ESOP pool sizing: how big, and who really pays for the dilution?
Two questions decide what an ESOP pool really costs you: how big it is, and when it is created. Size it to your actual hiring plan, not a round number. And know that a pool created pre-money comes out of the founders' share, while a pool created post-money is shared with the new investor. That timing point, the “option pool shuffle”, can move real ownership by several percent, and it is negotiable.
An early-stage Indian startup is not required by law to have a pool. It needs one when it plans to grant options, and an Indian company grants them only under a scheme its shareholders approve. When the team sits in India, the UAE and the US, size one pool on the cap table of the company whose shares the options are over. After a Delaware flip, that is the US parent. The sections on one pool across three countries and the pool after the flip cover both.
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The short answer
An ESOP pool is the block of equity reserved for employee options. Investors want it large enough to hire the next team; founders want it no larger than needed, because every unallocated share still dilutes them. The two decisions:
- Size: map the senior hires for the next 12 to 18 months and the equity each expects, then set the pool to that, not to a habit like “10%”.
- Timing: decide, and negotiate, whether the pool is created pre-money or post-money.
Pre-money vs post-money pool, side by side
| Dimension | Pool created pre-money | Pool created post-money |
|---|---|---|
| Who bears the dilution | Existing shareholders, mostly the founders | Shared with the incoming investor |
| Effect on valuation | Lowers the effective pre-money below the headline | Headline and effective valuation stay closer |
| Who usually prefers it | Investors | Founders |
| What to watch | A large pool quietly discounts your valuation | Investors may resist; it is a negotiation |
Rough pool sizes by stage
| Stage | Common pool range | Why |
|---|---|---|
| Pre-seed / seed | Often around 10% | Room for the first senior hires and early team |
| Series A | Frequently topped up toward 10 to 15% | Refresh for the next layer of leadership |
| Series B and beyond | Topped up to the hiring plan | Sized to specific roles, not a percentage habit |
These are indicative ranges, not a rule. The right number is whatever your named hiring plan needs. Norms shift by market and investor, so treat percentages as a starting point, not a target.
Size it to the plan, not the percentage
The cleanest way to size a pool is bottom-up: list the senior roles you will hire before the next round, attach an equity band to each, add a buffer, and total it. That number, expressed as a percentage of the fully diluted cap table, is your pool. A pool set this way is defensible in a negotiation, because it maps to real hires, rather than a round figure an investor can push around.
The worksheet runs that sum role by role. If the team spans more than one country, build the list by country, because each country adds its own checks to the same total.
Does an early-stage Indian startup need an ESOP pool?
Not by law. A pool is the reserve for options, and you need it only when you intend to grant options. In an Indian company the route is section 62(1)(b) of the Companies Act 2013: shares to employees “under a scheme of employees’ stock option”, approved by shareholder resolution and subject to prescribed conditions. Section 2(37) defines the option as one given to directors, officers or employees of the company, its holding company or its subsidiaries.
The prescribed conditions turn the pool into a number your shareholders approve. In the 2014 text of Rule 12 of the Companies (Share Capital and Debentures) Rules, the explanatory statement to the resolution must state the total number of options to be granted and the maximum per employee and in aggregate (Rule 12(2)). A top-up beyond those figures therefore goes back to shareholders. Only the original 2014 text of Rule 12 could be checked for this page, so verify the current text before drafting.
A pool earns its place when the first senior hires want equity or an investor makes one a condition of the round. Until then, a scheme with no grants is paperwork with no purpose. The grantor, the instrument and who may receive options are set out on ESOP design for startups in India, the UAE and the US.
Salary and equity for early employees in India
Pay a salary that covers the person’s costs. Use options for the upside. Then put three things in the grant letter: the number of options, the exercise price and the vesting schedule. Under the 2014 text of Rule 12(6)(a), at least one year must pass between grant and vesting, so the first tranche vests no earlier than the first anniversary (verify the current text).
Show the employee the cash cost of exercising. Under the Income-tax Act 2025, in force from 1 April 2026, an option is taxed in India on exercise as a salary perquisite (sections 17(1)(d) and 17(4)(h)). An employee who takes a lower salary for more options takes on that tax bill too. Whether an eligible start-up can defer the tax is on ESOPs for Indian employees after the Delaware flip; the tax comparison of ESOPs, SARs and phantom shares is on ESOP design.
The shuffle, and why timing is money
When an investor asks for a pool to be created pre-money, the new option shares are carved out of the pre-money valuation, so the dilution falls on the existing shareholders, which is mostly the founders. The headline valuation looks unchanged, but your effective valuation is lower. Creating the pool post-money spreads that dilution. Neither is wrong, but the difference is real ownership, so it belongs in the term-sheet conversation, not the fine print.
