[Direct answer]The option pool is generally reserved for 10%-15% of the equity before the first round of financing, which is held by the founding shareholders on behalf of the company or by a limited partnership holding platform; the grant recipients, maturity period, exercise price, and exit repurchase are specified in a written option agreement and the articles of association, and the tax arrangements are made in accordance with the "Notice on Tax Issues Concerning Equity Incentive for Employees" (No. 101 of 2016). Beijing Henglue Law Firm\nCorporate Commercial TeamIt can assist in the design process. For more details, please refer to the following link:Beijing Henglu Law Firm.

1. Problem background and typical scenarios

When startups introduce institutional investors, investors usually require the founding team to reserve an option pool in advance to incentivize core employees and attract talent, with the proportion typically ranging between 10% and 15%. The option pool is expanded as financing rounds proceed. Typical scenarios include: several partners need to set aside incentive space for employees when allocating equity; adjusting the equity structure before financing to determine from whom the option pool will be diluted; disputes over the vesting period and repurchase price arising when employees leave after being granted options; and compliance issues encountered by companies with overseas structures in terms of nominee ownership and foreign exchange registration. The essence of the option pool is an incentive quota allocated from shareholder equity, which must address four questions: where it comes from, who holds it, how it is granted, and how it is exited. Any lack of written arrangements in any of these steps may lead to litigation during financing or personnel changes.

II. Key points of contention

  • The debate over the source and dilution: Whether the reserved proportion of the option pool should be diluted proportionally from the founding shareholders, or be transferred solely by the major shareholders, and how to allocate the expansion portion in subsequent financing rounds often lead to disputes among shareholders due to the lack of clear agreements.
  • Disputes over grant terms: The maturity period, exercise price, performance conditions, and buyback formula for resignation were not included in the agreement, and the employees and the company disagreed over the ownership of unvested options and exercised equity when the employees resigned.
  • The debate over holding methods: If the founder holds the shares on behalf of others, the validity of the holding agreement and the formal registration process may easily lead to disputes; if the shares are held by a limited partnership platform, it involves the rights and responsibilities of general partners and tax declaration, and if the structure involves overseas entities, there is also an obligation to register foreign exchange transactions.

III. Professional analysis by Henglue Law Firm

Judging from the equity disputes handled by Henglue Lawyers, the root cause of the vast majority of disputes is that the agreements are not put into writing and the actions do not follow through. In one equity investment contract dispute, the investor contributed 320,000 yuan and all parties signed an agreement to jointly establish a new company and operate offline campuses. However, after the campus had been in operation for years, the company was still not registered and established, and the investor's contractual objectives were frustrated. The court ultimately ordered the dissolution of the agreement and the return of the investment amount of 320,000 yuan, indicating that the equity and investment arrangements must be completed simultaneously with written signing and establishment actions. In another equity transfer dispute, the transferee paid the transfer amount in installments as agreed, but transferred the acquired equity to his spouse's name and refused to pay the remaining balance. Henglue Lawyers claimed that the transferee's actions constituted a breach of contract and anticipatory breach of contract according to Article 578 of the Civil Code, resulting in the advance maturity of all debts. The firm recovered more than 780,000 yuan for the client. Similarly, in option pool arrangements, the six stages of reservation, nominee holding, granting, maturity, exercise, and repurchase are interconnected. Each stage must have an agreement, supporting documents, and traceable records. Otherwise, when exiting the arrangement, the parties will only have to resort to litigation to resolve the issues.

IV. Practical suggestions and legal basis

At the legal and policy level: Article 162 of the Company Law, which was amended in 2023 and implemented on July 1, 2024, allows joint-stock companies to repurchase shares for employee stock ownership plans or equity incentives, providing a basis for listed and potential listed companies to directly reserve incentive shares; limited liability companies mainly rely on articles of association, shareholder agreements, and limited partnership shareholding platforms to achieve this. When making arrangements for personnel outside of shareholders, they must pay attention to the priority purchase rights rules in Article 84 of the Company Law, and the granting plan should be confirmed in writing by all shareholders. In terms of taxation, Document No. 101 of 2016 on Financial and Taxation Matters implements deferred taxation for equity option incentives in qualified non-listed companies. There is no taxation at the exercise stage, but taxation is imposed on the transfer of shares according to the income from the transfer of property. Listed companies must also comply with the proportion and procedural requirements of the "Measures for the Management of Equity Incentives for Listed Companies". Suggestions for enterprises: Determine the proportion and sources before financing and incorporate them into shareholder agreements; establish limited partnership platforms or sign written agency agreements; sign option agreements with each person, clarifying the maturity table, exercise price, and repurchase formula; handle foreign exchange registration simultaneously for overseas structures, and relevant arrangements can be referenced accordingly.Financial Capital | Foreign-related Cross-border ServicesAndIntellectual Property Protection | Corporate Legal Services.

