When you are running a startup, there are many different things to focus on: product, customers, leads, employees, investors, marketing, CASH. With your attention being tugged in so many directions, it's easy to overlook some of the smaller things. Today's article will focus on one of those smaller things, the option pool. A lot of founders overlook the option pool because they don't understand its value. Let's take a look at why the option pool is important and how it can best be used to drive value for your company.
What is an Option Pool and Why Does it Matter?
An option pool is a block of shares set aside so that equity can be issued to people in the future. Simply put, your option pool is shares that don't have owners yet. These shares are part of your capitalization table and dilute from ownership just as if they had been issued to another person. For example, let's say you're the sole owner and your company has 1 million total shares. If you have 800,000 shares and your option pool has 200,000 shares then you only own 80% of the company even if you are the "sole" owner. If there is a liquidity event, like a sale or an initial public offering, then the shares in the option pool without owners get retired. Setting aside shares in an option pool is extremely easy and it's a super valuable tool for founders.
Now that we understand what an option pool is, let's look at some of its functions and value. The most common way an option pool is used is to attract quality talent. As I have said many times before in this blog series, owning a startup is a race against insolvency and cash is crucial. The option pool gives your company the ability to offer shares instead cash to get high quality people interested in working for you. You might not to be able to offer a salary like other mature companies, but what you can offer is upside. Options can also be used to recruit advisors or even groups that you need work from. For example you could get help from a high quality development team by offering them shares in your option pool. The option pool is a valuable tool that your company can leverage when cash is tight.
Summary
Setting up an option pool is an easy, but often overlooked, part of running a business. The option pool can be used to attract talent, advisors, outside services, etc. It is a valuable substitute for cash that startups are so desperately trying to cling onto. If you need help setting up and properly sizing your option pool, reach out to us at InfleXion Point. We are happy to help!
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