Stock options are key to startups. Despite some larger companies adopting restricted stock award plans, options are still the way to go for startups. They are a vital recruitment, incentive and retention tool.

Share Reserve for Compensatory Stock Options

I was recently asked by a private company: Do I have to adopt a stock option plan with a share reserve in order to grant compensatory stock options?

The question was motivated by the concern that it was too early to put a stake in the ground regarding the size of a share reserve. You see, the founders didn’t know yet how many shares to reserve under a plan and didn’t want to establish a reserve that might be too large because that would then drive down the price per share in the company’s anticipated financing.