Triggers for expanding the option reserve
Most companies increase the pool when it falls below roughly 1% to 2% of fully diluted shares remaining unallocated, or as part of negotiating a new funding round. Investors in a new round typically want to see enough pool to cover hiring until the following round, so a top-up is often built into the round's pre-money calculation, the same mechanic covered in pool dilution.
Increasing the pool outside a funding round is possible but means existing shareholders absorb the dilution without a new investor also being diluted, since there is no new money coming in to share the cost, unlike the pre-money vs post-money pool split that applies during a round.
Authorization process for additional pool shares
- Recalculate the hiring plan and required pool size using the same bottom-up method as initial sizing.
- Agree the top-up amount with the board and, at a funding round, with the incoming investor.
- Pass the resolutions needed to authorise and reserve the additional shares.
- Reflect the increase in the fully diluted share count used to set the price per share for any concurrent round.
A top-up calculated at a Series A round
A company has 9,000,000 fully diluted shares, including a 500,000 share pool with 100,000 unallocated. The Series A investor asks for the pool to be topped up to 12% of the post-money fully diluted share count. If the round issues new shares such that fully diluted shares after the round are 11,000,000, a 12% pool means 1,320,000 pool shares are needed in total, so 820,000 new pool shares must be created in addition to the 500,000 already reserved.
Because this top-up happens pre-money in the term sheet, existing shareholders, mainly founders, bear the dilution rather than the new investor. This is the mechanic behind the so-called option pool shuffle described in the pre-money vs post-money page.
Questions about topping up a pool
- Who pays for a pool increase at a funding round?
- If the increase happens pre-money, existing shareholders bear the dilution. If it happens post-money, the new investor shares the dilution too. Term sheets usually specify pre-money pool increases.
- How often are pools topped up?
- Typically at each priced funding round, and occasionally in between if hiring runs ahead of plan.
- Can unallocated pool shares be cancelled instead of granted?
- Yes. A company can choose not to use reserved pool shares, or formally reduce the pool, though this is less common than topping up.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.