Pre-money vs post-money pool: a worked example
The founders own the company before the round. An investor puts in USD 2,000,000 at a USD 8,000,000 headline pre-money, so the investor buys 20 percent. The term sheet asks for a 10 percent unallocated pool after closing.
| After closing | Pool created pre-money | Pool created post-money |
|---|---|---|
| Founders | 70% | 72% |
| Investor | 20% | 18% |
| Unallocated pool | 10% | 10% |
| Founders’ effective pre-money | USD 7,000,000: the pool is carved out of the headline | USD 8,000,000 at closing; the pool then dilutes everyone |
Illustrative arithmetic only, not market data and not an Infinilex figure. With a 15 percent pool the gap widens: 65 percent for the founders with a pre-money pool against 68 percent with a post-money pool.
ESOPs across borders
If your structure spans India and the US, the pool question gets a second layer: which entity grants the options, how they are taxed for the employee, and how a later flip treats the existing grants. An LLP cannot run a normal option pool at all, which is one more reason the vehicle you choose matters; see Pvt Ltd vs LLP vs C-corp. Design the pool with the structure in view, not after.
The two sections below take the sizing side of that question. The grantor and instrument for each country are on ESOP design.
Sizing one pool for a team in India, the UAE and the US
Keep one pool and one number, on the cap table of the company whose shares the options are over. Build it bottom-up from the hiring plan, country by country. Where each hire sits does not change the method. It changes the checks around the number.
| Hire and grantor | Rule that touches the size | What to do when sizing |
|---|---|---|
| India hire, Indian company grants | The resolution states total options and per-employee and aggregate maximums (Rule 12(2)); a grant to an identified employee of one percent or more of issued capital in a year needs a separate resolution (Rule 12(4)(b)). 2014 text; verify the current rule | Put the full hiring-plan number in the resolution, and flag senior grants near one percent before the offer letter |
| UAE or US hire, Indian company grants | Grants to employees of a subsidiary or holding company need a separate shareholder resolution (Rule 12(4)(a), 2014 text) | Pass that resolution with the pool, not hire by hire |
| India hire, foreign parent grants | Shares under a foreign ESOP are overseas portfolio investment while the holding does not exceed 10 percent of paid-up capital and gives no control (OI Directions, paragraph 22(2)); there is no separate cap on the ESOP remittance itself, but it counts towards the employee’s LRS limit of USD 250,000 a financial year (paragraph 22(7)) | Model the exercise cost of the largest grants against one year’s LRS headroom |
| US hire, Delaware parent grants | Rule 701 counts options as sold on the grant date, valued at the exercise price, against a twelve-month ceiling: the greatest of USD 1,000,000, 15 percent of total assets or 15 percent of the class (17 CFR 230.701(d)) | Check a large refresh against the twelve-month count before the board approves it |
| UAE hire, any grantor | The UAE does not levy income tax on individuals (u.ae taxation page, undated; read 6 October 2026); which entity can grant equity depends on where the employer is licensed | If UAE staff hold cash phantom units, count those units against the same pool so the economics stay in one place |
Two mistakes recur. The first is sizing the pool as a percentage of the Indian company and then flipping, so the percentage is quoted on the wrong cap table. The second is a separate pool per country that together add up to more than the board agreed. One pool with country-level allocations avoids both.
The ESOP pool after a Delaware flip
A Delaware flip moves the pool question to the parent. Granted Indian options are exchanged for parent options, and the parent plan sets the new pool. Size it in four steps:
- Carry across what exists. Count every granted Indian option at the swap ratio, plus the unallocated balance you still need. Retire the Indian ledger once the mirror grants are made, so no option is counted twice.
- Add the hiring plan by country. Indian, UAE and US roles go into one parent pool, sized as a percentage of the parent’s fully diluted capital.
- Check the twelve-month count. Mirror grants are option grants by the parent, and Rule 701(d)(1) counts options as sales on the grant date, so the mirror and the first US grants can fall in the same twelve months.
- Expect the shuffle again. The parent’s first priced round reopens the pre-money or post-money question, now on the parent’s cap table.
The mirror grants, Form OPI, funding the exercise and the employee’s tax are on ESOPs for Indian employees after the Delaware flip; this page does not repeat them.
Sources read 6 October 2026: Companies Act 2013 (Gazette, 30 August 2013), sections 2(37) and 62(1)(b); Companies (Share Capital and Debentures) Rules 2014, G.S.R. 265(E) of 31 March 2014, Rule 12 in its original text; Income-tax Act 2025 (Gazette, 21 August 2025), sections 1(3), 17(1)(d) and 17(4)(h); RBI FEM (Overseas Investment) Directions 2022 (22 August 2022), paragraph 22; RBI Master Direction on LRS (updated 6 September 2024); 17 CFR 230.701 (1 April 2025 edition); u.ae taxation page (page undated; read 6 October 2026).
What we check on the cap table
- Hiring plan: the named roles and equity bands the pool is meant to cover.
- Timing: whether the pool is pre-money or post-money, and what that does to founder ownership.
