The Option Pool Shuffle

The actual valuation at a VC funding round is almost always lower than what the VC puts on the term sheet - because of the “option pool shuffle.” Learn from former VCs how to reduce this hidden dilution, and negotiate for a better valuation. Use our calculator below to estimate the impact of an option pool increase on your startup’s valuation.

Try the option pool dilution calculator

Option pool shuffle by former VCs

What is the option pool shuffle?

The “option pool shuffle” lowers the effective valuation at a venture capital fund raise, and dilutes the founders’ ownership more than expected. The impact of option pool dilution on the terms of a VC round are often ignored or misunderstood by founders. Even well intentioned investors can push unnecessary dilution into an otherwise normal venture round – so let’s educate you on how to spot the option pool shuffle and give you tools to negotiate it to a good place!

Getting venture capital funding for your startup is an exciting moment for founders. You’re on your way, getting ready to build something amazing. But you need to be careful before you sign your term sheet, because VCs frequently add provisions that are advantageous to them, and not necessarily to you. And one provision founders need to understand is the option pool shuffle. 

The option pool shuffle relates to the allocation of your startup’s shares to the VC investor, while creating or adding to an employee stock option (ESO) pool at the same time. There are two ways to allocate shares, and they’re typically referred to as the VC Friendly Approach and the Founder Friendly Approach. And as you might guess from those names, one method doesn’t favor founders. And remember to always work with an experienced startup attorney when raising venture funding – they will understand the impact on your cap table.

In this article we’ll explain how the pool dilutes founders, provide an online stock option dilution calculator, offer some negotiation tips, and also link to an Excel model you can use to negotiate with VCs.

The shuffle begins when startups set up option plans

With an employee stock option plan, startups and other employers offer their employees the option to purchase stock in the company. It’s a great benefit, and an important tool for startups to use to attract talent. To set up an ESO plan, you’ll need to allocate shares to it. And this is where the option pool shuffle takes place. 

Of course, for a pre-funded company, it’s pretty easy to understand the dilution from setting up a plan. You hire your first employee, then provide some shares to them … and it’s pretty clear that you, as the founder, now don’t own 100% of the company. You’ve been diluted.

But it’s a lot more abstract at a fund raise.

VC’s want shares set aside for new hires

Frequently the VC investor will require an option pool as part of the term sheet during a funding round. That’s 100% normal. Founders will hire – that’s a big reason to raise venture funding - and setting up an option plan ahead of time makes bringing on new employees easier. (You do not want to be doing one off option legal work – that gets expensive!) 

Where the valuation hit and hidden dilution happens is when the VC demands X% set aside for the pool, created PRIOR to their investment. So, essentially, the new shares set aside hit only the existing startup owners – the founders, any existing employees, and previous investors who hold shares. 

And if the dilution happens prior to the investment coming in, it disproportionately impacts the founders, to the benefit of the incoming investors.

How does the option shuffle work?

With that in mind, let’s look at an example of the option pool shuffle using a hypothetical startup with 10 million shares as a starting point. Each share has a price of $1, which means you’ve got a $10 million pre-investment valuation. A VC investor wants to invest $5 million in your company in exchange for one-third ownership. You’ll add 5 million shares to your existing 10 million to provide the VC with 33% ownership.

Without an option pool, your startup’s capitalization table would look like this:

  Before VC Investment After VC Investment
Founder 10,000,000 100% 10,000,000 67%
VC 0 0% 5,000,000 33%
Total 10,000,000 100% 15,000,000 100%
Valuation $10,000,000      
Share Price $1.00      

We are about to introduce two ways that an option pool can be added around a venture round. It’s important to note that we almost never see the ‘founder friendly’ approach – it just doesn’t happen. However, it’s a great illustration of how dilution works, so let’s dive in: 

The Founder Friendly Approach

At this point, AFTER you’ve accepted the funding, both you and the VC investor agree that you’ll need a stock option pool to help you hire top talent. You decide to allocate 10% of the final total of shares to the ESO Plan. Now your cap table looks like this:

  Before VC Investment After VC Investment
Founder 10,000,000 100% 10,000,000 60%
VC 0 0% 5,000,000 30%
ESO Plan 0 0% 1,666,667 10%
TOTAL: 10,000,000 100% 16,666,667 100%
Valuation $10,000,000      
Share Price $1.00      

Why are we adding 1,666,667 shares? Because the founder and VC agreed that the option pool should be 10% of the final total. In math terms, that means Founder + VC = 90% of TOTAL. If Founder + VC = 15,000,000 shares, then 15,000,000 = 90% of TOTAL. That means TOTAL = 16,666,667 shares (15,000,000/90%). So the founder has 10 million shares, the VC has 5 million, and the option pool now has 1,666,667 shares. 

