Ten percent is the number most founders end up with, and almost none of them chose it.
It arrives in a term sheet, it sounds reasonable, and by the time anyone works out what it actually costs, the round has closed.
What is an ESOP pool?
A block of shares set aside for employees before any option is granted.
Without one, every grant needs fresh shareholder approval. With one, the company hires and grants from a pre-approved reserve.
The pool appears on the cap table as reserved and unallocated, and it dilutes everyone the moment it is created, whether or not a single option is ever issued.
How much ESOP pool should a startup have in India?
Between 8% and 12% at seed, and 10% to 15% by Series A.
Stage | Typical pool |
Pre-seed | 5% to 10% |
Seed | 8% to 12% |
Series A | 10% to 15% |
Series B and beyond | 15% to 20% |
Indian company law sets no minimum or maximum. These are conventions, and a company running 6% or 18% is not doing anything unusual if the hiring plan supports it.
What moves the number is who you need to hire. A company that needs a CTO, a head of sales, and eight engineers in the next eighteen months needs more room than one hiring three mid-level people.
How do you calculate the right ESOP pool size?
Backwards from the roles, not forwards from a percentage.
List every hire you expect to make in the next eighteen months. Assign each a grant range by seniority. Add a margin for refresh grants to people already there. The total is your number.
If that comes to 8% and the term sheet says 15%, you now have a position. Without it, you are negotiating a percentage against a figure somebody else picked, which is not a negotiation.
When should the ESOP pool be created: pre-money or post-money?
Post-money is better for founders, and that is exactly why investors ask for pre-money.
When a pool is created pre-money, it comes out before the investor's shares are issued, so existing shareholders absorb all of it, and the investor's percentage is untouched. When it is created post-money, it sits on the enlarged share base, and everyone dilutes together.
Take a company raising ₹5 crore at ₹20 crore pre-money, which gives the investor 20% post-money. Now add a 10% pool.
Post-money: founders land around 72%, investor around 18%, pool 10%.
Pre-money: founders land at 70%, investor keeps a full 20%, pool 10%.
Two points moved from the founders to the investor, and nothing about the round changed except when the pool was created. Practitioners call this the option pool shuffle.
Most term sheets specify pre-money without anyone raising it, which is why it is worth reading for. And there is an argument to make when you do. If the pool is going in pre-money, you are paying today for hires that happen after the investor's money is already working.
Our guide on angel investor equity covers how the rest of the dilution maths works.
How to create an ESOP pool in India
Two approvals and one filing, in that order.
ESOPs are issued under Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
Board resolution approving the scheme document and the pool size, and calling a general meeting.
Shareholder resolution. A special resolution by default, though eligible private companies can pass an ordinary resolution under MCA notification G.S.R. 464(E) dated 5 June 2015. Many pass a special resolution regardless.
Form MGT-14 within thirty days of the shareholder resolution. Options granted before this filing lack legal validity, which surfaces during diligence at the next round and is difficult to fix retrospectively.
Two restrictions. Promoters cannot receive options, and neither can a director holding more than 10% of the company, with a limited exception for recognised startups. Independent directors are excluded as well.
Rule 12 also sets the minimum one-year gap between grant and vesting, covered in full in our guide on the vesting period.
What happens to unused ESOP pool?
It sits on the cap table, diluting everyone until somebody deals with it.
An unused pool is not free. It was carved out at creation, and if that happened pre-money, the founders paid for it. A 15% pool with 6% granted after two years means 9% of the company has been idle at founders' expense.
In practice, it either gets carried into the next round and counted against whatever the new investor asks for, which is the good outcome, or it gets topped up anyway because nobody checked the balance.
Before agreeing to any expansion, check what is actually granted. The number is usually lower than everyone assumes.
At PedalStart, the question we ask founders setting up their first pool is not how big it should be. It is who they are actually planning to hire, because that answer decides everything else.
Key takeaways
Pool sizes run 8% to 12% at seed and 10% to 15% at Series A, but nothing in Indian law requires either.
Build your number from the next eighteen months of hiring, before the term sheet arrives.
Timing costs more than size. A pre-money pool is absorbed entirely by existing shareholders, while a post-money pool is shared with the incoming investor.
Creating a pool needs a board resolution, a shareholder resolution, and Form MGT-14 within thirty days. Grants made before that filing are not legally valid.
An unused pool is not free. Check the balance before agreeing to a top-up.
Frequently asked questions
What is an ESOP pool?
A reserved block of shares set aside for employee stock options before any individual grant, so the company can issue options without seeking shareholder approval each time.
How much ESOP pool should a startup have?
Commonly 8% to 12% at seed and 10% to 15% at Series A in India. There is no legal minimum or maximum, so the right number follows from your hiring plan.
Should the ESOP pool be created before or after funding?
Investors almost always require it before, which means founders absorb the full dilution. A post-money pool spreads that dilution across all shareholders, including the new investor.
What is the option pool shuffle?
Creating the pool in the pre-money valuation so the incoming investor's percentage is protected while existing shareholders absorb all the dilution. The same pool size produces a materially different founder outcome depending on which side of the round it sits.
Who cannot receive ESOPs in India?
Promoters, directors holding more than 10% of the company, and independent directors. Recognised startups have a limited exception to the director restriction.
What approvals are needed to create an ESOP pool?
A board resolution, then a shareholder resolution, then Form MGT-14 within thirty days. Options granted before the MGT-14 filing are not legally valid.
Can the ESOP pool be increased later?
Yes, through the same approval process. It usually happens at a funding round, and investors typically want the top-up done pre-mone
