Control & governance
Employee option pool
Also called ESOP, Share option scheme
Shares reserved for issue to employees as options, giving them the right to buy at a fixed strike price and share in the company's growth.
In plain English
An option pool is how startups pay people they could not otherwise afford. An employee receives the right to buy shares at a strike price set today, usually the current market value of ordinary shares. If the company grows, the difference between the strike and the eventual value is theirs. If it does not, the options are worthless and cost the employee nothing but opportunity.
Pools run from roughly 10% to 20% of the company, with the size negotiated at each round. Grants vest on the same four-year, one-year-cliff pattern as founder shares, and unexercised options usually expire ninety days after an employee leaves — a provision that has caused a great deal of unhappiness, since an employee who has vested valuable options may be unable to fund the exercise cost and the associated tax bill within three months.
The strike price is set by an independent valuation of the ordinary shares, which is typically a substantial discount to the last preferred round price because ordinary shares lack the preferences, vetoes and protections that the preferred price paid for. In the United States this is a 409A valuation; other jurisdictions have their own equivalents.
Tax treatment varies enormously and materially affects how valuable options are to employees. The UK's EMI scheme is unusually generous; many jurisdictions tax at exercise on paper gains, which can leave employees with a bill and no cash.
What it means for your cheque
The pool dilutes you, and it is the dilution most worth accepting. A company that cannot attract good people because it has no equity to offer will not produce the outcome you invested for. The question is never whether there should be a pool but whether it is sized to a real hiring plan.
What to look for in diligence: how much of the existing pool is unissued, whether grants have actually been documented and board-approved rather than merely promised, and whether the company uses a tax-advantaged scheme where one exists. Undocumented promises are a cap-table problem that surfaces at the worst moment.
Do the arithmetic
What an early employee grant is actually worth
An employee joins at seed and receives options over 0.5% of the company, with a strike price set at the ordinary share valuation. The company exits at $300m six years later.
| Grant at seed | 0.5% of the company |
|---|---|
| Strike price | the ordinary-share valuation at grant — a fraction of the preferred round price |
| Position after four rounds of dilution | about 0.21% |
| Gross value at a $300m exit | about $630,000 |
| Less exercise cost and tax | varies by jurisdiction and scheme |
| If the employee left in year three | 75% vested, 90 days to exercise, cost payable in cash |
The upside is real and the 90-day exercise window is the trap. An employee who leaves before an exit often cannot fund the exercise, and forfeits options they genuinely earned.
At the table
What to negotiate
- Ask how much of the existing pool remains unissued before agreeing to a top-up.
- Check that grants are documented and board-approved, not promised in offer letters and never issued.
- Ask whether the company uses an available tax-advantaged scheme — EMI in the UK, and local equivalents elsewhere.
- Look at the post-termination exercise window. Extending it beyond 90 days is increasingly common and treats employees better.
- Confirm the strike price is supported by a current independent valuation.
Around the world
How this differs by market
ISOs and NSOs have different tax treatment; strike prices must be supported by a 409A valuation, typically refreshed annually or after each round.
LATAMEmployee equity is less established and often granted at the offshore parent, which creates tax and currency questions for local employees.
EUThe UK's EMI scheme is among the most generous employee equity regimes anywhere, with significant tax advantages. Most European countries have their own schemes with widely varying attractiveness.
APACSingapore and Australia have workable schemes. In several markets options are taxed at exercise on paper gains, which limits their usefulness as compensation.
Employee option pool: common questions
Why is the strike price lower than the last round price?
What happens to options when an employee leaves?
Should I object to a large option pool?
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