Founders9 min read

How Big Should Your ESOP Pool Be? A Guide for Indian Founders Hiring Their First Team (2026)

Cleya Team

Founder Guides · 8 November 2026

Your first engineers and operators are taking a risk by joining you instead of a company that pays more. Stock options are how most startups share the upside with them. But an ESOP pool is also dilution, and the size, timing and terms you pick at pre-seed and seed will follow you into every later round.

This guide covers how ESOPs work for an Indian private company, how founders and advisers think about pool size, how grants for first hires are usually sized, vesting and cliffs, tax at exercise and at sale, and the mistakes that come up most often. Where we give a range, we say whose range it is: the sources below don't all agree, and there is no single "market" number.

This is general information, not legal or tax advice. ESOP rules and tax law change, and the right scheme depends on your company and your people. Have a company secretary or lawyer draft the scheme, and a chartered accountant advise on valuation and tax.

How ESOPs work for an Indian private company

The legal basis. Section 62(1)(b) of the Companies Act, 2013 lets a company with share capital issue further shares to employees under an employee stock option scheme, subject to a special resolution of shareholders and to conditions that are prescribed. For unlisted companies, those conditions are in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. Listed companies follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 instead, so if you're a private company, Rule 12 is the rule book you need.

The life of an option. A grant gives an employee the right to buy a number of shares at a set exercise price. The options vest over time. Once vested, the employee can exercise them by paying the exercise price, at which point the company issues the shares. Until then, Rule 12 says employees have no right to dividends or to vote on those shares, and options can't be transferred, pledged or mortgaged.

Who can receive options

Under Rule 12, "employee" covers:

•permanent employees working in or outside India;

•directors, including whole-time directors, but not independent directors; and

•employees of certain group companies (part of this clause has since been amended, so check the current text if you plan group-wide grants).

Rule 12 excludes:

•employees who are promoters or belong to the promoter group; and

•directors who hold, directly or indirectly, more than 10% of the company's equity shares.

The startup exception. For a startup company, those two exclusions don't apply for up to ten years from incorporation or registration. In practice, this lets a startup that meets the government's definition of a startup grant options to its founders and to directors who hold more than 10%. Check that your company still meets the startup definition before relying on this, and remember the window closes.

The rules your scheme must follow

Rule 12 sets out the key conditions for an unlisted company:

•Shareholder approval by special resolution. The notice must disclose, among other things, the total number of options, who is eligible, the vesting terms, the exercise price or formula, the lock-in, how the shares will be valued, and the conditions under which options lapse.

•A minimum one-year gap between grant and vesting. No option can vest within a year of being granted.

•Freedom on exercise price and lock-in. The company can set the exercise price, in line with applicable accounting policies, and can choose the lock-in period for shares issued on exercise.

•Death and permanent incapacity. All options granted vest immediately, in the employee or in their legal heirs or nominees.

•Leaving the company. On resignation or termination, unvested options expire. Vested options can be exercised within the period the scheme specifies.

•Records. The company keeps a register of options in Form SH.6, and the Directors' Report discloses options granted, vested, exercised and lapsed.

How big should the pool be?

There is no legal minimum or maximum. Treelife notes that pool size is a negotiated commercial term. What sources do publish are rough ranges, and they differ:

Source	Pre-seed / seed	Series A
Treelife, ESOP pool size benchmarks	8–12% (created pre-money)	12–15%
King Stubb & Kasiva	5–10% (seed)	10–15% (pre-Series A)
Treelife, term sheet negotiation guide	10–15% (seed, founder-friendly if post-money)	12–18%

All of these are percentages of the company on a fully diluted basis. Qapita quotes two founders and advisers suggesting a pool of around 10% as a starting point by Series A.

Why the ranges differ: the answer depends on how many people you need to hire before your next round, how senior they are, and how much cash you can pay. That's why both Treelife and King Stubb & Kasiva recommend sizing the pool from your hiring plan rather than copying a benchmark.

Size it from your hiring plan

Treelife's bottom-up method is simple enough to do in a spreadsheet:

List the hires you expect to make in the next 18–24 months, grouped by level.
Multiply each group by a typical grant size for that level.
Add a buffer for unplanned hires and retention grants. Treelife's worked example uses 25% of the subtotal.
Round to a clean number.

The result is a number you can defend when an investor asks for a bigger pool. If an investor wants 15% and your plan supports 9%, the plan gives you something concrete to negotiate with.

Pre-money or post-money: the hidden question

When an investor asks for a pool to be created as part of a round, when it's created matters as much as its size.

•Pre-money pool: created before the investor's shares are issued, so only existing shareholders, mostly the founders, are diluted by it. King Stubb & Kasiva and Treelife both say investors generally prefer this.

