How a startup option pool works, and who it dilutes
The pool is usually created before an investment closes, which means founders fund it. That timing is the whole negotiation.
Every priced round involves an option pool discussion, and it is frequently treated as housekeeping. It is not. It is one of the largest economic terms in the deal.
Pre-money versus post-money
If the pool is created before the investment, it comes out of the pre-money valuation — so existing shareholders, mostly founders, bear the dilution. If created after, all holders including the new investor share it.
Pre-money is the market convention. That is worth knowing before treating pool size as a detail.
Sizing it
The defensible approach is a hiring plan. List the roles you intend to fill before the next round, attach a grant range to each, total it, and add modest headroom. A pool built from a plan is arguable; a round number is not.
Strike price and 409A
Options are granted at a strike price set by a valuation of the common stock, obtained independently. Granting below that value creates tax problems for the recipient, which is why the valuation is not optional.
Vesting and exercise
Four-year vesting with a one-year cliff is conventional. The term that matters more to employees is the post-termination exercise window — often ninety days, which forces a leaver to fund the exercise and any tax bill quickly, or forfeit.
“A generous grant with a ninety-day window is worth less than employees think.”
Practical points
- Build the pool from a hiring plan and show it.
- Model founder ownership after the pool and after conversion of any outstanding SAFEs.
- Refresh the 409A valuation when required, not when convenient.
- Decide the exercise window deliberately; extending it is a real benefit at modest cost.