option pool
A portion of equity set aside by a company for future issuance to employees, advisors, and directors as stock options or other equity compensation.
Example
“The startup reserved a 15% option pool to recruit engineers with equity compensation despite limited cash salaries.”
Memory Tip
OPTION POOL = reserved shares for employees. Dilutes founders but attracts talent.
Why It Matters
Understanding option pools is crucial if you work at a startup or early-stage company, as it directly affects the potential value of your equity compensation. Knowing how large the pool is and how diluted your shares might become helps you evaluate the true worth of stock options offered as part of your compensation package.
Common Misconception
Many employees believe that stock options granted to them are guaranteed profits or that the option pool size does not affect their ownership percentage. In reality, as new options are granted from the pool to other employees, your ownership stake becomes diluted, and options are only valuable if the company succeeds and the stock price rises above your exercise price.
In Practice
A startup might set aside 15 percent of its total shares as an option pool when it raises its Series A funding round. If the company has 10 million shares outstanding, that means 1.5 million shares are reserved for future employee grants. As the company hires and grows, it grants portions of this pool to new employees, and once the pool is exhausted, the company must either create a new pool through shareholder approval or stop offering equity compensation.
Etymology
OPTION (the right to buy shares) POOL (reserve, collection). A POOL of shares reserved for OPTION grants.
Common Misspellings
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Related Terms
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See Also
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