Option Pool Refresh

An option pool refresh is the increase in shares available in the option pool, typically negotiated as part of a priced funding round. The critical structural question is whether the new pool shares are added pre-money (diluting existing stockholders, particularly founders) or post-money (diluting all stockholders proportionally including new investors). It is one of the most economically significant negotiation points in any priced round, and the founder dilution impact of pre-money pool refresh is often larger than the dilution from the investment itself.

The pre-money vs post-money option pool math:

• Pre-money option pool: the pool is created/expanded BEFORE the new investment, so it dilutes only the existing cap table (founders, prior investors, existing option-holders). The new investors get their percentage of a "post-money fully-diluted" cap table that already includes the expanded pool. The new investors aren't diluted by the pool.
• Post-money option pool: the pool is created/expanded AFTER the new investment, so it dilutes ALL stockholders proportionally (including the new investors). The math is simpler and more "fair" but rarely the structure investors propose.

Concrete example: company has 10M outstanding shares all common (founders), raising $5M at $20M pre-money ($25M post-money). New investors will own 20% post. Investor proposes a 10% post-money option pool refresh.

• Pre-money pool option (typical investor ask): pool is added pre-money. After the round: 12.5M shares total (10M existing + 2.5M new pool + 2.5M new investor). Founders go from 100% to 80% (10M/12.5M). New investors get 20% (2.5M/12.5M). Option pool is 20% (2.5M/12.5M). Founder dilution: from 100% to 80%, a 20-point hit (10% from investment + 10% from pool). Notice that despite the term sheet describing this as a "10% option pool refresh," founders absorbed all 10 points of pool dilution PLUS the full 20-point investment dilution.
• Post-money pool option (rarely conceded): pool would be added after the round. Founders would dilute only 20% from the investment plus their proportional share of the post-money pool. Net founder ownership higher than the pre-money structure.

The negotiation reality: investors almost always insist on pre-money option pool because it protects their target ownership percentage. Founders should push for: (a) the smallest pool that's defensible (the actual hiring plan for the next 12-18 months, not generic 10-15%), (b) a "shadow grant" exercise where the company commits to specific hire-by-hire grants from the pool rather than carrying excess pool that ends up returning to existing stockholders if unused, and (c) understanding that the pool size IS a price negotiation (a smaller pool means higher effective valuation for the founders). What "industry standard" really means: 10-15% post-money pool is "standard" for early-stage rounds but the right number depends on actual hiring plans. Companies hiring conservatively can defend 8-10%; companies with major hiring plans may need 15-20%.

Ryan's Take

The option pool refresh is the biggest hidden term in venture financings. The term sheet says "we're investing $5M at $20M pre-money for 20%." The actual founder dilution often includes another 8-15 points from the pre-money option pool refresh. Founders who think they're getting 80% post-investment discover they're getting 65-70% after the pool comes out of pre-money. The negotiating moves that work: (1) base the pool size on the actual 12-18 month hiring plan, not a generic percentage; (2) trade pool size against valuation explicitly (smaller pool = higher effective valuation); (3) commit to a "shadow grant" exercise so excess pool isn't carried; (4) understand that the pool size is part of the price negotiation, not a separate administrative line. The cost of doing this badly is 5-10 points of permanent founder dilution. The cost of doing it well is the same financing with materially more founder ownership.

What founders get wrong: Treating the option pool refresh as administrative ("we need a pool, it's standard") rather than as a price negotiation. The pre-money pool dilutes founders, not new investors; every point of pool reduces founder ownership directly. The right discipline: build the 12-18 month hiring plan (every role, every grant), back into the pool size from there, and negotiate against the investor's percentage ask. A 15% requested pool that the actual hiring plan justifies as 9% is 6 points of founder dilution that doesn't need to happen. The negotiation is worth real money; treat it like a major term, not a checkbox.

Related: [Option Pool] · [Pre-money vs Post-money Valuation] · [Dilution] · [Cap Table] · [Term Sheet]

FAQ

What is an option pool refresh? The action of increasing the number of shares available in the company's option pool, typically negotiated as part of a priced funding round to ensure adequate equity for new hires and refresh grants in the post-round period. The structural question is whether the new pool shares are added pre-money or post-money.

Why does the pre-money vs post-money pool distinction matter so much? Because pre-money pool dilutes only existing stockholders (primarily founders), while post-money pool dilutes all stockholders including new investors. Pre-money pool refresh of 10% in a 20% investment round actually causes 10 additional points of founder dilution beyond the 20 from the investment itself. Investors almost always insist on pre-money structure.

How big should the option pool refresh be? Based on the actual 12-18 month hiring plan, not a generic percentage. Build the plan role by role (each role x typical grant size) and back into the pool requirement. Companies with conservative hiring can defend 8-10%; companies with aggressive hiring plans may need 15-20%. Negotiate against the investor's "standard 15%" ask with the actual data.