What is an Options Pool?

If you are running a small business or startup, you may consider incentivising and rewarding your employees by allowing them to have company shares. This can be a good way to retain the best talent within your business and give new hires an extra reason to work hard. One way of doing this is to use an option pool. This article will explain what an option pool is and how using an option pool might affect your company, your employees, and your shareholders. 

What is an Options Pool?

An options pool is where a company reserves a portion of its shares, which it can later issue to certain people. A company’s shareholder agreement will usually set out the details of the option pool. 

How is an Option Different From Shares?

An option gives your company the choice to issue shares. Shares are a portion of the value of the company. Therefore, when a company sets up an option pool, it does not need to issue all of its options then and there. Instead, it can issue the options when the necessity arises. 

Further, if a person has options rather than shares, they do not have the rights that come with shares. For example, they may not have rights to dividends or vote at shareholder meetings. 

Usually, options are exercisable after meeting certain conditions. These are called vesting conditions. Likewise, these conditions are usually related to an employee’s performance or staying in the company for a set period. 

How Do I structure an Option Pool?

There are important points about option pool structure that you need to know if you are planning to create an option pool.

First, issuing shares within an option pool will likely affect your shares as a founder. This is because the shares that make up an employee option pool are usually made from the founders’ stock rather than from the shares of any equity investors. 

Second, by creating a share option pool which is later issued to employees, your shares and investor shares within the company will become diluted. Consequently, sophisticated investors will want to make sure that the size of the option pool is by reference to the company value before their investment. 

Third, it is crucial to understand how you calculate your options pool. Importantly, you calculate an options pool as a portion of a company’s fully diluted share capital. Fully diluted share capital is calculated as the amount of shares that currently exist plus the options pool. 

When Should I Set up an Options Pool?

Setting up an options pool can be a good way of incentivising your employees to stay at your company or work extra hard. Although it may dilute your shares in the company, it can be good in the long term and investors may even ask you to set up an options pool because of its overall benefits. 

An options pool will also come up on your cap table. A cap table outlines all of your company stock, options, and equities that you can convert into shares. Having an organised cap table from early on will give confidence to potential new shareholders of the percentage of shares that they own now and that they will own the future. 

Therefore, setting up an options pool early in your business is a great idea. This is especially the case if you are looking for funding from big investors, such as venture capitalists. In addition, you can also set up new employee option pools as your business grows. 

Key Takeaways

Setting up an options pool is a good way of dealing with new hires for earlier stage companies. An option pool is a reserved portion of shares within a company that you can issue to employees after meeting certain conditions, such as staying with the company for a set amount of time. 

If you are considering setting up an option pool, it is a good idea to make sure that you have created the size of the option pool with reference to the value of your company shares on the whole. This can give confidence to investors, which in the long run should help increase the share price of your company. 

If you need help with creating an option pool, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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