पाठशाला Pathshala · दल Dal, The team · Lesson 09 · Start

ESOP design: the pool, the grants and the strike price

An ESOP is worth what its design lets an employee realise. How to size the pool from the hiring plan, set grants by role and stage, choose a strike price and avoid the terms that make options worthless.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Symmetrical flights of stone steps descend into an ancient stepwell in India. — Photograph: AXP Photography · Pexels

An ESOP is a promise that a share of the company’s future belongs to the people who build it. Most Indian startups make the promise. Fewer make it in a form that is worth anything to the employee: a pool sized for the hires it must cover, grants set by role and stage rather than by negotiation, a strike price and tax position the employee understands, and a route to turning options into money.

This lesson takes the three design decisions in order, the pool, the grants and the strike, inside the legal frame of an Indian private company, and ends with the mistakes that empty an ESOP of value.

What an ESOP is in an Indian private company

An option is the right to buy a share later at a price fixed now. In a private limited company the scheme sits under section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. The shareholders approve the scheme by special resolution, with an explanatory statement disclosing the total number of options, who is eligible, the vesting, the exercise price and any lock-in. There must be at least one year between the grant of an option and its vesting. Options cannot be transferred. On resignation or termination unvested options lapse and vested options can be exercised within the period the scheme specifies. On death or permanent incapacity in employment, options granted up to that day vest at once.

Two definitions matter. Employees include permanent employees and directors other than independent directors, but exclude promoters and directors holding more than ten per cent of the equity; a recognised startup is exempt from that exclusion for ten years from incorporation under the 2019 amendment, which is how founders of young companies can hold options at all. And the company has the freedom to set the exercise price in conformity with the applicable accounting policies. That freedom is the source of most of the design choices below.

Contractors and advisers are not employees under Rule 12 and cannot hold options under the scheme. The [contractors lesson](/library/contractors-interns-employees-who-should-be-what) covers what that means for who should be on payroll.

Sizing the pool

The pool is the number of shares reserved for options, as a percentage of the fully diluted company. Index Ventures’ Rewarding Talent handbook says pools have traditionally been set at 10 per cent at seed, with some accelerators including Y Combinator now advocating 20, and that US companies typically raise the pool to 15 per cent at Series A while European companies top it back up to 10 at each round. It puts a Series A pool very likely in the range of 10 to 15 per cent.

The right size is not a benchmark. It is the sum of the grants the company will make before the next round, plus a reserve. Build it bottom up: list the hires between now and the next raise by level, put a grant against each, add a reserve for one senior hire you have not planned (there is always one), and the total is the pool. If the total is 6 per cent, a 15 per cent pool is dilution for nothing; investors usually ask for the pool to be created before their money arrives, so its cost falls on the existing holders. If the total is 14 per cent, a 10 per cent pool means a top-up within a year, at another negotiation.

Grants by role and stage

Index’s US seed benchmarks are the reference most founders use: about 1 per cent of fully diluted equity for a senior engineer, 0.45 per cent for mid-level and 0.15 per cent for junior, with other functions from 0.05 to 1 per cent, and a seed team of about ten. At Series A, Index frames staff grants as a value equal to a share of base salary rather than a percentage: 75 per cent of base for director-level engineering, product and business development roles, 50 per cent for senior and 33 per cent for individual contributors, with sales and customer success at 33, 10 and 5 per cent. A new executive at Series A typically gets about 1 per cent.

The move from percentage to value is the one that matters. At seed a percentage is the honest unit, because the valuation is a guess and the grant is a share of the bet. From Series A a priced round sets the value of a share, and a grant stated as rupees of value at that price keeps grants consistent as the valuation rises: the same senior engineer joining a year later receives fewer shares worth a similar amount. Write the grant table by level and stage, and give every hire at a level the same grant, adjusted only for a documented reason.

At the defaults, two senior, four mid-level and six junior hires at the seed benchmarks, plus a reserve of one point, take 5.7 per cent of the company, comfortably inside a 10 per cent pool. Double every hire count and the same pool runs out before the round, which is when founders discover the top-up is negotiated at the new investor’s price. Halve the grants and the pool lasts, but the offers stop competing with the cash a candidate gives up, which the [first engineer lesson](/library/hiring-first-engineer-below-market) puts in rupees.

Size the pool from the hiring plan, not from the term sheet. Every point of pool nobody will be granted is a point the founders gave away.

