What is an Option Pool?

Simply put, an option pool is the authority to allot shares. It’s important to get this authority before any options are granted or shares are issued, because the company should have the permission to do so before it makes any commitments to option holders or enters into any agreements. . 

Importantly, the shareholder resolution creating the option pool will also disapply pre-emption rights, meaning once you sign the option pool documentation once, you don’t need to regularly go back to investors seeking permission to make further option grants. Option pools are typically created pre-money during a funding round. This means that only the existing shareholders are diluted by the creation of the pool, not the incoming investors. Investors usually expect this approach because it ensures that the percentage of the company they are purchasing isn’t inadvertently reduced by an option pool created after the investment. 

Creating and sizing an option pool is an important part of startup planning, as it allows you to incentivise your team and future hires without impacting investor ownership. Properly structured, an option pool aligns everyone with the long-term growth of the business. For more guidance, check out our article on how to size an employee option pool.

FAQs:

Does creating a pool issue shares? No 

Why is the option pool showing on my cap table if no shares are issued? 

Because the option pool makes up the fully diluted total, and it’s useful to be able to see this figure. The fully diluted total shows you the shareholding if the pool is used completely.

 It’s also used when calculating valuations and in funding rounds, as well as if you want to calculate how many options to give someone, if you know the % you want to give them. 

Is the option pool created for a specific share class or scheme type? 

No. When you grant options, you can determine the share class at that time, so the option pool itself isn’t tied to a specific class of shares. In your cap table, the option pool is usually represented in grey.

Likewise, the option pool authority on SeedLegals is not specific to a type of option scheme e.g. EMI or Unapproved. However it does specify that the authority is given for equity for the Company’s employees, advisors or consultants.