Option Pool

An Option Pool, also known as an Employee Stock Option Pool or Equity Incentive Plan, is a reserved portion of a company's equity that is set aside to be granted as stock options to employees, advisors, consultants, and other key contributors. It is a common practice for startups and growing companies to establish an option pool as part of their overall compensation and retention strategy.

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The purpose of an option pool is to attract and retain talented individuals by offering them the opportunity to become shareholders and share in the company's success. By granting stock options, companies can align the interests of employees with the long-term growth and value creation of the business.

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The size of an option pool is typically expressed as a percentage of the company's fully diluted capitalisation, which includes all outstanding shares and the potential issuance of shares through options, warrants, and other convertible securities. The specific percentage allocated to the option pool can vary depending on factors such as the stage of the company, industry norms, and the company's goals.

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Option pools are often created during fundraising rounds, as investors may require a certain level of equity ownership for future employees. The options granted from the pool usually have a vesting schedule, meaning that employees earn the right to exercise their options over a period of time, often subject to continued employment or specific performance milestones.

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The allocation and administration of the option pool are typically governed by a formal plan or agreement, which outlines the eligibility criteria, the exercise price of options, the vesting schedule, and other terms and conditions. Proper management of the option pool is important to ensure fairness, compliance with legal and regulatory requirements, and effective utilisation of equity-based incentives to attract and motivate key talent.

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Overall, an option pool serves as a valuable tool for startups to incentivise and reward employees by offering them the opportunity to participate in the company's growth and success through stock ownership. It can help align the interests of employees with those of the company's stakeholders and contribute to building a motivated and dedicated team.