ESOP (Employee Stock Option Plan)
The formal, board-approved plan governing how a company grants equity compensation to employees and other eligible recipients.
An ESOP (in the startup context, distinct from the ERISA-regulated employee stock ownership plans used at some larger, often employee-owned companies) is the formal legal plan document, approved by the board and typically stockholders, that authorizes the company to grant options, RSUs, and other equity awards to employees, advisors, and consultants out of the reserved option pool.
The plan sets the overall rules — total shares authorized, eligible recipients, vesting defaults, exercise procedures — under which individual grants are then made to specific people over time, and it needs board approval to increase the total authorized pool as the company grows and needs more equity capacity for new hires.
Review the ESOP's total authorized pool against your actual hiring plan at least once a year, and go back to the board for an increase before the pool runs dry — running out of available option pool mid-hiring-cycle creates an awkward scramble that's easy to avoid with basic planning.
Who approves an ESOP and changes to it?
The board of directors approves the plan and increases to the authorized pool, and stockholder approval is often required as well, particularly for material increases to the total shares reserved.
Related terms
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