Founders and Investors should be incentivized to work together for the benefit of the company, not work against each other to the benefit of themselves.
tl:dr; Sam is right, and I hope this becomes standard practice.
Founders and Investors should be incentivized to work together for the benefit of the company, not work against each other to the benefit of themselves.
tl:dr; Sam is right, and I hope this becomes standard practice.
1. During initial funding ("pre money") talks the founder is incentivized to ask for a small option pool because she doesn't want to divert a lot of her stock into the option pool
2. After the option pool has been exhausted through new hires the founder then asks the board for a larger pool, which is now created from the combined stock of the founders and the investors - thus the founder is diluted less than if the expanded pool had been created at the start.
Keep in mind that not all founders are this savvy when it comes to deal terms, and most investors will push founders to issue a larger option pool than needed. The investor will say something like "we want to be sure we have enough options available to recruit the best employees" or "we don't want to have to issue more options later because it would be a distraction". Both of these arguments have a kernel of truth in them, but they're not very good. You can always issue more options later and it's quite simple. What they're actually saying is, "I don't want you to come back and dilute me later when you could dilute yourself now instead". How thoughtful!
In a perfect world, this would have no effect on you. In the real world, it sometimes causes people to create option pools that are too big/small, since it's a confusing topic and it can be really hard to predict exactly what you need in advance! How people then act in those situations differs massively, but only affects things on the margin (e.g. perhaps the founder will issue a slightly more generous equity package to a new employee because "I have this whole option pool to spend").
tl:dr; this should have very little effect on you as an employee, but if your company's option pool came out of the pre, then the founders probably wasted valuable time and energy figuring this out with an investor who shouldn't have asked to structure it this way in the first place. Unfortunately, like many terms in financing (see the rest of Sam's post), this is too often the case. Fortunately, it will have little impact on the company or your experience, so don't worry about it :)