What it is
In startup usage, an employee stock option pool, usually called an option pool, is company equity reserved for grants of stock options to employees and advisors, letting them share in the upside they help create. In the US, "ESOP" normally means a distinct, regulated employee stock ownership retirement plan.
Facts
- Startup option pools are typically 10% to 20% of fully diluted shares.
- The board sets each option's strike price, typically using the fair market value established by a 409A valuation as the minimum. Options usually have four year vesting with a one year cliff.
- In a priced round, the pool is often expanded before the investment, so founders bear the dilution.
- Common option types in the US are ISOs for employees, which are tax favored, and NSOs for contractors and advisors.
Who it's for
Founders hiring early employees who need equity upside in place of high salaries.
How it helps you
An option pool lets you attract and retain talent you couldn't otherwise afford, aligning employees' rewards with building the company's value over time.
Caveats
Watch expansion of the pool before an investment. It dilutes founders, not new investors. Grant thoughtfully. Overly generous early grants leave nothing for later key hires.
Conclusion
An option pool is how startups pay in upside instead of cash. Size it deliberately, and remember that expanding it before an investment dilutes you, not your investors.
