Understanding Pools and Plans in
Employee Incentive Plans (ESOP).
Pools
A pool in a business context refers to a block of shares reserved by the company for future issuance to employees, advisors, and other stakeholders—either as stock options, stock, warrants or as phantom shares. This element is a critical part of employee incentive plans, designed to attract and retain talent by offering equity participation in the company’s growth.
How Pools Work When a company creates a pool, it reserves a percentage of its shares for future allocations. Employees receiving stock options gain the right to purchase company shares at a predetermined price, known as the exercise price, after a certain vesting period. On the other hand, phantom pools allow employees to benefit from the company’s growth without actually owning shares, as they offer bonuses tied to the valuation of the company. Both types of pools—whether stock options or phantom shares—align the employees’ interests with the success of the company, as the value of their benefits increases as the company’s valuation grows. At Capboard, pools aren’t limited to a single type; instead, multiple pools can be created and different types of incentive plans can be defined, including: Stock Options: These allow employees to purchase company shares at a fixed price after a vesting period. Stock Plans: These grant employees actual shares of the company, typically subject to certain restrictions such as vesting schedules. Phantom Shares: These are bonus plans tied to the valuation of the company’s shares, enabling employees to benefit from growth without owning actual shares. Warrants: Warrants are financial instruments giving holders the right to purchase company shares at a specific price within a certain timeframe, often issued to investors, advisors, or board members as part of funding agreements or compensation packages. The size of an option pool varies based on a company's stage, hiring plans, and specific needs. Early-stage startups might allocate around 10% of their total shares to the option pool, while later-stage companies could set aside up to 20%. It’s essential to tailor the pool size to your company’s anticipated hiring needs until the next funding round. Over-allocating can lead to unnecessary dilution for founders, while under-allocating may result in insufficient equity to attract key talent. During investment rounds, investors often require companies to expand their pools to ensure sufficient equity is available for future hires. The timing of this expansion can significantly impact both founder and investor ownership percentages. Creating the pool pre-money means the dilution primarily affects founders, while creating it post-money shares the dilution between founders and investors. Careful planning and negotiation are essential to balance these interests. Let’s consider the following scenario: A startup has 1,000,000 shares outstanding. The company decides to create an option pool of 15% before raising a funding round. Step 1: Calculate the Pool Size Step 2: Adjust Ownership Percentages Founder A: 600,000 shares (60%) Founder B: 400,000 shares (40%) After the pool creation: Founder A: 600,000 shares (51.43%) Founder B: 400,000 shares (34.29%) Option Pool: 150,000 shares (15%) The creation of the pool dilutes the founders’ ownership. However, this is a necessary step to ensure the company can offer equity incentives to future employees and key contributors.
Standard Size of an Option Pool
15% of 1,000,000 shares = 150,000 shares allocated to the pool. In Capboard, the platform automatically calculates the number of shares needed for the pool, streamlining the process and reducing manual errors.
Before the pool creation:
At Capboard, we provide tools for the management and implementation of various incentive plans. Our platform helps:
Create and manage stock options and stock plans with automated calculations and vesting schedules.
Track and report on phantom shares and profit-sharing plans.
Simulate the impact of different incentive plans on your cap table.
By using Capboard, you can streamline the process of designing and managing incentive plans, ensuring transparency and alignment with your company’s goals.