A Stock Option Pool is a specific number of shares in the company set aside for future employees.

The reason we setup a Stock Option Pool is so that as small awards are given to employees, we’re not constantly re-updating our Cap Table (ledger of stock) every time someone gets a few extra shares.

Instead, we allocate a larger block of shares that stays fixed, and hand out shares from that pool. Investors insist on putting this pool together for two reasons:

1. Ensure Employees have Incentive. The more ownership employees have, the harder they will work for a big outcome.
2. Because Founders PAY for it. The more important reason is investors will insist that the existing shareholders (not them!) contribute their stock to create this Option Pool before they take their ownership.

If this sounds like a huge amount of dilution in addition to the amount we’re about to take for their investment – we’re right. A Stock Option Pool can easily add another 10-20% of total Dilution to a Funding Round.

What’s more, this is a very standard practice in term sheets and among investors, so while it’s not fun, it’s typically not something we can negotiate out of either.