How an option pool dilutes founders and why investors want one
The option pool sounds like a small technical line in a term sheet, but where it sits in the maths can quietly cost founders several percentage points of equity.
What an option pool actually is
An option pool is a block of shares set aside, unissued, so a company can grant share options to future employees without going back to shareholders for approval every time. It sits alongside the EMI or other option scheme rules that govern how those options are actually granted and taxed. The pool itself is simply a reserved slice of the company’s fully diluted share capital.
Most investors will not put money into a funding round unless a pool of a certain size, commonly discussed as somewhere in the mid to high single digits or low double digits as a percentage of the company, exists or is created as part of the deal. The exact percentage investors ask for varies by stage, sector and negotiating leverage, so treat any number you hear as a starting point for negotiation rather than a rule.
Why investors insist on one
Investors want a pool for a straightforward reason: they need to know the company can hire the engineers, salespeople and senior leaders it will need without diluting the investor’s own stake every time a new hire needs equity. If there is no pool, every future grant to an employee dilutes everyone, including the investor, pro rata. By insisting on a pool being created before their money comes in, investors effectively push that future dilution onto the existing shareholders, which in an early-stage company usually means the founders.
This is not necessarily unreasonable. A well-sized pool is a genuine tool for hiring, and candidates increasingly expect meaningful equity as part of a UK startup’s offer. The issue for founders is not that a pool exists, but how and when it gets created, because that timing changes who actually pays for it.
Pre-money versus post-money pools
This is the mechanic that catches founders out. If an investor asks for a 10% option pool to be created and it is built into the pre-money valuation, the pool is carved out of the company’s value before the investor’s new money is added. That means the founders and any existing shareholders bear the entire cost of the pool through dilution, while the incoming investor’s percentage stake is protected.
If the same pool is instead calculated on a post-money basis, everyone including the new investor gets diluted by the pool’s creation, in proportion to what they hold after the round closes.
The difference sounds technical but the financial effect is real. A pre-money pool of meaningful size, layered on top of a priced round, can shave several extra percentage points off founder ownership compared with structuring the same pool post-money. Investors who ask for a large pre-money pool are, in effect, asking the founders to fund the pool at the pre-round valuation while the investor buys in afterwards unaffected.
Why the pool is often sized larger than needed
A related tactic worth knowing about is that some investors will push for a pool sized generously beyond what the company’s actual hiring plan for the next 12 to 18 months requires. An oversized pool inflates the effective pre-money dilution while leaving unused options sitting on the cap table, which benefits future fundraising rounds and the investor’s own future percentage more than it benefits the founders today.
A sensible pool size should be tied to a real hiring plan for the period the round is meant to fund, not to a round-number percentage picked out of habit. Founders and their advisers can model exactly how many options are needed to hire the specific roles the business plans to fill before the next raise, and negotiate the pool size from that evidence rather than accepting a market convention wholesale.
What founders can actually negotiate
There are a few concrete levers. First, whether the pool is calculated pre-money or post-money is a legitimate point of negotiation, and shifting even part of the pool to post-money treatment reduces founder dilution directly. Second, the size of the pool itself should be justified against a real headcount plan rather than accepted at a standard percentage. Third, founders can ask what happens to unused pool shares at the next round: unallocated pool often gets rolled into fresh dilution calculations again, so an oversized pool from one round can quietly cost founders twice.
It is also worth checking how the pool interacts with existing option grants and any EMI scheme already in place, since UK tax-advantaged option rules have their own limits and reporting requirements that sit on top of the commercial cap table question.
The bottom line
An option pool is a normal and reasonable part of UK startup fundraising, but its size and its position in the pre-money or post-money maths determine who actually pays for it. Founders who understand the mechanic can negotiate a pool that is fit for their actual hiring needs, structured fairly, rather than accepting a term sheet convention that quietly transfers extra equity from founders to investors before a single new employee has been hired.