Stock options: shares reserved pool raises key issues.

• Author: Marshall, Jeffrey
• Position: BusinessBriefs

A company that is going public frequently lavishes executives and employees with potentially lucrative stock option grants at the time of the company's initial public offering (IPO)--grants that will be worth far more than their weight in gold if the company's stock experiences a run-up in share price.

But it gets even better for executives and eligible employees, says PricewaterhouseCoopers. Granting of gilded-edged stock options does not end at the time of the IPO, but is only the beginning. Executives and eligible employees can look forward to periodic grants of stock options for as long as the company remains public and they remain with the company.

This begs an obvious question, say consultants in PwC's human resource practice: Where do all the shares of employer stock come from to fund IPO stock options grants and post-IPO stock grants? The answer: From the "shares reserved" pool, which represents the number of shares of common stock that a public company specifically earmarks for purposes of funding stock option grants (or any type of equity compensation grant).

The number of shares set aside in this pool raises a host of critical and potentially controversial issues that must be dealt with by a going-public company, PwC says. These include:

* Shareholder dilution. Shareholders, particularly institutional shareholders, have become more sensitive to dilution issues raised by the size of shares reserved pools. The...