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 to create an option pool?

While the mechanics of option pools can be confusing, it’s essential to learn how to set up an option pool that matches the startup’s needs and trajectory, especially if you’re raising a venture capital for your startup. As a founder, start by understanding the impact of a pool on your ownership. Always keep the pool just big enough for your staffing plans to avoid dilution caused by future hires that are outside the plan.

How to determine your pool size?

The number of shares is determined by a startup’s board of directors and approved by the stockholders when the company’s equity incentive plan, or stock plan, is established. Ideally, an option pool should be somewhere between 10% of a startup's total equity and should be sufficient to hire enough talent until the next round of funding. A normal option pool size is between 5% and 15% of your total equity.

Can an option pool change in size?

While it is crucial to effectively allocate early equity at each new round of an equity incentive plan, a startup’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 next round of financing, when it may need to be “topped up” again.

What happens to unused option pools?

Unused option pools tend to get negotiated in the next round of funding and are usually rolled over into a new option pool. In certain cases, you may opt to cancel any unused option pools and return the corresponding shares to the treasury. This would reduce the total number of outstanding shares and increase the ownership percentage of existing shareholders.

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.