Definition of option pool

Definition

At some point early on, generally before the first employees are hired, a number of shares will be reserved for an employee stock option pool (or employee pool). The option pool is part of a legal structure called an equity incentive plan. A typical size for the option pool is 20% of the stock of the company, but, especially for earlier stage companies, the option pool can be 10%, 15%, or other sizes.

Related terms

More from The Holloway Guide to Equity Compensation

Startups and Growth › The option pool

Once the pool is established, the company’s board of directors grants stock from the pool to employees as they join the company.

technical Well-advised companies will reserve in the option pool only what they expect to use over the next 12 months or so; otherwise, given how equity grants are usually promised, they may be over-granting equity. The whole pool may never be fully used, but companies should still try not to reserve more than they plan to use. The size of the pool is determined by complex factors between founders and investors. It’s worth employees (and founders) understanding that a small pool can be a good thing in that it reflects the company preserving ownership in negotiations with investors. The size of the pool may be increased later.

You’re reading an excerpt from a Holloway Guide.
The Holloway Guide to Equity Compensation
Joshua Levy, Joe Wallin, and over 35 contributors
Over 3 hours and 300 linked resources
Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up and made to be improved over time.