An option pool is an amount of a startup’s common stock reserved for future issuances to employees, directors, advisors, and consultants. These issuance typically take the form of stock options.
The option pool is created pursuant to a written plan in order to satisfy Rule 701 which provides a registration exemption from Section 5 the 1933 Securities Act. Via the written plan, a startup pre-authorizes a certain amount of the company’s common stock which will be issued by the plan’s administrator (usually the startup’s board of directors or a committee selected by the board). For example, if the startup has 5,000,000 shares of common stock outstanding, it may elect to authorize 1,000,000 shares to be issued pursuant to the plan. An option pool is typically created at each round of venture capital financing.