ESOP / Option Pool
ESOP
A pool of shares reserved for current and future employee equity compensation.
Definition
An Employee Stock Option Pool (ESOP), or simply 'option pool,' is a block of company shares set aside for grants to employees, advisors, and contractors. Options give recipients the right to purchase shares at a fixed strike price (typically the fair market value at grant date). Employees earn their options through vesting schedules. Most VCs require a 10–20% option pool be established before a priced round, which effectively dilutes existing shareholders.
Why It Matters
Equity compensation is the primary mechanism for attracting and retaining talent in startups that cannot compete on cash salary. A well-structured ESOP aligns employee incentives with company success. The option pool shuffle — requiring the pool to be created pre-money — is a common negotiating tactic that increases founder dilution.