Option Pool

An option pool consists of the shares set aside by a company as stock options for its key employees and advisors. The purpose of the option pool is to create other forms of incentives for key employees to continue performing and be motivated on a longer term basis in the absence of cash payments. In the case of startups and young companies that do not have excess cash reserves, they can use option pools to attract talent to the company without having to pay out large sums of cash to that talent. The option pool is created pursuant to a formal stock option plan that is put together by the company and its lawyers, and the plan must be fully compliant with the rules of the Internal Revenue Code as to such plans. The employees who are granted options under such plans typically must hold the options until the occurrence of certain events or dates, at which point the options become available for the employees to exercise. Upon exercise, the employees pay the option price to the company and are awarded the underlying equity. Companies seeking to create an option pool should be careful to work with attorneys who have experience creating such pools, and who are familiar with the governing tax rules as to option pools.