How To Create ESOP Pool

Let’s design your ESOP pool strategically

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Content Overview

Let’s design your ESOP pool strategically

Quick Summary

An Employee Stock Option Plan (ESOP) pool is a designated reserve of company shares allocated for employees, serving as an incentive and retention tool. To establish an ESOP pool, founders typically allocate about 10-15% of the company’s total shares before fundraising, as this is tax-efficient and helps attract and retain talent with minimal cash outflow.

The creation of an ESOP pool leads to dilution of founder and investor shareholding at the time of creation of the pool.

Implementing an ESOP pool not only motivates employees by offering them a stake in the company’s success but also aligns their interests with long-term organizational goals.

Blog Content Overview

1 Sample cap table on a fully diluted basis :
2 Practical Insights

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

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.