Option pool

An option pool is a pre-allocated block of authorised but unissued shares (or notional allocation in a private company) set aside exclusively for future grants to employees, advisers, and key service providers under the company's ESOP scheme. It ensures the company always has shares available to make grants without seeking fresh shareholder approval each time, which would be slow and administratively burdensome.

The size of the option pool is expressed as a percentage of the fully diluted cap table — meaning the total share count including all issued shares, outstanding options, warrants, and convertible instruments assumed converted. A pool of 10–15% is typical for early-stage Indian startups; growth-stage companies expanding the team rapidly may carry 15–20%.

Who bears the dilution? This is the central negotiating point around the option pool in a funding round. Investors will typically insist that the pool be set at the desired post-round size before computing their ownership percentage — meaning the pool expansion dilutes existing shareholders (founders and previous investors) rather than new investors. This pre-money pool expansion can meaningfully reduce founder ownership; founders should model the impact carefully and negotiate the pool size to be realistic rather than padded.

As grants are made to employees and those options vest and are exercised, shares flow out of the pool. Ungranted shares, lapsed unvested options, and forfeited grants return to the pool for future use. When the pool is running low — typically below two to three years of grant runway — it is topped up via another shareholder resolution, which triggers another round of dilution.