- An options pool is the portion of a company's shares set aside for future employees as part of an equity incentive plan.
- They are often used to attract talent to a company as part of an employee's compensation package and are also used to create alignment amongst employees and motivate them to work hard.
Simply put, an option pool is the portion of a company's shares set aside for future employees as part of an equity incentive plan.
Any shares in an option pool do not belong to you or your investors, but are reserved in order to be granted to employees when they join your company.
Option pools are a way of attracting employees to your company and creating alignment between your team, encouraging employees to work hard. Employees will receive a certain percentage of the option pool when hired. This will reflect both the stage at which the employee joins in relation to the company’s growth and what the employee’s position is within the company.
Typically, the issuing of options to employees is not done immediately and instead takes place through a vesting schedule. This is to ensure employees don't leave with all their options soon after joining.
A standard vesting schedule is four years with a one year cliff. Under such a vesting schedule, an employee would receive 25% of their shares after one year or, in other words, 25% of an employees shares would 'vest' after one year. After the one year cliff, 1/36 of the remaining options (or 1/48 of the original options) would vest each month until the four year vesting period is over. After four years, the employee would then have received all of their shares and would be 'fully vested'.
By delaying any financial reward from their portion of the option pool, it is presumed that awarding shares through an option pool will create alignment amongst the company’s employees, motivating employees to contribute more to the growth of the company in order to maximise their chances of greatest possible gains if, and when, the company goes public and their shares vest.
Typically, the size of an option pool is 20%, but can be 10% or 15%, particularly in the case of earlier stage companies. A small option pool can be a positive thing as it reflects a desire from the company to preserve ownership in negotiations with investors and the pool can always be increased later.
Things to note
- Shares allocated to an option pool do not equate to the issuing of shares themselves.
- Issuing the options is not the same as issuing the shares themselves.
- Options pools can be increased as part of future investment rounds in addition to as and when needed. Increases do, however, require shareholder and board approval.
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