Employee stock option plan (equity incentive plan): how startups set one up

October 13, 2026

A startup’s “employee stock option plan” is really an equity incentive plan: a board- and stockholder-approved document that reserves a pool of shares for options and restricted stock for employees, directors, advisors and contractors. Adopt it when you incorporate, before the founders’ shares are issued, so shares are set aside for future hires. (It isn’t an Employee Stock Ownership Plan, which is a retirement plan.)

Key takeaways

Adopt the plan at incorporation. Westaway’s default is a pool of 1,000,000 shares out of 10,000,000 authorized.
The board adopts the plan, and the stockholders approve it within 12 months.
Every grant needs its own board approval at the 409A price.
Grants under the plan can only go to people providing services to the company.

What is an option pool?

The shares the plan reserves for grants. Most companies set it at 10% to 20% of fully diluted shares, depending on the hiring plan, and create it before the founders’ shares are issued so there are shares left to grant. See Employee Option Pool.

How is the plan approved?

The board adopts the plan and reserves the shares.
The stockholders approve it by written consent, within 12 months before or after the board adopts it. This is required for ISOs.

The plan is then loaded into the cap table platform, which won’t allow grants beyond the reserve. Each grant then needs its own board approval at the 409A price. See 409A Valuation.

Who can receive grants under the plan?

Employees, directors, consultants and advisors who provide real services. Investors, former service providers and vendors can’t. Founders usually buy their shares outside the plan, under their own stock purchase agreements.

How do I increase the pool?

The board and stockholders approve an amendment to the plan’s reserve. If there aren’t enough authorized but unissued shares, the charter has to be amended first. Investors usually require a pool increase as part of a priced round. See Negotiating an Option Pool.

See our Stock Option Plan service.