How To Create ESOP Pool
Written By
Rohit Gandhi, Jitesh Agarwal
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AI Summary
- An ESOP pool is a set of shares set aside on the cap table for issuance to employees under an ESOP scheme, and creation of the pool dilutes the shareholding of existing founders and investors.
- Shares in the ESOP pool are not actually issued at creation; they are notional shares carved out and reflected only on the fully diluted cap table.
- In the sample cap table, two founders holding 5,000 shares each (50 percent apiece) on a base of 10,000 shares see their percentage holding reduced once an ESOP pool is carved out, even though the pool itself has zero shares issued.
- Founders typically create an ESOP pool of 10 to 15 percent of the fully diluted capital at the outset.
- As the company raises successive funding rounds, the ESOP pool typically dilutes down to approximately 3 to 4 percent.
- Mature investors often require founders to create the ESOP pool before the investment round closes, so that the investors' own stake is not diluted by pool creation in later funding stages.
- Creating an ESOP pool requires only the passing of a simple board resolution, with no requirement for a special resolution or shareholder approval at this stage.
- Investors commonly impose ESOP pool creation as a pre-investment condition, which founders should factor into cap table planning and valuation negotiations before term sheet execution.
- A sample cap table illustrating ESOP pool creation is available for reference, which founders can use as a template while structuring their own pool.
Blog Content Overview
Often founders are confused about creating an ESOP pool on the cap table when investors require them to create one before making the investment.
- An ESOP pool is a set of shares earmarked for the company’s employees – which will be issued to them under ESOP Scheme.
- Creation of ESOP pool leads to dilution of founder and investor shareholding at the time of creation of the pool.
- The shares forming part of the pool are not issued yet. They are just notionally carved out shares which are represented on the fully diluted cap table of the company.
Sample cap table on a fully diluted basis :
| Shareholder | Pre-ESOP | On creation of ESOP pool |
| # of shares | % shareholding | |
| Founder 1 | 5,000 | 50% |
| Founder 2 | 5,000 | 50% |
| ESOP Pool* | – | – |
| Total | 10,000 | 100% |
These are just notional shares and not issued to any employee benefit trust*
We have also created a sample cap table with an ESOP pool for your ready reference: Click to know more https://bit.ly/3pYF4zH
Practical Insights
- Founders typically create an ESOP pool of 10-15%. As the company grows and raises rounds of funding, the ESOP pool dilutes to approx. 3-4%
- Mature investors usually ask founders to create an ESOP pool before making investment so that their stake does not dilute during later stages of funding
- Creation of an ESOP pool only requires passing of a simple board resolution.
About the Author
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Rohit Gandhi
Senior Associate | Tax & Regulatory | rohit.g@treelife.in
Specializes in financial due diligence, valuations, business structuring, and income tax advisory. Contributes to the Financial Advisory team by helping startups and businesses make informed strategic decisions.
Jitesh Agarwal
Founder | jitesh@treelife.in
Leads the VCFO, finance tax, and regulatory functions at Treelife. Responsible for the firm’s non-operational growth and providing strategic advisory in GIFT City, helping clients navigate complex regulatory landscapes effectively.
We Are Problem Solvers. And Take Accountability.
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