An option pool refers to a designated block of common shares set aside by a company to be issued as equity to individuals (and in some cases, business entities) who provide services to the company. This group can include employees, advisors, consultants, and independent contractors. While startups may not exactly be able to offer top-market salaries, the potential upside of early equity in a growing company can be an attractive incentive. Moreover, venture capital investors commonly expect startups to have an option pool to grant employee equity, making it an industry standard in the startup ecosystem.

In practical terms, the option pool is a block of Common Stock reserved for the company’s service providers. It is represented on the company's capitalization table and is depleted each time a service provider joins the company or receives a “top up” stock grant during their employment. Startups use the option pool to budget and reserve equity for future hires between funding rounds. This approach avoids the need for individual equity grants and the associated complexities and burdens. The option pool also enables current and future investors to understand the company's overall ownership structure and percentage they acquire when investing.

Although called an "option" pool, the equity granted from the pool can take various forms, including stock options, restricted stock awards (RSAs), and restricted stock units (RSUs). The size of the option pool and its formation are determined by the company's stock option plan, which outlines the number of shares reserved. The plan requires approval from the board of directors and shareholders and typically lasts for a specified period, such as ten years.