Vesting, the cliff and the leaver terms

Index describes the standard: four years, a one-year cliff with 25 per cent vesting at the first anniversary, then monthly in the US and monthly or quarterly in Europe. Rule 12’s one-year minimum between grant and vesting makes the one-year cliff the natural Indian default as well. The [vesting lesson](/library/vesting-and-the-cofounder-cliff) draws the schedule.

A glass hourglass with white sand stands on a brown wooden table. — Vesting is earned grain by grain over four years. The exercise window decides whether any of it is still worth something on the day someone leaves. Photograph: Towfiqu barbhuiya · Pexels

The term that decides whether an option is worth anything to someone who leaves is the exercise window. Index reports that US employees who leave typically have ninety days to exercise vested options or lose them, that some companies now give an extra year for each year of service after the cliff, and that almost half of European startups let leavers keep vested options without the right to exercise until an exit. In India the scheme sets the window. A short one forces a departing employee to find the strike price and the tax on a paper gain in cash, for shares they cannot sell. Most will walk away, which turns the options into a retention device for the company’s convenience rather than pay. Write a long window, or exercise at a liquidity event, into the scheme from the start; changing it later needs the shareholders again.

The strike price and the tax

Because Rule 12 leaves the exercise price to the company, Indian schemes range from a strike at face value, ₹1 or ₹10 a share, to a strike at the current fair market value. The choice moves money between what the employee pays to exercise and what they pay in tax on exercising.

The Income Tax Department’s guidance sets out the mechanics. At exercise, the difference between the fair market value of the shares on that date and the amount the employee pays is a perquisite, taxed as salary. For unlisted shares the fair market value is set by a merchant banker, on the exercise date or a date no more than 180 days before it. On sale, the gain above the fair market value at exercise is a capital gain, with the holding period counted from allotment. A low strike means a cheap exercise and a large taxable perquisite; a strike at fair market value means a costly exercise and a small perquisite. Neither is free. A face-value strike is no gift if the employee must find tax at their slab rate on nearly the whole value of the shares, in cash, to exercise.

For eligible startups the timing has a partial fix. The same guidance lets a startup eligible under section 80-IAC defer the tax on the perquisite until fourteen days after the earliest of three events: forty-eight months from the end of the assessment year of allotment, the employee leaving, or the sale of the shares. Eligibility needs validation by the Inter-Ministerial Board, which requires DPIIT recognition, a private limited company or LLP incorporated on or after 1 April 2016 and before 1 April 2030, and an innovative or scalable business. If options are part of how you hire, apply before the first grant. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered its sections, so confirm with an adviser how the current Act carries each of these rules. Checked 10 October 2026.

Five mistakes that make ESOPs worthless

A promise instead of a grant. A percentage in an offer email, with no scheme approved and no grant letter, is not an option. It is an expectation that ends in a dispute when the company succeeds.

A percentage without a share count. Write the number of options, the total shares on a fully diluted basis on the grant date and the strike. A percentage alone invites the question, years later, of a percentage of what.

A ninety-day window. The employee who built the company for three years and leaves for a good reason should not lose vested options for want of cash.

No route to liquidity. Options in a private company are worth something only when there is a buyer. Say in the scheme what happens on an acquisition, whether unvested options accelerate and whether the acquirer can cash them out, and plan periodic buybacks once the company can afford them. A scheme that pays only at an IPO is a lottery ticket with a ten-year draw.

A pool sized by the term sheet. Accepting a 15 per cent pre-money pool because the investor asked, without a hiring plan behind it, moves value from the founders to the new investor, who does not bear that dilution. Bring the bottom-up plan to the negotiation; the [dilution lesson](/library/dilution-a-cap-table-you-can-touch) shows what each point costs.

The ESOP calendar

Before the first grant: the scheme drafted and approved by special resolution, the grant table by level written, the strike policy chosen and explained in a paragraph an employee can read, and the Inter-Ministerial Board application made if the company is eligible. At every hire: a grant letter with the share count, strike, vesting start date, exercise window and what happens on an exit, signed within the first month. Every quarter: the pool reconciled against grants made, lapsed and exercised, and the next two quarters’ hires costed against what is left. Every year: a statement to each holder of what has vested and what it is worth at the last priced round, because options an employee cannot value are not pay. Before every raise: the bottom-up pool, done before the term sheet arrives.

Nothing here is legal, tax or investment advice. The Companies Act rules, the Income-tax Act and the startup conditions change; have the scheme drafted by a lawyer who has written ESOP schemes for Indian private companies.