Equity & options
Also called option pool, employee share option pool
An ESOP pool is a block of shares set aside for employee equity grants, normally 10% to 20% of a company's fully diluted capital, and where it sits in a term sheet determines who pays for it in dilution.
Pools are typically 10% to 15% at seed and are topped up at each subsequent round as hiring plans expand. The right size is derived from the hiring plan for the next 18 to 24 months rather than from a convention.
An oversized pool costs founders dilution for grants that may never be made. An undersized one forces a top-up at the next round, at a moment when the investor is setting terms.
Term sheets usually require the pool to be created or increased inside the pre-money valuation. That means the dilution falls entirely on existing shareholders, not on the incoming investor, even though the pool exists to hire people who will build value for everyone.
This is negotiable, and it is worth quantifying. A 10% pool created pre-money at an $8m pre-money valuation is worth $800,000 of founder dilution that a post-money pool would have shared with the investor.
Size it from the hiring plan for the next 18 to 24 months. That usually lands between 10% and 15% at seed, but a plan is a better basis than a convention.
If the pool sits in the pre-money, existing shareholders alone. If it is created post-money, the dilution is shared with the new investor. This is one of the most valuable points to negotiate in a term sheet.
They stay in the pool and can be granted later, or the pool can be reduced at a subsequent round, which returns that ownership to shareholders.
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