An option pool is a ring-fenced block of shares a startup reserves to hand out to its people - engineers, early hires, the odd adviser - as part of their pay. Cash is scarce at the early stage and equity is the currency a young company has plenty of, so it promises a slice of the future instead of a bigger salary today. For you, the angel, the pool matters less for what it is than for when it gets created. Done one way, it costs you nothing extra. Done another, it's the quietest dilution you'll take all round.
That's the whole story in a paragraph. The detail is where the money hides.
Why do startups create an option pool?
Because they can't compete on salary and shouldn't try. A two-year-old company going up against a bank or a big tech firm for a senior engineer can't match the cash, but it can offer something the incumbent can't: a stake that might be worth a great deal if the thing works. Options - the right to buy shares later at a price fixed today - are how that promise is packaged. The pool is simply the bucket those grants come out of.
Investors generally want a pool to exist. A startup that can't pay its team in equity struggles to hire, and a company that can't hire doesn't grow. The argument is never really about whether there should be a pool. It's about how big it is and, more pointedly, who pays for it.
How does an option pool show up on the cap table?
As shares that are authorised but not yet issued. The pool is a reservation - a line on the cap table that says "these shares exist for the team, we just haven't granted them yet." They turn into real shares only as options are granted and employees exercise them. Options that are never granted, or that lapse when someone leaves before vesting, fall back into the pool.
The catch is the phrase fully diluted. Cap tables at this stage are usually quoted on a fully diluted basis, meaning every reserved option share is counted as though it already exists. So a 10% pool dilutes your percentage today, even though most of those shares haven't been handed to anyone. Your ownership figure is calculated against the larger total from the moment the pool is created.
The fight is never whether there's a pool. It's how big it is - and who pays for it.
Pre-money or post-money: who actually pays?
Here's the line that decides everything. When a lead investor prices a round, they'll often require the pool to be created or topped up before their money arrives - inside the pre-money valuation. That's a pre-money pool. The effect is that the existing shareholders - the founders, and any angels from earlier rounds, you included - are diluted to make room for it. The incoming investor's percentage is untouched.
Flip the timing and the result flips with it. A post-money pool is carved out after the round, so everyone on the cap table, the new investor included, shares the dilution proportionally. Same pool, same headcount plan, very different bill.
Walk it through with numbers. Say a founder is raising £1m at a £4m pre-money valuation - a £5m post-money company, with the new investor taking 20%. Now the term sheet asks for a 15% pool to be set up pre-money. Those pool shares get squeezed into the £4m pre-money figure, so the value attributed to the existing shares falls. The practical effect is that the company's "true" pre-money is lower than £4m once you net the pool out, and the founders and earlier holders absorb close to the whole 15%. Had the pool been struck post-money, that same 15% would have been shared across everyone, the new investor taking their fifth of it.
The "option pool shuffle"
This pre-money manoeuvre has a name among people who do deals: the option pool shuffle. It lets a lead quote a flattering headline valuation while quietly lowering what the existing shareholders actually receive. The number on the front of the term sheet looks generous; the number that matters - the effective price per share after the pool - is lower. None of this is sharp practice in itself. It's a standard negotiating tool. The mistake is not seeing it.
For an earlier angel, the sting is that you're being diluted by a pool designed to hire people who'll build value after the new investor came in - yet you're carrying more of the cost than they are. Whether that's fair depends on the company, the plan and the round. What's not in doubt is that it's negotiable.
What should an angel look for?
Three things, and none of them requires a spreadsheet you don't already have.
- The fully diluted cap table, before and after. Ask for both. The gap between your percentage on the two versions is the dilution you're taking, full stop.
- Pre-money or post-money. Get it in writing. This single word is the difference between you carrying the pool and everyone sharing it.
- Whether the pool is sized to a real hiring plan. A pool justified by named roles over the next 18 months is a different animal from a round number plucked to pad the lead's ownership. If the founders can't tie the pool to who they're hiring, it's worth asking why it's that big.
You won't usually win the argument outright - leads ask for pre-money pools because they work, and a sensible pool is genuinely in the company's interest. But a pool sized to the actual plan, rather than rounded up to flatter a valuation, is a reasonable thing to push for. And sometimes the most useful move is simply to price the dilution into the valuation you'll accept, with your eyes open.
Does the pool touch my SEIS or EIS relief?
Not retrospectively. Creating or enlarging an option pool doesn't claw back relief you've already claimed on the shares you hold. Under the Seed Enterprise Investment Scheme you can claim 50% income tax relief, and under the Enterprise Investment Scheme 30%, calculated on what you put in, provided you hold the shares for at least three years and meet the conditions. Dilution from a later pool or round doesn't undo that.
That said, both schemes carry conditions on the rights attached to your shares and on certain arrangements around them, and the company-side rules sit alongside the investor reliefs. The figures and conditions are set out on gov.uk, and tax treatment turns on your own circumstances - so confirm the current position there and with an FCA-regulated adviser rather than taking a rule of thumb from a newsletter.
The option pool isn't a trap. It's a tool - one your company needs, and one a clever lead can use to shift cost onto you without ever misstating a figure. See the timing, read the fully diluted numbers, and it's just another line you've understood before you signed.