- Grant entity and tax: which company grants, and how options are taxed for employees.
- Later rounds: how the pool refreshes, and how a flip carries existing grants.
- Country checks: the Rule 12 resolutions for an Indian grantor, the Rule 701 twelve-month count at a Delaware parent, LRS headroom for Indian holders of parent options, and phantom units for UAE staff counted against the pool.
Frequently asked questions
How big should an ESOP pool be?
Size the pool to your actual hiring plan for the next twelve to eighteen months, not to a round number. Early-stage pools are commonly around ten percent of the cap table, but the right figure depends on how many senior hires you need and what equity each will expect. Ranges vary widely, so map the hires first.
What is the option pool shuffle?
It is the practice of creating or topping up the ESOP pool pre-money, before an investment closes. Because the new shares come out of the pre-money valuation, existing shareholders, usually the founders, bear the dilution rather than the incoming investor. It lowers the effective pre-money valuation below the headline number.
Does the ESOP pool dilute founders or investors?
It depends on when the pool is created. A pool created pre-money dilutes the existing shareholders, which is mostly the founders. A pool created or counted post-money is shared more evenly with the new investor. This single timing point can move real ownership by several percent, so it is worth negotiating.
Should the ESOP pool be created before or after the round?
Investors usually prefer it created pre-money, so founders absorb the dilution; founders prefer it post-money, so it is shared. There is no universally correct answer, but you should know which one is on the table, size the pool to a real hiring plan, and negotiate the timing deliberately rather than accepting the default.
Can you increase the ESOP pool later?
Yes. Pools are commonly topped up at each round as the team grows, and a later increase can be negotiated like any other term. The trade-off is that every top-up dilutes the cap table again, so it is better to size each pool to a real plan than to over-provision early or scramble to refresh mid-hire.
What is the difference between a pre-money and a post-money ESOP pool?
A pre-money pool is created before the investment closes and sits inside the pre-money valuation, so only the existing shareholders, usually the founders, are diluted. A post-money pool is created or counted after the money comes in, so the new investor shares the dilution. On a USD 2,000,000 raise at a USD 8,000,000 headline pre-money with a 10 percent pool, the founders keep 70 percent with a pre-money pool and 72 percent with a post-money pool. That is illustrative arithmetic, not a market figure.
Is an ESOP pool necessary for an early-stage Indian startup?
No law requires one. You need a pool only when you plan to grant options, and an Indian company can grant them only under a scheme its shareholders approve under section 62(1)(b) of the Companies Act 2013. A pool earns its place when the first senior hires want equity or an investor makes it a condition of the round. If no one will be hired against equity in the next twelve to eighteen months, say so in the term sheet and size the pool later.
How do I compensate early employees with salary and equity in India?
Pay a salary that covers the person's costs and use options for the upside. Grant from a shareholder-approved scheme and put the number of options, the exercise price and the vesting schedule in the grant letter. The 2014 text of Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules sets at least one year between grant and vesting; verify the current text. The employee is taxed in India on exercise as a salary perquisite (sections 17(1)(d) and 17(4)(h) of the Income-tax Act 2025), so show them the cash cost of exercising before they trade salary for options. The tax comparison of ESOPs, SARs and phantom shares is on the ESOP design page.
How do you size an ESOP pool when the team is in India, the UAE and the US?
Size one pool on the cap table of the company whose shares the options are over, built from the hiring plan country by country. Then run the local checks. In an Indian company the shareholder resolution states the total options and the per-employee and aggregate maximums, and grants to staff of a subsidiary or holding company need a separate resolution. At a Delaware parent, Rule 701 counts options as sold on the grant date against a twelve-month ceiling. For UAE staff on cash phantom units, count those units against the same pool.
What happens to the ESOP pool after a Delaware flip?
The pool is reconstituted at the Delaware parent. Granted Indian options are exchanged for parent options, and the parent plan sets the new pool. Size it to the combined Indian, UAE and US hiring plan, retire the Indian ledger so no option is counted twice, and expect the pre-money or post-money question to return at the parent's first priced round. The mirror grants, Form OPI and the employee's tax are covered on the ESOP after the flip page.
Sizing a pool, or reading a term sheet?
Send us your hiring plan and the term sheet, and we will size the pool to real hires, model the dilution both ways, and tell you what to negotiate before you sign.
Thirty minutes with Prashant Sharma, the founder, who does the work himself. You leave with next steps either way. Email is read by the founder and answered within one working day.
This article is general information for founders, not legal, tax or financial advice for your specific cap table. Market norms and tax treatment of ESOPs across India and the US change; confirm every point against current law before relying on it. The right pool depends on your hiring plan, your structure and your round. Have the cap table modelled before you sign a term sheet. The sections on Indian startups, salary and equity, one pool across three countries and the pool after a flip were added on 6 October 2026 and are stated as at that date.