every founder who has raised a priced round has been handed the same line in the term sheet. it sits two paragraphs below the valuation. it reads, more or less, "the post-close option pool shall be 10% of the fully-diluted capitalization." most founders nod and move on. the 10% number sounds reasonable. it isn't the number that matters.
the number that matters is where the 10% comes from. taken from pre-money, the pool dilutes only the founders and existing investors. taken from post-money, it dilutes everyone, including the new investor. the difference, on a typical series a, is worth millions of dollars to the founder and exactly that much to the new investor on the other side of the table. that's why the default in almost every term sheet is pre-money. that's why most founders find out which version they signed after they've signed it.
what the pool actually does
an option pool is a slice of the cap table reserved for future employee equity grants. investors require a refresh at every priced round because they want enough unallocated options to cover the next 18-24 months of hiring without another dilution event. 10% post-close is the standard. some funds push for 12-15% at series a if the team is thin.
the refresh itself isn't the issue. companies need options to hire. the issue is who pays for the refresh, and the answer is hiding inside the phrase fully-diluted pre-money valuation — which means the pool gets carved out of the founders' share before the new money lands.
the pre-money trap, by the numbers
run the math on a $40m pre-money raise of $10m, post-money $50m, with a 10% post-close option pool.
if the pool is taken from pre-money, the effective pre-money is $36m, not $40m. the founder's share gets diluted by both the new money and the new pool. on a clean cap table where founders held 80% pre-round, the founders end up with about 57.6% post-close. the new investor still gets exactly 20%.
if the pool is taken from post-money, the effective pre-money stays $40m and the pool is funded proportionally by everyone — including the new investor. the founders end up with around 64%, a 6.4 point swing. on a $1b exit five years later, that's $64m of value that moved from the founders' column to the investors' column at signing, for one line in the term sheet.
the line itself is short. it's often phrased as "on a fully-diluted basis assuming the post-close option pool." fully-diluted is the tell. it means the pool is included in the share count used to calculate everyone's percentage, which means it's carved out of the existing holders' share. which means founders.
what to actually negotiate
three things, in order.
size of the pool. the default is 10% post-close. if the company is well-staffed and the next 18 months of hiring is mapped, 7-8% is defensible. the conversation has to start with the hiring plan: how many engineers, at what level, what grants. specific. if you can show the partner a hiring plan that consumes 6% over 18 months, you have ground to argue for 7%. you don't get to 5%.
allocation rules. the term sheet says "10% of fully-diluted." what counts as fully-diluted is the second hidden lever. some sheets include unvested founder shares, some include all outstanding options, some include only the new pool. ask. get it written down. the difference between "fully-diluted including existing unallocated options" and "fully-diluted excluding existing unallocated options" is often another 1-2% of dilution that lands on the founder.
source of the pool. this is the big one. ask whether the 10% is being taken from pre-money or post-money. if pre-money, ask whether the partner would consider a split — say, 60% pre, 40% post. this isn't crazy. it's a known compromise. partners who have done a lot of deals will recognize the ask and either accept it or counter. partners who are junior will say "that's not how we do it" and you should respectfully push back, because that's exactly how some funds do it.
the conversation founders avoid
most founders read the term sheet, see the 10%, and don't want to look like they're haggling over the pool when they're excited about the valuation. this is the conversation that costs the most equity per minute of awkwardness in the entire fundraise. ten minutes of polite negotiation on the pool location can shift $5-10m of value at exit. it costs you nothing in goodwill if you do it well. it costs you the company if you don't.
the script that works is simple. "i want to understand how the pool is being structured. is the 10% coming from pre-money, post-money, or split?" then listen. if the partner says pre-money, ask what their range is on splits. they will have one. if they say post-money, sign immediately.
how zift handles this
zift models dilution scenarios for any term sheet you upload, including the pool refresh structure. on monday morning the briefing shows your projected ownership through the next two rounds under different pool-source assumptions, so you walk into the next partner meeting knowing exactly what each version of the line costs you. no spreadsheet. no cap table consultant.
if you're a finance lead at a series a team and you need this for board reporting or for modeling secondary-stage scenarios, zift handles that too.
the founders who read the term sheet twice and ask one question about the pool aren't smarter than the ones who don't. they just know which line moves the most money for the least conversation.