However, now the VC doesn’t own 33% of the company any more.The VC’s ownership stake was reduced since the option pool was created AFTER the VC provided funding and got one-third ownership of the startup.

Again, we pretty much never see the founder friendly approach. Ten times out of 10 you are going to see the VC friendly approach: 

The VC Friendly Approach

For obvious reasons, VCs don’t like that method. They wanted 33%, not 30%. So they often propose the VC Friendly Approach, where the option pool is allocated BEFORE funding. Now our cap table looks like this:

  Before VC Investment After VC Investment
Founder 10,000,000 85% 10,000,000 57%
VC 0 0% 5,789,474 33%
ESO Plan 1,754,386 15% 1,754,386 10%
TOTAL: 11,754,386 100% 17,543,860 100%
Valuation $10,000,000      
Share Price $0.85      

How do we get here? Again, the founder and VC agree that the ESO pool should be 10% of the final total of shares, and the VC insists that they want 33% of the final total. So Founder + 10% + 33% = 100%, which means Founder = 57%. Right away you can see that the founder’s position has declined from 60% to 57%. 

Let’s fill in the actual numbers. To get to our final share total, we divide our 10 million shares by the founder’s final percentage (10,000,000/57% = 17,543,860). The VC gets 33% of 17,543,860 which is 5,789,474 shares. And the ESO plan ends up with 10% of 17,543,860, which is 1,754,386. It also drops the share price from $1.00 to $0.85 ($10,000,000/11,754,386) 

So now the VC does own 33% of the company, but the founder’s ownership is down to 57%. Basically, by allocating the ESO pool before the VC funding is received, the founder’s stake was diluted.

Option Pool Dilution Calculator

This calculator can roughly help you understand the impact of increasing the size of an option pool – using the VC friendly approach – during a venture fund raise. You’ll need to know the pre-money valuation, the amount raised, your existing pool size, and how large of a ESO plan you’ll need after the round closes.

Venture Round Option Pool Dilution Calculator
Calculate how increasing an option pool pre-close dilutes the founders
Venture Round Details
Round Size
Pre-Money Valuation
Cap Table Details
Founder Ownership
Current Ungranted Option Pool
Option Pool Details
Option Pool After Fundraise
Email Address
Dilution impact of option pool - post fund raise
Round Size Dilution
Option Poll Needed Pre-Close
New Option Pool Required
Dilution to Founders
Effective Pre-Money Valuation
Founder Ownership Post Investment
With Increase in Option Pool
What it would be w/o an Option Pool Increase
Always consult with your attorney and accountant during a fund raise. This does not constitute accounting or legal advice.

What can founders do about the option pool shuffle?

Founders really have two points of negotiation: the size of the option pool and who should pay for it. 

Negotiating the Option Pool Size

Does the option pool size meet your startup’s needs? Is it too big or too small? Your financial projections should help you here. You drafted a budget when you started looking for venture capital, and that budget should have your planned expenses and your timeframe. Who will you need to hire during that time frame, and how much equity will you need to offer them? 

The number one way to keep the option pool manageable is to have excellent financial projections that include a hiring plan. Estimate how many options those new hires will need, and present that to the VC.

The venture capitalist may default to ‘you need a 15% option pool’ – we see pretty standard, round numbers presented in term sheets. Usually 10%, 15% or 20%. 

These are just generic amounts. 

Use your hiring plans to negotiate the size of the option pool. One tip that often works is to ask why the VC wants the sized pool that they are asking for. They will typically respond something along the lines of ‘to have enough shares available to provide to new employees over the next 18/24 months.”

If you have a strong hiring plan, you can use that to show them how many options you will actually need, and then negotiate down the pool to that amount. 

You’ll need to spend some time researching and building out an option pool budget: Figuring out what equity percentage each of your hires will need (you can find typical ranges online), and then totaling them. If it’s lower than the option pool (10% in our example above), then you can probably bring down the size of your pool. If it’s too low, though, you risk running out of pool money and not having enough to hire the right people. 

Use our free Excel model to take your hiring plan and attach the shares you’ll need for each new employee.

Paying For The Option Pool

Obviously, nobody wants to pick up the check here. Pre-investment option pools benefit the VCs, and post-investment benefits founders. Another thing you can negotiate with is your company valuation. If your VC investors insist on a pre-investment option pool, you might be able to ask for a higher company valuation. Conversely, you might be able to reduce the size of your valuation, which is basically the entry price for the VCs, and push the option pool to after the investment. A lower valuation makes your VC look like a savvy investor, so they might agree.

