Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Find a Job
  • Home
  • Law, Transactions, & Risk Management
  • Business Transactions, Antitrust, & Securities Law

Option Pool - Explained

What is an Option Pool?

Written by Jason Gordon

Updated at April 15th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is an Option Pool?How an Option Pool is UsedAcademic Research on Option Pool

What is an Option Pool?

Startups use an Option Pool to set aside stock (or other equity-related securities, such as options) to compensate and incentivize key employees of the company. In reality, it is just a percentage of company ownership that is allocated for this purpose. When these shares are later issued to employees, it does not affect the ownership percentages of existing owners (i.e., nobody is being diluted when these shares are issued or committed to employees).

Back To: BUSINESS LAW

How an Option Pool is Used

Generally, a startup will create an option pool when it is going through a round of inventor financing. The investors will demand a specific percentage of company ownership in exchange for their investment. They will also demand that the company set aside shares in an option pool. The typical size is between 15-25% of total authorized shares. 

Whenever the startup hires a key employee who demands an ownership percentage in the company as compensation, this ownership percentage is drawn from the option pool. Investors realize that any time that a company issues additional shares, it will reduce that investors percentage of ownership in the company. This is known as dilution. 

To combat this, the investors demand the creation of the option pool. Setting up the option pool will affect the total outstanding shares of the company. As such, it will affect the price per share, as the price per share is based upon the total value of the company divided by the number of outstanding shares. The option pool will be accounted for in the capitalization table or Cap Table.

It is worth noting that ownership of the shares in the option pool are rarely directly issued to employees. Generally, these shares are subject to vesting over time. This means that the employee does not become the full owner of these shares until a specific amount of time or specific company milestones are accomplished. Once this time has passed or milestones are accomplished, the shareholder becomes owners of the shares.

Back to: Business Transactions


option pool

Was this article helpful?

Yes
No

Related Articles

  • Earnout (Sale of Business) - Explained
  • IPO Lockup - Explained
  • Common Stock Equivalent - Explained
  • Carveouts to Antidilution Protection - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand