An option pool is a number of shares set aside to cover stock options given to employees. The basic idea is that some options should be given out to encourage employees to join up, work hard and stick with the company. If a company doesn't have an option pool set aside before a financing, investors are likely to insist on one. But, the option pool also dilutes the founders' ownership of the company, and lowers the company's effective valuation (see the Pro Tip for more).

Option pools are usually around 20% of the total outstanding shares of a company. Founders will usually try to reduce the size of the pool. Here are a couple of ways to do it:

Consider an Option Pool at Formation. It's often a good practice for companies to set up a reasonable option pool when the company is formed. The benefit is that if you have a reasonable pool to start with, you can start issuing options before a financing, and you'll have more leverage in negotiations with investors to keep the existing pool, even if it's smaller. The downside is that a pre-funding option pool only dilutes the founders, not investors. If the option pool is created post-financing it dilutes both founders and investors in proportion to their ownership in the company (unless you get the Option Pool Shuffle described in the Pro Tip).

Use a Hiring Plan to Justify a Smaller Pool. Rather than just argue about made up numbers, create a plan of the employees you intend to hire, and how many options you will give them. Redmond-based coworking space thinkspace has put together a lot of useful information for figuring out how much equity to give founders and employees, which is useful in setting up the plan: //thinkspace.com/how-to-divide-equity-to-startup-founders-advisors-and-employees/

You can present the hiring plan to investors to justify a smaller option pool that is consistent with the plan. This will give you a big advantage, because you'll have information to justify the size of the pool and the investors will be effectively just throwing out "standard" numbers. You may end up haggling over the line items in the hiring plan, but this is a lot better than arguing over the total size.

When you set up the option plan, go over it carefully with your lawyer to make sure that it's fair to the founders. Keep an eye out for provisions that would let the company take back unvested options, prevent shares from continuing to vest after a merger or acquisition, or allow the company to buy back vested shares after employees leave.