What’s a typical option pool size for employees?
Wouldn’t it be awesome if your office had a pool for employees? You might be surprised to find out that it does! (Although it’s not exactly the kind you can dive into).
That’s because we’re talking about an employee option pool. This article will look at how to approach and size employee option pools.
First things first, what is an employee option pool?
A share option scheme is a way to give your employees equity in a private company.
In designing that scheme, you'll need to create an option pool which is an approved allocation of your company’s equity reserved especially for employees.
But while some companies may offer employees shares right away, options are a promise of shares yet to come - assuming that the employees fulfil certain requirements.
Understand the difference between shares and options.
The Enterprise Management Incentive is a prime (and popular) example of an employee share option scheme.
Why employee option schemes are useful
Allowing your employees to share ownership in your company can be an excellent way of aligning and inspiring them. Now, companies can issue shares with and without conditions, but in most cases, options are conditional.
In practice, this means employees must meet agreed milestones before they can access their full equity reward - such as working with a company for a set period of time or smashing performance-based goals.
You can also implement causes which state that if an employee fails to meet these conditions, their options will lapse. This is an effective way of incentivising employees to fulfil their obligations and preventing them from walking away with equity they didn't earn.
Typical option pool sizes
So, now that we’ve explored the function and benefits of employee option pools, let’s take a closer look at how they work in practice.
We talk about creating and designing your own option pool more comprehensively in this article - so do check it out.
But for the purposes of this blog, we’ll concentrate specifically on the ideal size for your employee option pool.
Sizing your option pool is more important than you might think. So, when you’re trying to decide on the ideal size for your employee option pool, it’s important to remember that this is not a decision to be taken lightly.
Option pools dilute your ownership
When a company issues new shares, it reduces the ownership percentage of existing ones. On the surface, this makes perfect sense, right?
Imagine you own 10,000 shares (100% of the company) and you create an option pool of 1,500 shares, you’d then own 87% of the company, not 100%.
Now, on the one hand, that’s just basic math. But it is a common concern among founders - when really, it shouldn't be.
Nonetheless, it's still an important fact to keep in mind when defining the size of your employee option pool. So, what’s the ideal size?
Choosing your ideal option pool size
It would be awesome if we could give you an exact number, but the reality is that the right option pool size will depend on you and your company.
You know how many employees and investors you have, how many shares you’re willing to give up, and how this will likely impact your company.
But we have devised tools to help you work out the amounts yourself.
Open up our equity sharing calculator alongside this article that will guide you through it.
And know this...
You don’t have to do what everyone else is doing
It’s only natural to look to others for advice. But it’s also important to remember that the strategies which work for other companies may not be an exact match for yours.
Comparing your pool to others may seem helpful when setting the parameters of your own pool, but this can occasionally cause you to miss the mark, dive into the pool at the deep end, and wind up over your head.
However, anywhere between 5-15% is considered a typical size for an employee option pool.
And within that, you can split employees into different brackets depending on when they joined and their level of expertise. Learn more.
The 5-10% rule is a benchmark to consider when setting your own parameters, but it’s vital to do your own research and assess it in relation to the specific needs of your business.
Be realistic and strategic
By the time you’re sizing your employee option pool, you’ve probably already realised that being realistic and strategic are crucial aspects of launching your own startup. And it’s important to keep that in mind during this phase as well.
Although you may feel pressure from investors to tailor your option pool according to the parameters that best suit them, remember that you have to be realistic about your own hiring needs, your company’s potential for growth, and the impact of an employee option pool.
How many people will you need to hire in the next 18-24 months? What kind of talent are you hoping to attract? What incentives will you need to attract them?
The answers to these questions will play a tremendous role in the size of your company’s employee option pool.
It’s also important to remember that if your company is relatively new, you may need to up the ante a little bit when it comes to your incentives. The talent market is competitive and your ideal employee may need a few extra reasons to see why they should work for you.
Creating an employee option pool is actually pretty straightforward (if you use a tool like Vestd). But the same can't always be said for defining its size.
Hopefully, this blog will serve as a starting point to help you decide what's right for your business. (It's one of six key questions to ask yourself before setting up a scheme).
When you're ready, why not have a chat with one of our equity specialists to see how easy setting up an employee option scheme can be?