The Option Pool — from The Holloway Guide to Equity Compensation

The following excerpt is from The Holloway Guide to Equity Compensation, a detailed reference with hundreds of resources on stock options, RSUs, job offers, taxes, and more. You can read more from this excerpt, or access the full guide text here.

THE FULL VERSION OF THIS GUIDE ANSWERS QUESTIONS LIKE:

What is an option pool?

What percentage of stock typically makes up the option pool?

How do companies decide the size of the option pool?

Early on, often before the first employees are hired, a number of shares will be reserved for an employee option pool (or employee pool). The option pool is part of a legal structure called an equity incentive plan. Twenty percent of the company’s stock is the typical size for the option pool, but (especially for earlier stage companies) the option pool can be 10%, 15%, or other sizes.

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

Well-advised companies will reserve only what they expect to use over the next 12 months or so in the option pool. This is done to prevent the company from over-granting equity (given how equity grants are usually promised). 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 is important for both employees and founders to understand that a small pool can be a good thing because the company is preserving ownership in negotiations with investors. The size of the pool may be increased later.