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 :

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.

Disclaimer: The content of this document is for information purpose only and does not constitute advice or a legal opinion. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of this write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

Related posts:

Tax implications on ESOP in India ESOP FAQ