What Is an Option Pool?

An option pool consists of shares of stock reserved for employees of a private company. The option pool is a way of attracting talented employees to a startup company - if the employees help the company do well enough to go public, they will be compensated with stock. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.

The initial size of the option pool may decrease with subsequent rounds of funding because of investors' ownership demands. The creation of an option pool will commonly dilute the founders' share in the company because investors (angels and venture capitalists) often insist on it.

KEY TAKEAWAYS

How Option Pools Are Structured

The shares that comprise an option pool typically are drawn from investor stock in the company rather than the shares earmarked for investors. This may be 15%–25% of the overall outstanding shares and may be determined when the startup receives its earliest funding round as part of the overall terms put in place.

It is also possible that a company, over the course of its development and subsequent funding rounds, may establish additional option pools after the initial one is put in place. The size of the pool may be dictated or advised by the venture backers to be a portion of the pre-money or post-money valuation of the company. Negotiations over the scope of the option pool can affect the startup’s overall price. For example, investors may want an option pool offered post-money option to be priced at the pre-money valuation, which could lower the price for the company.

Other Considerations

The shares disbursed from the option pool may be determined by the roles of the employees as well as when they are hired. For example, senior management that is brought on board near the founding of the startup may receive a percentage of the entire pool, whereas later employees in more junior roles might be granted just fractions of a percent.

The option pool grants shares that, like other types of stock options, often require a period of time before they are vested. This means the employee will not be able to benefit from these shares possibly for several years. By delaying their ability to reap monetary value from their portion of the option pool, the belief is that the employee will contribute more to the overall health and growth of the company in order to see the greatest possible gains when the shares vest.

Vital to the success of a growing enterprise is the effective management of employment documents. This process, however, if not structured properly, can evolve into a highly chaotic and messy proposition.

Typically under the auspices of an HR Department, the purpose of these documents is to clarify the rights, accountabilities, and expectations for successful workforce engagement. Part of the employee record, they play a critical role in ensuring consistency in how workplace policies, procedures, and practices are applied.

These are among the documents commonly used to codify an employment relationship:

At Equa, we believe that compliance audits along with the need for organizational risk mitigation activity underscore the need for unalterable, timestamped, single source of truth documents. Other emerging trends informing Equa’s value proposition and solutions in this space include:

Companies are increasingly employing digitally signed records and other documents tied to workplace relationships.

The growing acceptance of “electronic signatures” as so-called wet signatures.

The need for easy access and identification of a single source of truth documents for workplace compliance audits and employer-employee disputes

HR cost and productivity savings associated with advancements in the management of records and permissioned access.

In today’s dynamic business environment where workplace disputes and compliance audits are common, seamless access to properly executed documents holds great importance. Equa’s innovative solution fostering frictionless, single source of truth documentation represents a major leap forward in this quest.

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