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An option pool, or employee stock option pool (ESOP), is a block of company stock that you set aside to use for hiring and retaining employees. Startups often rely on equity compensation, especially when making important hires early on.
Option pools are generally first established when the company first raises funding, and are often expanded during each funding round. Investors may want you to add to your option pool, and include the amount in the pre-money valuation of your term sheet. In this scenario, the option pool expansion could dilute current shareholders’ ownership, and then the investment further dilutes your shares.
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