Reserved Shares
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Reserved shares are equity set aside by an Irish company for future issuance, most commonly to populate an employee option pool during a funding round.
Reserved shares are equity set aside by an Irish company for future issuance, most commonly to populate an employee option pool during a funding round.
Reserved shares represent a portion of a company's share capital that has been authorised by the board but not yet issued to specific individuals or entities. In the context of an Irish startup, these are most commonly found within an option pool created to incentivise employees, advisors, or future hires. Unlike issued shares, which are currently held by shareholders, reserved shares sit in a state of readiness, waiting for the right moment to be converted into active equity.
From a legal perspective, these shares are part of the authorised share capital. This means the company has the legal right to issue them without needing further broad shareholder approval, provided the board acts within the limits set during the previous funding round. For founders, reserving shares is a strategic move that ensures they have the "currency" available to attract top talent as the business scales, without having to renegotiate the company constitution every time a new senior engineer or head of sales joins the team.
When looking at a cap table, it is vital to distinguish between "issued" and "fully diluted" views. Reserved shares do not appear on the issued share register because they have no legal owner yet. However, seasoned investors will always look at the fully diluted shares count. This calculation includes all shares that could potentially exist, including those reserved for options or warrants.
If a startup has a significant amount of reserved shares, existing shareholders must account for future dilution. For instance, if 10 percent of the company is reserved for an employee share scheme, the current founders effectively own a smaller piece of the "economic pie" even if their current voting power remains unchanged. Understanding this distinction is essential during a pre-money valuation, as the size of the option pool usually affects the price per share paid by new investors.
In Ireland, the management of reserved shares is governed by the shareholders agreement and the company's constitution. When shares are "reserved," the board is essentially granted an authority to allot these shares up to a certain limit. This authority is not permanent and is usually refreshed or modified during each funding round. It is a common requirement for investors to insist that an "unallocated" pool of reserved shares is maintained, ensuring the company can hire key personnel without diluting the incoming investor immediately after the round closes.
Administratively, keeping track of reserved shares requires diligent record keeping. While they are not yet registered with the Companies Registration Office (CRO), they must be clearly earmarked in the company's internal registers. If these shares are ever actually issued, the company must then file the appropriate forms, such as a Form B5, to notify the CRO of the new allotment. Failure to manage this properly can lead to a messy cap table, which can delay or even derail future fundraising efforts due to uncertainty over who truthfully owns what percentage of the company.
For an Irish founder, reserved shares are more than just an accounting entry, they are a recruitment tool. In a competitive market like Dublin or Cork, offering equity is often the only way a cash-strapped startup can compete with the high salaries offered by multinational tech giants. By reserving a specific share class for employees, founders can create a culture of ownership where every early hire has a vested interest in the long-term success of the business.
It is important, however, to balance the size of the reserved pool. Too small, and you run out of equity to hire key staff. Too large, and you face unnecessary dilution early in the company's life. Most Irish startups find that a reserve of 10 to 15 percent is standard for early-stage companies, though this will be negotiated heavily during investor meetings. Proper management of these shares ensures that the founder remains in control of their equity story while still having the flexibility to grow the team dynamically.
