27 Apr Employee Pool

Employee Pool

An employee pool consists of authorized stock in a corporation that is set aside by the corporation as a form of incentive compensation for employees in the corporation. The stock that is set aside is commonly referred to as stock options. The word pool is used because the stock that is set aside in all grouped together in a finite lump sum. For example, a corporation may authorize up to 10 million shares at its founding, issue out 7 million shares to its initial two or three founders, some shares of which may be subject the vesting, and then reserve a portion — perhaps 1 million — of the remaining 3 millions share for the employee pool. One of the advantages of creating an employee pool of stock options is that the creation of the pool allows a startup company to offer incentives to talented new hires that include something other than cash compensation. Startups are often short on cash reserves, of course. Employees who receive stock options often do not understand all of the obligations that come along with such equity. One important obligation is that, to exercise the options, the employee must pay a purchase price. In other words, the stock issued to the employee under the employee pool is not free; it comes with a price.