An Option Pool is the reserve of equity (typically stock options, and sometimes RSUs) that a company sets aside to grant to employees, advisors, and directors as incentives. In venture rounds, the Option Pool size is negotiated because expanding the Option Pool dilutes existing shareholders, and the Option Pool is usually calculated on a fully diluted basis.
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 9,000,000 shares of common stock outstanding, it may elect to authorize 1,000,000 shares to be issued pursuant to the plan.