The impact of SAFEs and converts

Unfortunately for founders, the most common, non-priced investment vehicles – SAFEs and convertible notes – are going to end up getting their shares priced at the close of the venture round. This means that these investors (the SAFE and convert investors) also are NOT impacted by the increase in the ESO plan, so the dilution to founders is even greater. 

Review the possible scenarios

It’s worth the time and effort to model various scenarios. There are software programs that make it easy to change variables and review the results of different plans. But the most important thing for founders to understand about the option pool shuffle is that it exists. If you’re aware of how the option pool funding will affect your ownership stake in your startup, you can assess your options, get information to negotiate, and make appropriate decisions. If you need more information on the option shuffle, capitalization tables, and startup funding, please contact us.

About the Authors - Former VCs

Healy Jones has been a venture capitalist with two funds, and has made scores of investments into early-stage startups.

Healy Jones blends his venture capital experience with operational knowledge to support startup financial strategies. With a background in investing in over 50 startups and holding executive roles in VC-backed companies, Healy has been featured in major publications like the New York Times, Wall Street Journal, and TechCrunch. His efforts at Kruze have been crucial in helping startups collectively secure over $1 billion in VC funding, showcasing his ability to effectively navigate financial challenges and support startup growth.

Scott Orn, CFA, is Kruze’s COO and was a partner at a venture debt fund where he invested in many well known startups, including Upwork, Impossible Foods and more. He is also a CFA.

Scott Orn leverages his extensive venture capital experience from Lighthouse Capital and Hambrecht & Quist. With a track record of over 100 investments ranging from seed to Series A and beyond in startups, including notable deals with Angie’s List and Impossible Foods, Scott brings invaluable insights into financing strategies for emerging companies. His strategic role in scaling Kruze Consulting across major U.S. startup hubs underscores his expertise in guiding startups through complex financial landscapes.


We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!

Talk to an experienced accountant, not a generic sales person

 Kruze Consulting
Alex Janeck
 Kruze Consulting
Edith Silva
 Kruze Consulting
Randy Hall
Viz AI

$250M+ VC Funding Raised

"I had a great experience working with Kruze Consulting when we raised Series A. They know what VCs need to see, and how to present a startup’s books and finances. If you are going to raise venture capital, you need experts like Kruze."
Chris Mansi

Chris Mansi


Startup Venture Capital Assistance

With former venture capitalists on staff, our team is here to help you navigate the fundraising process and manage your board of directors

 Kruze Consulting
Scott Orn
COO | Former VC
 Kruze Consulting
Healy Jones
VP FP&A | Former VC

Scale Remote Operations & Team

"Kruze has supported us above and beyond basic accounting needs by ensuring we have everything we need to expand and support our team wherever they may be located"
Zack Fisch

Zack Fisch

Head of Operations & Legal

Clients who have worked with Kruze have collectively raised over $15 billion in VC funding.

We set startups up for fundrising success, and know how to work with the top VCs.

 Kruze Consulting
Vanessa Kruze, CPA
Founder & CEO
Kruze Logo

Experienced team helping you

Our account management team is staffed by CPAs and accountants who have, on average, 11 years of experience.

 Kruze Consulting
Bill Hollowsky, CPA
VP of Accounting Services
 Kruze Consulting
Claudine Vantomme, CPA
 Kruze Consulting
Morgan Avery
SUT/R&D Sr. Tax Accountant
 Kruze Consulting
Beth Bassler
Controller, CPA
Protara Therapeutics

Grew from a 2-person startup to a NASDAQ listed public company.

"The Kruze team helped us grow from a 2-person startup to a NASDAQ listed public company in 2 years. We wouldn’t have gotten public without Kruze’s support. Anyone thinking of launching a startup should make Vanessa their first call!"
Jesse Shefferman

Jesse Shefferman


Kruze Logo

Get in Touch

Please help us connect with you

How can we reach you?

Our first response is typically via email, so please check your inbox.

Help us have a productive first consultation by providing some additional information.

What year was your startup incorporated?

What is your stage of funding?

(pick up from the list)

Approximately how much funding have you raised?

(please enter a dollar value such as 5000000)

Help us understand what you are looking for:

(Optional, click the ones you need)

Anything additional that you’d like to share?

Optional - if you’d like to share anything else to help us prepare for our consultation, please let us know. We are also happy to sign an NDA, just let us know.

Important Tax Dates for Startups

  Talk to a leading startup CPA