and 23.0 percent after Series B. Not all of that is the pool. Plenty of it is the ordinary, healthy price of capital, and dilution itself is not the enemy. But some of that slope is pool top-ups nobody modeled, and the difference between the two matters, because one is the cost of the money and the other is a term you could have negotiated.

The shares nobody ever grants

There is one more asymmetry, and it is the one I almost never hear discussed in a term sheet negotiation. The unallocated part of the pool is not inert. It sits in the fully diluted share count for the life of the company, which means every ownership percentage anyone quotes you, including your own, is calculated against a denominator that includes shares nobody holds. And at an exit, options that were never granted are typically cancelled, with that reserved value shared out pro rata among all shareholders.

Read that sequence again slowly. You paid for the entire pool at the round, alone, out of your pre-money. The portion you never grant comes back at the exit and is shared with everyone, including the investor who paid for none of it. An oversized pre-money pool is not a harmless buffer. It is a transfer that settles years later, in someone else's favor. This is the argument I would lead with if I were sitting on your side of the table, because it reframes the ask honestly: a pool larger than your plan is not caution, it is a discount on the round that nobody wrote down.

How to negotiate it

Five moves, in the order I would make them. First, bring the plan. A written 12-to-18-month hiring plan with grant ranges per role turns the pool from a convention into a calculation, and it is the only move that reliably moves the number. Second, count what is already there. Unallocated shares still sitting in your existing pool count toward the target, and founders routinely forget to net them out and end up topping up from a lower base than reality. Third, ask for the increment post-money, or split it. The full ask may not land, but "we will do 12 percent, half of the increase post-money" is a normal conversation and it is worth real points. Fourth, trade knowingly. If you are going to accept a bigger pool, say out loud what it is worth and take the equivalent back on the price, because the two are interchangeable and only one of them is being tracked. Fifth, pin the definition. Fifteen percent of what, exactly: post-closing fully diluted, and does that base include converting SAFEs and notes? The base changes the answer, and the base is where the last few points hide.

One caveat worth stating plainly. This is education, not legal advice, and the norms here are US venture conventions as of 2026 that vary by stage, sector, and geography. A qualified startup lawyer reads your actual documents. My job is to tell you which sentence to point them at.

The takeaway from someone who prices them

The option pool is the cheapest expensive thing on a term sheet. It costs you nothing to negotiate, it is decided in a sentence, and it routinely moves more of your ownership than the valuation you spent a month on. The reason it wins so often is not that investors are hiding it. It is that the pool is presented as an administrative parameter and priced like one, when it is actually part of the price. Read it as price. A pool inside the pre-money is a discount you are granting, and the size of the discount is the size of the pool. Bring a plan, name the number yourself, put the difference where you can see it, and you will keep points that most founders hand over without ever knowing the trade was on the table.

Common questions

What is the option pool shuffle?

The option pool shuffle is the standard practice of requiring an employee option pool to be created or topped up inside the pre-money valuation, meaning before the new investment lands on the cap table. Because the pool is counted as pre-money shares, it is carved entirely out of founders and prior holders, and the incoming investor absorbs none of it. The effect is to lower the price per share and raise the investor's effective ownership for the same headline valuation. The term was named by Nivi and Naval Ravikant on Venture Hacks in April 2007, and the arithmetic has not changed since.

Is the option pool created pre-money or post-money, and why does it matter?

Almost always pre-money, and it matters because pre-money and post-money decide who pays for the pool. A pool created pre-money is carved out of existing shareholders only, so founders and prior investors absorb 100 percent of it. A pool created post-money dilutes everyone including the new investor, in proportion to their ownership. The pool percentage in the term sheet looks identical either way. The ownership outcome does not. On an illustrative $10 million pre-money with a $2.5 million round and a 15 percent post-closing pool, moving the pool from pre-money to post-money is worth roughly three percentage points of the company to the founders.

How big should my option pool be?

As big as a written 12-to-18-month hiring plan justifies, and not one share bigger. Build the plan role by role, attach a grant range to each role, add a reserve for refresh grants to existing employees, and total it. Carta's equity data has put the median seed-stage pool in the low teens of percent, above the old 10 percent convention, but a median is not a plan. The number that survives a negotiation is the one you can defend line by line, because the alternative is accepting a round number the investor picked to be safe, and safe is paid for entirely by you.

Does the option pool dilute investors at all?

Not the incoming investor, when the pool sits in the pre-money. That investor's ownership is calculated on the post-closing capitalization that already includes the pool, so the pool is fully absorbed by everyone who was on the cap table before the round. Existing investors from earlier rounds are diluted alongside the founders. The new investor is diluted by the pool only later, when a subsequent round tops the pool up again and this investor has become one of the existing holders paying for it.

What happens to option pool shares that are never granted?

They sit in the fully diluted share count for the entire life of the company, dragging down every ownership percentage that is calculated against it, and in most exits the unissued options are simply cancelled and the reserved value is shared out pro rata among all shareholders. That is the quiet asymmetry of an oversized pre-money pool: founders paid for every share of it at the round, and the portion that never gets granted is eventually shared with the investor who paid for none of it. Oversizing the pool is not a harmless buffer, it is a transfer.

Related reading

• How to read a cap table before it reads you.
• The five term sheet clauses that move money.
• Raising on SAFEs: the dilution you signed and forgot.
• How much should you actually raise?

Go deeper

If a term sheet is sitting in your inbox with a pool number in it, let's model what it costs before you sign, or read more of how I think about pricing rounds.

Tomasz Felpel is an investor, founder, and advisor in private markets and healthcare, based in New York. He is a three-time founder of Value Alpha, an AI-powered private-markets valuation platform, Sonnerie VC, an early-stage healthcare venture firm, and Pond. Previously he led corporate development and M&A at Fortune 500 scale, pricing more than 1,000 private companies. Columbia Business School EMBA. Read the full story.