Option pools are common shares that are set aside to compensate and incentivize future employees of the company.  The most sophisticated entrepreneurs create option pools before seeking investment from VCs.  However whether or not you have created an option pool before seeking investment, the cap table proposed by a VC will include an option pool.

Option pools are created at or before the time of investment for a few reasons:

• First, option pools ensure that the company has sufficient shares to compensate new hires, avoiding any future politicking of stakeholders to protect their investments at the expense of the company’s growth.
• Second, creating new shares in the future can be costly (legal and accounting fees) and time consuming (as the board is required to meet and approve the creation of new shares).
• Third, by allocating the option pool up front, it is easier for the VC to evaluate the dilutive effect that these shares might have on stakeholders, enabling VCs to ensure that the cap table is appropriately balanced for the near future.

Depending on how many employees the company needs to hire in the future, their seniority in the company and the value of the company, the size of the option pool may vary.  However, at the series A round the option pool is typically sized as 10% to 20% of the cap table.

Options pools are a standard component of the cap table – something that entrepreneurs should be aware of when considering the future structuring of the company.