What is an option pool?

An option pool represents the share of a company’s equity that is reserved for allocation to employees, advisors, and other key individuals, but not yet assigned.

When a company grants employee stock options, it commits to issuing shares in the future through a directed share issue. However, only shareholders can approve a new issue, which means there is a theoretical risk that they could vote against the resolution required to deliver shares to option holders, leaving the company unable to fulfill its promise.

In Sweden, unlisted companies cannot hold a reserve of existing shares that are unallocated. Instead, the same effect is achieved if the shareholder agreement, or in some cases a board authorization, specifies a certain number of shares, employee stock options, or warrants (Sw. teckningsoptioner) that may be issued in the future. This ensures that the board has both the authority and the flexibility to deliver equity instruments to participants in an option program.

Regulating the option pool in the shareholder agreement

The shareholder agreement governs how a company is managed from the owners’ perspective, including how new shares may be issued. Shareholders are naturally concerned about dilution, but they can agree in the shareholder agreement to permit management to issue a defined number of shares to future employees.

For example, shareholders may approve the creation of an option pool equal to 10 percent of the total outstanding shares, and commit to voting in favor of such issuances at future shareholder meetings. To avoid misunderstandings, a complete ownership register or cap table is typically attached to the agreement, explicitly showing the size of the pool.

If the option pool is recorded in the shareholder agreement, signatories are contractually bound to support the issuance. A shareholder who votes against such an issue risks breaching the agreement and may become liable for damages, a risk that usually deters opposition.

Because shareholder agreements only bind their signatories, they must also include provisions requiring any new shareholder to adhere to the agreement as a condition of acquiring shares.

The shareholders' agreement only applies to those who have signed it. So what happens if the shareholders who have signed it sell their shares? This is resolved by including a provision in the shareholders' agreement requiring any new shareholder to adhere to the agreement as a condition of acquiring shares.

Creating a board authorization

In addition to regulating the pool in the shareholder agreement, shareholders may authorize the board to allocate and issue a defined number of warrants or shares to employees. Such authorizations are granted for one year at a time. With this mandate, the board can establish a warrant program and issue warrants to participants without convening an additional general meeting.

However, because these authorizations expire annually, they cannot be used to establish a multi-year pool of equity linked to employee option programs.

Conclusion

In Sweden, the concept of an option pool requires careful structuring within the framework of the shareholder agreement and, where applicable, board authorizations. While the mechanics differ from other jurisdictions, the objectives remain the same: to secure flexibility for management, to protect shareholders against unexpected dilution, and to ensure that employees and key contributors can reliably receive the equity incentives promised to them. Companies that address these issues proactively create stronger alignment among shareholders, boards, and employees, positioning themselves for sustainable growth.

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