What it means
An option pool is a block of shares the company sets aside to grant to future employees, advisors and contractors, as stock options or restricted stock. The shares aren't issued yet. They're reserved, so the board can make grants from them as people join.
The pool lives inside an equity incentive plan, a legal document the board adopts and the stockholders approve. The plan sets how many shares are reserved and the rules for granting them.
Each grant reduces the shares available. When someone leaves before vesting, the unvested options are forfeited and, under most plans, go back into the pool. The cap table tracks shares granted, exercised, forfeited and still available.
The pool itself doesn't touch the books. The accounting starts at grant, through stock comp expense over the vesting period, and again at exercise, when cash comes in for the exercise price.
Say Acme's Series A investors offer an $8 million pre-money valuation and ask for a 10% pool on a post-money basis, created before their money comes in. Because the pool is counted in the pre-money, its dilution falls on the founders and existing holders, and the new investors' percentage is unaffected. The headline valuation stays at $8 million, but the effective price per share is lower than it looks.
In numbers: the founders hold 7,000,000 shares and the investors put in $2 million, for a $10 million post-money. A 1,000,000-share pool goes into the pre-money, so the price is $8 million ÷ 8,000,000 shares, or $1.00, and the investors get 2,000,000 shares. The founders end with 70%, which is $7 million of the post-money: in effect a $7 million pre-money for them.
Grants from the pool are priced at or above the current 409A valuation. Sizing the pool to an actual hiring plan through the next round, instead of a round number, keeps its cost down.
Why it matters. In a priced round, investors often ask for the pool to be created or enlarged before their money comes in, so the dilution falls on existing holders. Its size is part of the price.
Try it with your numbers
Change any number. The working below updates as you type.
Effective pre-money = Pre-money − Pool % × Post-moneyIncluding any unissued pool.
Effective pre-money for existing holders
$7,000,000.00
How it’s worked out
- 1Post-money$8,000,000.00 + $2,000,000.00$10,000,000.00
- 2New investors' share$2,000,000.00 ÷ $10,000,000.0020.00%
- 3Shares after the round(10,000,000 − 0) ÷ (1 − 20.00% − 10.00%)14,285,714.29
- 4New pool shares10.00% × 14,285,714.29 − 0, rounded up1,428,572
- 5Price per share$8,000,000.00 ÷ (10,000,000 + 1,428,572)$0.7000 (was $0.8000)
- 6New investors' shares$2,000,000.00 ÷ $0.7000, rounded down2,857,143
- 7Pool after the round1,428,572 ÷ 14,285,71510.0000%
- 8Value of the pool, carved from the pre-money10.00% × $10,000,000.00$1,000,000.00
- 9Effective pre-money$8,000,000.00 − $1,000,000.00$7,000,000.00
| Holder | Shares before | % before | Shares after | % after |
|---|---|---|---|---|
| Existing holders | 10,000,000 | 100.00% | 10,000,000 | 70.00% |
| Unissued option pool | 0 | 0.00% | 1,428,572 | 10.00% |
| New investors | 0 | 0.00% | 2,857,143 | 20.00% |
| Total | 10,000,000 | 100.00% | 14,285,715 | 100.00% |
The investors' percentage is the same whatever the pool size; the pool's cost comes out of existing holders. Pool shares are rounded up so the pool reaches its target, investor shares rounded down.
The entry, worked
An employee exercises 10,000 vested options at a $0.60 strike, paying $6,000. Acme's common stock has a $0.0001 par value, so par totals $1.
| Account | Debit | Credit |
|---|---|---|
| Cash | $6,000.00 | |
| Common stock, par value | $1.00 | |
| Additional paid-in capital | $5,999.00 | |
| Total | $6,000.00 | $6,000.00 |
The exercise price comes in as cash and equity; the stock comp already booked for the grant stays in paid-in capital.
Common questions
Does the option pool show up in my books?
Not by itself. Reserved shares aren't issued. The books change when options are granted, through stock comp expense, and when they're exercised.
Why do investors care where the pool is created?
If the pool is added to the pre-money valuation, its dilution falls on existing holders, not the new investors. That changes the real price per share.
Do stockholders have to approve the plan?
Yes, if the plan will grant incentive stock options. Stockholders must approve the plan within twelve months before or after the board adopts it, or the options can only be nonqualified. Increases to the pool need stockholder approval for the same reason.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- EquityThe residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61)Glossary
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.Guide · 4 min
- How to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.Guide · 4 min
- The accounting equationAssets = liabilities + equity is not a formula you apply at period end. It is true after every single entry, and that is what makes the books provable.Lesson 2
- Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.Lesson 3
- The balance sheetThe other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.Lesson 11
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.