Glossary
An option pool is a portion of a company’s share capital set aside to grant share options to employees, directors or consultants, typically as part of an equity incentive arrangement. It represents potential future shares that may be issued if options are exercised.
An option pool is commonly created by early-stage and growth companies to attract, retain and incentivise key individuals. The pool is usually established before or during a funding round and is expressed as a percentage of the company’s fully diluted share capital.
From a founders’ perspective, creating or increasing an option pool reduces their percentage ownership because the pool is factored into the company’s capital structure. This dilution can occur even before options are granted.
In the UK, options granted from an option pool may form part of a formal share scheme such as an Enterprise Management Incentive (EMI) scheme. Where EMI options are used, HMRC valuation considerations often apply to determine the market value of shares at grant, particularly in venture-backed businesses.
Option pools therefore sit at the intersection of capital structuring, founder dilution, investor negotiations and tax-efficient employee incentivisation.
Key characteristics of option pool include:
A UK technology start-up raising external investment agrees with investors to establish a 10% option pool on a fully diluted basis. The pool is created before completion of the funding round. As a result, the founders’ percentage ownership reduces to reflect the enlarged share capital, even though no options have yet been granted. The company later grants EMI options to senior employees using shares reserved within that pool.
An option pool does not mean shares have already been issued to employees.
An option pool does not automatically qualify as a tax-advantaged scheme.
An option pool does not prevent further dilution in future funding rounds.
The size varies depending on hiring plans, growth strategy and investor expectations. Early-stage venture-backed companies often establish pools in the range of 5% to 15% of fully diluted share capital, although there is no standard percentage.
An option pool is a reserve of shares set aside for potential option grants. An employee share scheme, such as an EMI scheme, is the legal and tax framework under which options are granted. The pool provides the shares; the scheme governs the terms.
An option pool is created by shareholder approval to reserve a specified number or percentage of shares for future option grants. This may involve amending the company’s articles of association and updating its capitalisation table.
Yes. When measured on a fully diluted basis, the creation or expansion of an option pool reduces the percentage ownership of existing shareholders, even before options are exercised.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this glossary entry only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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