How much ESOPs are Enough for Seed Round Funding?
- Kartikeyan Khator
- 5 days ago
- 3 min read
We often get this question from founders raising their maiden round from institutional investors – What should be the size of the ESOP (Employee Stock Option Plan) Pool to be created in seed stage?
Before we answer that, let’s quickly understand, why are ESOPs even required in the first place?
Great tech companies are built by great teams, not just founders. Startups are usually hard pressed for money and therefore attracting high quality talent solely with cash compensation becomes difficult. Attaching an ESOP component to employee compensation helps bridge below market salaries without compromising on the quality of the resource. It also gives an opportunity to the employees to own a piece of what they’re building – a shared purpose. For instance, Zomato’s listing on the Indian bourses in 2021 led to 18 dollar-millionaires, mostly thanks to ESOPs granted over the years.
Institutional investors increasingly insist on a clear ESOP policy and a right-sized pool, at the seed stage itself, before they invest, because it signals hiring readiness, ability to retain top quality talent, and cap-table hygiene. After seed stage, in most priced rounds, the investors usually also ask for a pre-money ESOP top-up, so the pool is expanded before their money comes in (i.e., primarily diluting existing holders, not the new investor).
To answer the main question, we went through the cap tables of 50 startups who raised their seed rounds between 2024 and 2025, here’s what we found out:
1 - Source: Startup Indian analysis based on cap tables of 50 Indian seed stage deals in 2024 and 2025
What are the other critical trade-offs while finalizing your first ESOP plan?
More often than not, in startups, ESOP plan implementation has become an outcome of fundraise from institutional investors rather than a conscious business decision. Nonetheless, once mandated, founders should make the entire implementation process more intentional. Each critical trade-off must be carefully decided considering the startups own use case. Here are the most important ones to consider:
Restrictive Exercise Plan vs. Free Exercise Plan
Time based vesting vs. Performance based vesting
Cliff, tenure and vesting structure – monthly vs. quarterly vs. yearly rests
Front ended vesting vs. Back ended vesting
At par exercise price vs. Discounted exercise price
What happens to this pool after it is created?
Remember, this is only a pool and not actual ESOPs granted. Over time, the management must decide which existing employees and new hires shall receive ESOPs, and then gradually roll out the grant letters. Employees, especially the ones hailing from tech background, have difficulty in fully understanding what ESOPs mean, therefore, develop a simplified communication template, through which you transparently disclose the most important terms, especially exercise norms and tax impact.
Bottom line
Treat your ESOP plan as a hiring tool – a way to attract and retain, and not a mere fundraising checkbox. Size the pool as per investor’s mandate or, if you have a choice, based on next 18–24 months requirement. Align grant bands to a real hiring roadmap, and communicate terms (vesting, exercise, tax) with clarity. Track pool usage (created → granted → vested → exercised → cancelled → available). Keep cap table on a fully diluted basis and include ESOP status in investor updates. Plan a refresh on the next round or when it drops below ~3–4%.
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This article featured in our Founder's Playbook which answers questions around startup fundraising - when, how much, at what price, and more. You can access the Playbook here.
