What Is Equity Incentive Plan?

Equity incentive plan (stock plan) is the formal framework—typically a 2010 Stock Plan or similar—under which a company grants equity compensation from a reserved share pool.

How it works

The board and shareholders adopt the plan, setting:

• Share reserve (e.g., 5M shares or percentage of fully diluted)
• Eligible participants (employees, directors, advisors, consultants)
• Types of awards (ISOs, NSOs, RSUs, restricted stock)
• Administration by board or compensation committee
• Change-of-control acceleration rules (single vs double trigger)

Individual grant agreements reference the plan. Each grant specifies amount, strike price (from 409A), vesting schedule, and post-termination exercise windows.

At funding, investors often require increasing the plan reserve or confirming sufficient unallocated shares in the employee option pool.

Why it matters

• Founders: Cannot legally grant options without an approved plan. Setup early with counsel—retroactive fixes are painful and tax-risky.
• Investors: Term sheets include plan representations. Missing 409A or plan capacity blocks closing.
• Employees: Plan terms govern what happens in acquisition—acceleration, cash-out vs assumption of awards.

Common mistake

Granting options from a verbal promise before the plan exists. Fixes require expensive legal cleanup and may reset strike prices unfavorably for employees.

Related ideas

• Employee Option Pool — shares sourced from plan
• 409A valuation — strike price requirement (U.S.)
• EMI Options — UK parallel for tax-qualified grants
• Early Exercise — if plan allows