A set number of company shares reserved for future issuance to employees, advisors, or consultants as part of equity-based compensation plans.
What is an Option Pool?
An option pool is a portion of a company’s equity specifically set aside to grant stock options or other equity incentives to employees, advisors, or key hires. These options give recipients the right to purchase company shares at a fixed price (known as the exercise or strike price) after a certain period or once specific conditions are met, typically through a vesting schedule.
Creating an option pool is common for startups, especially those seeking to attract and retain talent without paying high cash salaries. By offering equity, companies give team members a direct stake in the business’s growth and success, aligning their interests with those of the founders and investors.
The size of the option pool is usually expressed as a percentage of the company’s total outstanding shares. Startups often create or expand an option pool during early funding rounds, sometimes at the request of investors, to ensure there is sufficient equity available to hire future talent. Increasing the pool dilutes all existing shareholders proportionally, so it is a strategic decision that impacts ownership percentages.
For example, suppose a startup has 1,000,000 shares split equally between two co-founders. They create a 200,000-share option pool (16.6% of the company) for future hires, reducing each founder’s ownership from 50% to 41.7%. When an employee is granted 20,000 options, those shares come from the pool, leaving 180,000 unallocated shares for future grants.
For non-U.S. founders with U.S. companies, setting up an option pool is especially relevant when planning to hire U.S.-based employees or contractors, as it allows for competitive compensation without significant upfront cash outlay, while still incentivizing long-term commitment to the company.
