Option pool (ESOP)
Shares reserved to grant equity to employees, usually created or topped up before a round, at the existing holders' expense.
The option pool is a block of shares reserved under an equity incentive plan for future grants to employees, advisors and sometimes directors. Grants out of the pool (options, RSUs, or local equivalents) vest over time; the pool itself is counted in the fully diluted share count whether or not it has been granted, which is why its size moves every ownership percentage on the cap table.
The negotiation that matters is the pool shuffle. Investors customarily require the pool to be created or increased before their money converts into shares, in the pre-money. Placed there, the dilution from the new pool falls entirely on existing holders, founders first, while the investor buys into a company already carrying the reserve. The same pool placed post-money would dilute everyone, investor included, which is precisely why term sheets do not write it that way.
Two habits keep the shuffle honest. First, translate any proposed pool into its real cost: pool points demanded pre-money are equivalent to a lower pre-money valuation, and can be negotiated as such. Second, drive the size from a named hiring plan rather than a convention; an oversized pool is not a safety margin, it is dilution warehoused today that a future round will demand be topped up anyway.
Quantum talent is PhD-scarce, courted by Big Tech labs, and a pre-revenue company cannot win on cash, so pools run larger than SaaS defaults, often 10 to 15% or more. The negotiation discipline: size the pool from the actual 18 to 24 month hiring plan (how many senior physicists and engineers, at what grant sizes), not from a percentage a term sheet proposes by habit. Every unneeded pool point demanded pre-money is founder dilution disguised as prudence.
A $2,000,000 round at $8,000,000 pre-money buys the investor 20% of the $10,000,000 post-money company. The term sheet also requires an unissued option pool of 10% post-money, created before the money comes in. On a 10,000,000-share post-money cap table, the pool's 1,000,000 shares come out of the existing holders, so founders and earlier investors end the round diluted by 30%, not 20%. The investor's effective pre-money for the existing business falls from $8,000,000 to $7,000,000, the headline price per share unmoved: the founders fund the entire pool.
From definition to decision
Model this in your own round, scenarios, dilution and runway, in the founder workspace.