Employee Equity Pools: What are They & Why Do They Matter?

Written By: Jon Burg

The equity incentive pool is a key way for early-stage companies to reward their talent. As a company grows, it’s crucial that the equity pool grows simultaneously, and that the equity plan strategy adapts to allow a company to scale to its full potential.

We’ll take a closer look at why the equity pool matters and why it needs to grow, but first let’s make sure we’re clear on what exactly the employee equity pool is.

What is the Employee Equity Pool?

The employee equity pool, sometimes simply called the option pool or employee pool, refers to the shares that a company sets aside or reserves. The pool can be used to grant stock options or restricted stock, which are attractive incentives that help early-stage companies recruit, retain, and motivate their talent. 

Offering employees equity via an employee equity pool incentivizes them and aligns them with the success of the business. Plus, the shares can be offered in lieu of cash to compensate directors, advisors, consultants, and employees.

Why Does the Equity Pool Matter?

Since equity incentive pools are a current reflection on how much of your company you can retain, they affect nearly everything. 

A company using the equity pool to attract early hires needs to manage a delicate balancing act: maintaining a big enough equity pool to fill out the team, while not letting the pool detract from the ownership interest of founders and early investors. 

Simply put, equity pools are there to attract, retain and incentivize talent. You are offering employees an opportunity to own part of the company, which should align them to act like owners. But if the equity pool doesn’t grow with the company, certain headwinds can arise.

Why Should the Equity Pool Grow?

Anywhere between 5% and 25% of a company’s total equity is a normal option pool size. This means that as the market cap of the company grows, the equity pool should also grow in value. 
While creating an option pool is an excellent strategy for growth, an equity pool that doesn’t match the size of the company carries certain risks. It can dilute stock, change the share price, and even alter the company’s valuation. That’s why calculating the right size for your equity pool is so important.

Finding the Right Equity Pool Strategy for Your Company

An option pool that’s too small may not attract the talent you need, while one that’s too large can dilute your ownership. This is why it’s so important to find a trusted resource or firm, one that can guide you to finding the specific equity pool strategy that’s right for your company … and answer all of your questions along the way. 
At Infinite Equity, we offer equity pool guidance throughout the full cycle of growth for your company. We’ll help you use your pool to ignite a culture of ownership without excessive dilution, all while allowing your company to continue to scale. Reach out to us today.

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