From Erin, Paysa’s Equity and Compensation Expert
From the perspective of an employee, a large, unissued stock option pool could actually be a good thing. Let’s take a step back and discuss a few basics first.
When a company issues stock options to an employee it does so from a stock plan. The board and shareholders agree to dedicate a certain number of shares to be issued under the plan, that’s what we call a stock option pool (or sometimes just a stock pool). So the stock pool is a diminishing number that must be replenished from time to time by the board and stockholders.
When a stock pool is authorized, those reserved shares are included as part of the fully diluted capitalization of the company – or the total number of number of shares currently outstanding. Even though the shares in the pool are unissued, they have been set-aside for future employees and are therefor considered outstanding.
So what’s so great about this? For starters, a large pool often means the company is getting ready to grow. A company usually increases its stock pool in connection with a financing to accommodate the new employees it anticipates hiring. So if the unissued stock pool is still large when you join, that means you’re getting in at the beginning of this wave of growth.
The more important reason that a large pool benefits an employee, though, is dilution protection.
Dilution is what happens when the company issues additional shares and your ownership percentage decreases proportionately. Your ownership percentage is determined by dividing the number of shares you hold by the fully diluted capitalization of the company. For example, if you own 65,000 shares and the company has 13,000,000 shares outstanding, your ownership interest is 0.5%.
As already mentioned, the reserved but unissued stock pool is included in the fully diluted number. If there is a large pool, then the company won’t need to increase the reserve or issue stock option grants outside the plan so the fully diluted capitalization of the company should stay pretty stable and you won’t be diluted by the company’s growing employee base.
To learn more about dilution, including how a company financing affects your ownership, check out this article on Paysa.