5. Henglu Law Firm's Reminder

The value of the option pool design lies in anticipating future disputes and turning them into current clauses. In the aforementioned equity transfer dispute, it was precisely because there were no rigid constraints on the payment schedule and equity changes that the parties were forced to pursue their claims through litigation. The case was handled by the court.Xiong BinrongThe lawyer (practice license number: 11101202211410897, subject to the document issued by the judicial administrative organ) acted on behalf of the client and ultimately secured the creditor's rights of over 700,800 yuan in advance through the anticipatory breach of contract rule. It is recommended that the founding team hire lawyers and tax consultants simultaneously when establishing the option pool: first set the rules and then issue options; first sign an agreement and then raise funds; and set a time limit and a price formula for handling the options of departing employees to avoid prolonged litigation.

Q1: What is a reasonable percentage to reserve for the option pool of a startup company?

The common range is 10%-15%, which may be adjusted according to the talent competition in the industry and the financing round: For technology-intensive or early-stage companies that need to introduce a large number of core team members, they can reserve 15% or even 20%; for traditional industries or stable teams, it can be controlled within 10%. There is no legal upper limit for the proportion itself. The key is to clarify who will be diluted — it is usually recommended that the founding shareholders jointly transfer shares according to their holding ratios, rather than just one shareholder assuming the responsibility. If the reserved amount is expanded with the new round of financing, the expanded portion will also be allocated proportionally. These arrangements should be included in the shareholders' agreement and articles of association to avoid oral consensus being reneged on in the future. The specific proportion should be determined in combination with the financing plan and dilution calculation, with the assistance of a lawyer.

Q2: Is it more secure for the founder to hold the options pool directly, or is it better to establish a shareholding platform for this purpose?

Both approaches have their own applications. The founder's nominee holding structure is simple and low-cost, suitable for early-stage companies with a small number of employees and a slow pace of granting options, but it relies on the effectiveness of the nominee holding agreement. When employees become publicly listed, transfer or inherit shares, the procedures are cumbersome, and the nominee holder's divorce or debts may also affect the equity. Limited partnership holding platforms (usually with the founder serving as a general partner and employees as limited partners) have clear ownership and are easy to manage and repurchase, making them the mainstream approach. The downside is that the setup and maintenance costs are slightly higher. For companies with many employees, frequent financing rounds, or plans to go public, it is recommended to prioritize establishing a limited partnership platform and completing industrial and commercial registration as soon as possible; for early-stage companies with a small scale, at least a notarized nominee holding agreement and the retention of investment certificates are required.

Q3: How should unvested stock options be handled after an employee leaves the company?

The common practice in practice is that the option expires upon termination, and the unvested portion automatically becomes invalid, while the vested portion is repurchased according to the agreement. This rule must be clearly stipulated in the option agreement, including: the distinction of termination circumstances (termination due to fault, negotiated resignation, disability or death, etc.), the point in time when unvested options become invalid, the exercise window for vested options, and the repurchase price formula (such as discounting based on the most recent valuation round or based on the investor's capital plus fixed income). Without a written agreement, terminated employees may claim to cash out at market price or refuse repurchase, and the company will face a lawsuit for rights confirmation. It is recommended that the agreement also stipulate the obligation of employees to cooperate in handling the registration of equity changes and the penalty for breach of contract, so as to reduce the exit cost to a manageable range.

Q4: Will the option pool dilute the equity of existing shareholders? How can this be stipulated in a fair manner?

Yes. Regardless of who holds the option pool, exercising the options will dilute the existing shareholders' ownership ratios and the relative shares of all parties in subsequent financing rounds. It's fair to specify in the shareholders' agreement the reserved proportion of the option pool, the sources (founding shareholders transfer their shares according to their ownership ratios or a single founder assumes the responsibility), and the allocation rules for subsequent rounds of expansion; it's also important to clarify whether investors are required to reserve options before or after the investment, as the degree of dilution for founders differs significantly between the two. Additionally, it can be agreed that the ungranted portion of the options will revert to the founding shareholders. Writing these rules in black and white is much more effective than debating fairness afterwards, and it also makes it easier for investors to confirm them directly during due diligence.

Q5: How is the personal income tax calculated for equity incentives in non-listed companies?

Qualified non-listed company stock (equity) options may enjoy deferred taxation in accordance with the Circular of the Ministry of Finance and the State Taxation Administration No. 101 [2016]: Employees are not taxed when exercising their options to acquire equity, and the taxation is deferred until they transfer the equity. The taxable income from the transfer of equity shall be calculated based on the difference between the transfer income and the cost of acquiring the equity, after deducting reasonable taxes and fees, and be subject to a 20% tax rate. To apply this policy, the incentive recipients, the equity proportion, and the filing procedures must meet certain conditions, and the company must complete the filing within the prescribed time limit. If the conditions are not met, the taxation shall be calculated based on the wage and salary income, which will result in a significantly higher tax burden. Listed companies have special policies such as extending the tax payment period. It is recommended to calculate the tax burden when designing the incentive plan to avoid employees perceiving that the incentive is generous but the actual after-tax income is low.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, so as to avoid missing the statutory time limit. →Business and commercial legal services·Attorney Xiong Binrong·Beijing Henglue Law Firm