What is an options pool?
Imagine you are starting a company and are looking for a way to get talented people to work for you. An options pool is a way to attract these valuable workers and have them stick around. With an options pool you essentially reserve shares for the employees. Normally with an options pool you would reserve between 10-20% of the company’s shares. In the case the company does well the employees are able to purchase the shares that are reserved for them. By being able to purchase the shares of a successful company, employees profit in proportion to the company’s success.
The percentage of the stock or shares allocated to the employee is normally greater the younger the company is. The percentage is greater because of the increased level of risk the company has to fail earlier on than later.
The amount of the pool allocated to each employee can vary depending on position. Senior positions at the beginning of the company may easily be a large portion of the pool. Junior roles on the other hand will typically be less. This is because the level of skill and experience required for the senior positions and the overall effect that they will have on the company’s success.
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Advantages of an options pool
As discussed, options pools allow startup companies to attract talent when capital is scarce. Options pools also generally have a vesting period which means that there is a certain amount of time that needs to pass before the employee can sell their portion of the pool. This incentivizes the employees to contribute more to the health and growth of the company because when the vesting period is over and they are able to sell, they would have made more money if the company is worth more.
Another advantage with having an options pool is the lowering of potential losses. Let’s say your company goes bust and you had an options pool in place. Because you attracted employees with an options pool instead of paying a large amount of money as compensation, if the company goes under you would not have lost money to the degree you would have without it.
To learn more about the structure of an options pool click here.
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Conclusion
Options pools are a nifty way to entice top talent into your start-up company. Offering stock in a company is a good way to incentivize and encourage employees to promote the health and well-being of the company. The reduced need for capital and less risk makes options pools one of the go to choices for start-up companies. If you are considering starting up a company it is advisable you seek legal advice. Feel free to reach out to our expert business lawyers and get a free quote today.
