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Intermediate

What is an option pool

Also known as: employee option pool, ESOP pool

Definition

An option pool is a block of shares reserved for future employees' options. If it is created before the investor's money, existing shareholders pay for it.

Why it matters

An option pool lets a young company hire people it cannot pay a full salary.

Common mistakes

Believing the new investor shares the cost of a pool created inside the pre-money. It comes out of the existing holders only.

Related terms

Worked exampleIllustration

Who pays for a 10% option pool

Illustrative numbers: a fictional clinic booking app raises ₪1,000,000 at a ₪4,000,000 pre-money valuation, and the investor asks for a 10% pool.

  1. Pool before the money

    The investor ends with 20% and the pool with 10%, and the founders keep what is left.

    100% - 20% - 10% = 70%

  2. Pool after the money

    The founders hold 80% after the round, then the 10% pool dilutes every holder.

    80% × 0.9 = 72%

  3. Pool after the money

    In that case the investor is diluted too.

    20% × 0.9 = 18%

  4. The difference

    Two points of the company at the ₪5,000,000 post-money valuation.

    ₪100,000

  5. The difference

    With the pool inside the pre-money, the founders' 7,000 shares are priced at ₪500 each.

    ₪3,500,000

The headline says ₪4 million. The founders' shares are priced at ₪3.5 million.

Illustration

Who pays for the pool

Created before the money, a 10% pool leaves the founders 70%. Created after it, they keep 72%. The difference is 2 points of the company, ₪100,000 at a ₪5,000,000 post-money valuation.⁨Before the money⁩70%20%⁨Founders 70%⁩⁨After the money⁩72%18%⁨Founders 72%⁩
  • Founders70%
  • New investor20%
  • Option pool10%

Created before the money, a 10% pool leaves the founders 70%. Created after it, they keep 72%. The difference is 2 points of the company, ₪100,000 at a ₪5,000,000 post-money valuation.

Both pies hold the same pool. Only the moment it is created changes, and with it who gives up the shares.

Definition

An option pool is a number of shares the company sets aside under an option plan, to grant as options to employees, advisors and consultants. Until an option is granted, the reserved shares belong to no one, yet a fully diluted cap table counts the whole pool. Options granted from it vest over time, and options that lapse when someone leaves usually return to the pool.

Why it matters

It is real dilution, and the timing decides who pays for it. When investors ask for the pool to be created inside the pre-money valuation, it comes out of everyone who holds shares before the round: founders, earlier investors and existing option holders. The new investor's percentage stays whole, so the founders' real price per share is lower than the headline valuation.

Directly related: Equity, Dilution, Vesting.

Improvement tips

  • Size the pool from a hiring plan: which roles you will fill before the next round and what grant each needs.
  • Negotiate the pool size in the term sheet together with the valuation, because a bigger pool inside the pre-money lowers your real price.
  • Show candidates what their options could be worth at a few company values, not only their percentage.
  • Before the plan is adopted, ask your accountant which tax track the options will use.

Common mistakes

  • Creating a pool far larger than the hiring plan, which dilutes the founders before anyone is hired.
  • Assuming options dilute no one until they are granted. A fully diluted cap table counts the whole pool from the day it is created.

Related terms

StartupsBeginner

Equity

Equity is ownership of a company, measured in shares and percent. On a balance sheet the same word means book equity: what the business owns minus what it owes.

StartupsIntermediate

Dilution

Dilution is the fall in existing shareholders' percentage of a company when it issues new shares. The percentage drops, while the stake's value can rise.

StartupsIntermediate

Vesting

Vesting is a schedule under which shares or options granted to you become yours to keep or exercise step by step, as long as you keep working for the company.

StartupsIntermediate

Pre-money Valuation

Pre-money valuation is the agreed value of a company just before new investment comes in. It sets the price per share and how many shares the investor receives.

StartupsIntermediate

Cap table

A cap table (capitalization table) shows who owns how many shares and options in a company, and what percentage each holds on a fully diluted basis.

From the blog

Early-Stage Fundraising: What Investors Need to See

How founders can prepare for early fundraising with clearer milestones, traction evidence, dilution thinking, and investor-ready answers.

What Is Equity in Business?

Plain-language equity basics for founders, partners, early employees, and investors, including cap tables, dilution, options, and rights.

Quick check

Who absorbs the dilution when an option pool is created inside the pre-money valuation?

Choose an answer

Frequently asked questions

Do I need an option pool before I launch?
No. Create one when you are about to hire, or when an investor asks for it as part of a round.
When does an option pool become relevant?
When you want to hire people you cannot pay a full market salary, and offer them a share of the upside instead.
How big should my option pool be?
Big enough for the hires you plan before the next round, and no bigger. Build it from the list of roles and the grant each needs, not from a rule of thumb.
Does creating a pool reduce my percentage as a founder?
Yes. The pool counts in the fully diluted shares from the day it is created. If it is created inside the pre-money valuation, its whole cost falls on the existing holders, founders included, and not on the new investor.
Why does the pool matter if I am not hiring now?
Because every reserved share counts in the fully diluted cap table, in your percentage and in how an investor or a buyer reads the company.
How do I decide how many options to grant a new hire?
Start from the role, how early the person joins and what the pool must still hold for the rest of the plan. Express the grant in shares and in percent, and put it on a vesting schedule.
What goes wrong with a pool that is too large?
The founders are diluted for hires that never happen. Size it for the plan and top it up later if you need to.
What happens to options when an employee leaves?
Options that have not vested usually return to the pool and can be granted again. What happens to vested options is set in the plan, so read it.
What is an option pool in simple words?
A reserve of company shares kept aside to reward the people you hire.
How are employee options handled for tax in Israel?
Option plans for employees in Israel are usually set up under section 102 of the Income Tax Ordinance, through a trustee, and the conditions of that track are for your accountant to check. Offering securities to employees also touches the Securities Law 1968. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Do I need a lawyer to create an option pool?
Yes. A lawyer drafts the option plan and the grant letters, and your accountant checks the tax track before the plan is adopted. Educational material, not legal or tax advice. Check your own case with a lawyer or an accountant.
Does setting up an option pool cost cash?
Granting options takes no cash out of the company. There are professional fees to set up the plan, and the real cost is dilution.

Sources: Income Tax Ordinance [New Version] 5721-1961, section 102, Securities Law 5728-1968

Last reviewed: 2026-09-24

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