Option Pool

An option pool is a reserved pool of shares intended for employee participation. Options are issued from it to employees so they can participate in the company's success. Start-ups in particular use it to attract talent and retain them over the long term. Its size is stated on a fully diluted basis in the cap table, with the pool regularly topped up in later rounds because part has already been allocated.

The timing of creation is economically decisive: if the pool is created before the financing round and included in the pre-money valuation, existing shareholders alone bear the dilution while the new investor enters undiluted. If it is created after the round, dilution is spread across all shareholders. The difference can amount to several percentage points of the company and is therefore one of the most economically significant points in a term sheet, even though it is rarely negotiated prominently. It should also be settled how unallocated or forfeited options are treated and whether they return to the pool.

In Germany participation is frequently implemented through virtual programmes. These confer payment claims rather than actual shares and voting rights. Their economic burden must also be reflected, even though the legal structure differs.

The appropriate size follows from the hiring plan up to the next financing round: which roles are needed, what grants are planned and what reserves are required for existing key people? An oversized pool unnecessarily burdens existing shareholders. An undersized one soon requires another top-up. Typical vesting terms run four years with a one-year cliff. Before accepting a grant, employees should also understand how the exercise price, later funding rounds and liquidation preferences affect their potential proceeds. Founders and investors therefore need to show the pool alongside grants already committed in the cap table.