ESOP pool

Hello startupists!

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With Halloween just around the corner, it’s the perfect time to face your fears. Arguably, understanding legal terms can be a nightmare. That’s why we’re back with a new edition of our newsletter dedicated to turning legalese into a language people actually speak. Today, we’re diving into another investment term sheet topic – ESOP pool. And because this concludes our term sheet saga, get ready for a little gift at the very end. Without any further ado, let’s talk ESOP, shall we?

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What’s an ESOP pool?

An ESOP (Employee Stock Ownership Plan) is an employee benefit plan that allocates equity to employees, allowing them to own a part of the company. It’s designed to attract and retain top talent by giving people a stake in the company’s success.

An ESOP pool is the portion of company equity set aside for employees. Its size varies based on company stage and location. At seed, companies worldwide usually set aside 10 %. For US companies, this number usually goes up to 15 % at Series A and can go as high as 20–25 % by Series D.

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Why does this matter?

Getting the ESOP pool right is important for two reasons. First, it guarantees you have enough shares to attract and keep great employees. If the pool is too small, it will be hard to hire the best people. If the pool is too big, you could run out of shares early and won't have enough left for future employees. Second, a well-balanced ESOP pool allows you to adjust its size as your company grows.

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Dos and don’ts

Here’s what to consider when setting up your ESOP pool:

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Dos

• at seed, aim for an ESOP pool around 10% in Europe and 15% in the US
• plan ESOP pool size based on current team size and future hires
• review ESOP pool size with each new funding round

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Don'ts

• give away too much stock to early hires, you’ll need it for future employees
• forget to keep a buffer for unexpected scenarios
• skip explaining how the ESOP pool works and how equity is allocated (it builds trust in ESOP and the company)

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In a nutshell

An ESOP goes beyond employee compensation – it’s a great way to shape your startup's culture and growth. A well-planned ESOP pool is the way to keep it future-proof. Aim for market-standard size and be ready to review it as your company grows. Give away enough to motivate your team, but keep some for future hires.

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Want to know more about ESOP pool or any other investment related topic? We’re here to help! Reach out to our team or follow us on LinkedIn for more insights.

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Get a grasp of term sheet terms with our investment vocabulary and make sure you’re ready for successful negotiations! Read here.

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See you next month!

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