•Post-money pool: created after the investment, so the investor is diluted too. Founders generally prefer this.

Treelife's example shows the gap: with a 15% pool and a 20% investor, founders end up with 65% if the pool is pre-money and 68% if it's post-money. Our pre-seed term sheet guide covers how this shows up in the term sheet.

How grants for first hires are usually thought about

There's no formula, but Treelife publishes illustrative single-grant ranges for Indian companies, as a percentage of the company on a fully diluted basis:

•Co-founder-equivalent hire before Series A: 1.0–3.0%

•VP or director: 0.4–1.0%

•Senior manager or team lead: 0.15–0.4%

•Mid-level individual contributor: 0.05–0.15%

•Junior or early career: 0.01–0.05%

Treelife notes these vary by sector, city and hiring market. A few principles help:

•Earlier joiners usually get more, because they take more risk.

•Think in percentages and in rupees. Tell people both what share of the company they're getting and what the options are worth at the latest valuation, minus the exercise price. Don't promise what they'll be worth later.

•Be consistent. Grants for similar roles at similar times should look similar, or the first awkward conversation about them will be with your team.

•Separate co-founders from first hires. Someone who would be a co-founder in all but name is a different conversation. Our co-founder guide covers how to approach it.

Vesting and cliff

Treelife describes four years with a 12-month cliff as the market default for Indian startups: 25% vests at the cliff, and the rest vests monthly or quarterly over the remaining three years.

The cliff fits neatly with Rule 12's one-year minimum between grant and vesting. One detail many founders miss: the year runs from the grant date, not the joining date. Treelife's example: an employee who joins and is granted options three months later first vests at month 15 of service. If you want the clock to start on day one, grant on day one.

Two other terms to settle in the scheme:

•Exercise window after leaving. Rule 12 lets the scheme set how long a leaver has to exercise vested options. Treelife says it is commonly 90 days. A short window can force people to pay the exercise price and tax just to keep their options.

•Good leaver and bad leaver. Neither term is defined in the Companies Act, so your scheme must define both, according to Treelife.

Tax: at exercise and at sale

The Income-tax Act, 2025 came into force on 1 April 2026 and replaced the Income-tax Act, 1961. King Stubb & Kasiva's summary says the two-stage structure for ESOP tax has been kept, though the sections have been renumbered.

At exercise. The employee is taxed on a perquisite under "Salaries": the fair market value of the shares on the exercise date minus the exercise price. The employer ordinarily deducts tax at source. This means the employee owes tax before they've sold anything. For an unlisted company, Treelife notes that each exercise needs a valuation certificate no more than 180 days old.

At sale. When the employee later sells, the gain is taxed as capital gains. The fair market value used at exercise becomes the cost of the shares, so the same increase isn't taxed twice. King Stubb & Kasiva says unlisted shares count as long-term after 24 months, measured from allotment, not grant.

The startup deferral. For employees of eligible startups, the tax on the perquisite can be deferred until the earliest of: 48 months from the end of the relevant assessment year in which the shares were allotted, the employee leaving the company, or the employee selling the shares, as King Stubb & Kasiva describes the framework. It postpones the tax; it doesn't remove it. King Stubb & Kasiva also points out that DPIIT recognition on its own doesn't make a startup eligible, so confirm eligibility separately. We found sources that disagree on whether the deferral period changed under the 2025 Act, so check the current position with your CA.

Common mistakes

Drawn from the Treelife and King Stubb & Kasiva guides:

Accepting the investor's pool percentage without asking whether it's pre- or post-money.
Copying a benchmark instead of building the number from a hiring plan.
Making the pool too big. King Stubb & Kasiva warns against reserving 20–25% without analysing actual hiring needs.
Leaving granted options out of the fully diluted count when you model ownership.
No vesting and leaver policy, so unvested options don't return to the pool when people leave.
Sizing a top-up from scratch instead of subtracting the unallocated options you already have.
Forgetting FEMA filings when options go to employees outside India or NRIs.

Two more that come from the rules themselves: granting options to a promoter after the startup window has closed, and promising options verbally before shareholders have approved the scheme.

The short version

Put a scheme in place under Rule 12 before you make promises. Size the pool from an 18–24 month hiring plan, and negotiate whether it sits pre- or post-money. Grant on the joining date, use a clear vesting schedule and leaver terms, and explain the tax honestly, including when it falls due.

Find the people you need

A pool only matters if you can find the people to grant it to. Cleya helps Indian founders meet co-founders, early hires, operators and investors. It proposes a few introductions at a time, each with the reason it's a fit, and contact details are shared only when both sides accept, or when a Cleya curator introduces you directly.

Ready to meet the people who fit what you're building? Apply to join Cleya. You're in as soon as you apply — check your email.