What Is an Option Pool?
Let me tell you directly: an option pool is a set of stock shares reserved specifically for employees in a private company. It's a key tool for startups to pull in top talent—if those employees drive the company to success, like going public, they get rewarded with stock. If you're an early joiner in the startup, you'll typically snag a bigger slice of this pool compared to those who come on board later.
As funding rounds progress, the initial option pool might shrink due to investors pushing for more ownership. Creating this pool often means founders see their own shares diluted, since angels and venture capitalists usually demand it as part of the deal.
Key Takeaways
- An option pool is a chunk of company equity set aside for early investors or employees in a startup.
- It's designed to draw in capital or skilled workers when the company is expanding but not yet generating sufficient revenue or cash flow to stand alone.
- These pools usually start at 15–25% of initial equity, but they lead to dilution of shares for founders and early participants as time goes on.
How Option Pools Are Structured
The shares in an option pool generally come from the founders' stock, not from what's allocated to investors. This could be 15%–25% of the total outstanding shares, often set during the first funding round as part of the terms.
Over time, as the company grows and goes through more funding, it might create additional pools beyond the original one. Venture backers could dictate or suggest the pool's size based on the company's pre-money or post-money valuation. These negotiations can impact the startup's overall value—for instance, if investors push for a post-money pool priced at pre-money levels, it effectively reduces the company's price.
Other Considerations
How shares from the pool are handed out depends on the employees' roles and when they're hired. Senior management joining early might get a full percentage of the pool, while junior hires later on could receive just a tiny fraction.
These shares, like other stock options, usually come with a vesting period, meaning employees can't cash in right away—it might take years. The idea here is that by making them wait, employees will work harder to build the company's value, maximizing their payout when the shares finally vest.
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