What Is an Option Pool?

The option pool is a part of the shares reserved for future introduction of senior talents before financing. If not reserved, it will lead to future senior talents. If they require shares, they will dilute the shares of the original entrepreneurial team, which will cause some problems. If the valuation before financing is 6 million, and the venture capital (VC) is 4 million, then the entrepreneurial team has 60% of the equity and VC has 40%. Generally speaking, the current entrepreneurial team reserves 20% of themselves for talents to be introduced in the future.

The equity period pool refers to reserve a part of the equity without diluting the original shares of the entrepreneurial team as a reserved share for the introduction of senior talents in the future;

The option pool is a part of the shares reserved for future introduction of senior talents before financing, and is used to motivate employees (including the founders themselves, executives, backbones, and ordinary employees).

Attract senior talent without giving high salaries in the early days of entrepreneurship;

Compensate the management and backbone entrepreneurial risks;

Give employees a sense of belonging and align the interests of employees and shareholders;

Solve long-term incentive issues and retain talent.

Silicon Valley's practice is to reserve 10% -20% of the company's entire shares as an option pool, and a larger option pool is more attractive to employees and VCs. VC generally requires the option pool to be established before it enters, and requires a certain percentage after it enters.

Generally, the board of directors decides which employees to issue and how many options to issue within the limits set by the option pool, and determines the exercise price; there are also direct authorizations to management.

Since each round of financing will dilute the equity ratio of the option pool, the option pool is generally adjusted (expanded) in each financing to continuously attract new talent.

The more important and deeply invested the company is, the more people will be allocated.

The earlier the risk of joining, the lower the exercise price. Generally, the exercise price of the same batch of employees is the same.

Mainly management and backbone employees, and some companies implement full employee incentives.

The company signs a contract with employees stating the following basic matters:

1)

There are two main situations:

Case 1: The contract is executed normally

At this time, the employee can exercise the vested option (Vested Option) at the exercise price agreed in the contract, and purchase the company's equity that does not exceed the total amount acquired. This right will remain in effect as long as the employee does not leave office;

Scenario 2: Employee departure

If employees leave after reaching the minimum effective period (Cliff) and before the IPO (listing), the option contract generally stipulates that the company has the right to repurchase this part of the option at an agreed price (called Call Right). Different Call Right clauses can be made for different reasons for leaving. The repurchase price should theoretically be the fair value at the time of the repurchase, but it can also be agreed to other prices, such as net assets per share.

If the company's equity changes in the process (including financing, share expansion, dividends, etc.), the amount of the options and the exercise price should be adjusted accordingly so that the value of the original rights does not change. The basic logic behind this is that the number of options and the exercise price reflect the value at the time the option was granted, not when it was exercised.

Company is sold or

Under the framework of Chinese company law, equity must correspond to registered capital, so equity cannot be reserved. Flexible approach:

1. Founder's behalf. When the company is established, the founder usually holds part of the equity (corresponding to the option pool). The company, the founder, and the employees sign a contract. When the company exercises the power, the founder transfers the employee to the employee at an agreed price.

2. Employee-owned companies. Employees hold shares in the target company through the holding company. It can avoid some inconveniences caused by employees directly holding company equity. This practice is generally used before listing in China.

3. Virtual stocks. A special account book is established inside the company, and employees enjoy corresponding dividends or value-added rights according to the stocks virtualized on the account book. Huawei's approach.

1) You cannot promise verbally.

2) Fully communicate with employees, make the information involved in the protection plan transparent, and make them have reasonable judgments and expectations about their rights.