An “option pool” refers to the number of shares reserved or set aside by a company to issue shares of stock, options, or other equity incentives to employees, advisers, and service providers.

How is the number of shares determined?

The number of shares is determined by a company’s board of directors and approved by the stockholders when the company’s equity incentive plan, or stock plan, is established. This number can be changed later but will again require obtaining both board and, usually, stockholder approval.

Can an option pool change in size?

At each new round of equity financing, a company’s lead investors will usually request an increase, commonly referred to as a “top up,” of the option pool. This is done so that the number of shares available for issuance under the option pool will last for another 12-18 months of hiring or until the company’s next round of financing, when it may need to be “topped up” again.

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Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.

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