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June 14, 2026
The Dispatch

Definition

ESOP Pool

An ESOP pool is the block of equity a startup sets aside to grant as stock options to employees.

Startups reserve a percentage of equity — often 5-15% — as an Employee Stock Option Pool to attract and retain talent who would otherwise command higher salaries. Investors frequently require the pool to be created or 'topped up' before a round, which means the dilution from the pool falls largely on founders.

In India, ESOPs are taxed at exercise and again on sale, and rules differ for startups recognised by DPIIT. The size and timing of the ESOP pool is a recurring negotiation point in term sheets because of who bears its dilution.

Related terms

  • DilutionDilution is the reduction in existing shareholders' percentage ownership when a company issues new shares.
  • VestingVesting is the schedule over which an employee or founder earns the right to their granted equity or options.

Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.