Option Pool

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Definition of 'Option Pool'

An option pool is a pool of shares of stock that are set aside by a company for future issuance to employees or service providers. The option pool is typically created when a company is first formed or when it raises capital from investors. The shares in the option pool are typically granted to employees over time, as they meet certain performance goals or milestones.

Option pools are used to attract and retain employees, as they provide employees with the opportunity to share in the company's success. Option pools can also be used to align the interests of employees with those of the company's shareholders.

There are two main types of option pools: incentive stock options (ISOs) and non-qualified stock options (NQSOs). ISOs are taxed at the favorable capital gains rate when they are exercised, while NQSOs are taxed as ordinary income when they are exercised.

The size of the option pool is typically determined by the company's size, its financial performance, and its growth prospects. The option pool can also be used as a tool to align the interests of employees with those of the company's shareholders.

Option pools can be a valuable tool for companies to attract and retain employees. However, it is important to understand the tax implications of option pools before granting them to employees.

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