Hire number five asks about ESOPs. You say yes, because everyone says yes. Then nothing happens for eight months — no scheme, no grants, just a promise floating in an offer letter. Then the Series A term sheet arrives, the investor asks for the ESOP pool, and your lawyer tells you the promise was never a plan.

Set the scheme up before the round. It is cheaper, cleaner, and entirely within your control while the cap table is still simple.

Why do it before the Series A?

Two reasons. First, valuation. Grants made before the round are priced on today's valuation, not the Series A valuation. Every month you wait, the exercise price climbs.

Second, the pool. Series A investors will insist on an option pool — usually 10% — and they will insist it comes out of the pre-money valuation. That means it dilutes you, not them. A pool you created yourself, at your own size, is a negotiating position. A pool created under term-sheet pressure is a concession.

What does the investor's pool demand look like?

It arrives as one line in the term sheet: "an unallocated option pool of 10% on a fully diluted basis, pre-money." Translation: before the investor's money is counted, 10% of the company is set aside for future hires, and that 10% comes out of the founders' share, not the investor's.

This is standard. It is also negotiable at the margins — the size of the pool, what counts as allocated versus unallocated, how unvested leaver options are treated. You negotiate better when you already have a pool and a scheme, because you are discussing an adjustment, not building from zero under a closing deadline.

What must be in place?

Four things, in this order.

One: a board-approved ESOP scheme. Not a template downloaded and renamed — a scheme drafted for your company, with vesting, exercise, and leaver provisions you have actually read.

Two: shareholder approval by special resolution under Section 62(1)(b), with the Rule 12 disclosures. This is the step most startups skip, and it is the first thing diligence asks for.

Three: grant letters to each employee, stating the number of options, the vesting schedule, and the exercise price.

Four: a valuation report backing the exercise price. Get a registered valuer's report. A number you made up will not survive diligence — or a tax officer.

What should you skip?

The trust. Pre-Series A, grant options directly. A trust adds trustees, a trust deed, and annual compliance for a problem you do not have yet. Skip broad-based grants to every employee — concentrate the pool on the people whose departure would hurt. Skip fancy vesting structures; four-year vesting with a one-year cliff is the market standard for a reason. And never reprice old grants to match a new valuation without advice — it creates tax and accounting tangles that cost more than the goodwill it buys.

What does the paperwork actually look like?

Less than you would fear. The scheme document — ten to fifteen pages covering eligibility, vesting, exercise, and leaver rules. A board resolution approving the scheme and the initial grants. The special resolution with the Rule 12 explanatory statement: what the scheme covers, how many options, who is eligible, the pricing formula. Grant letters, one page each, signed by both sides. And the valuer's report, which your valuer produces from your financials.

None of this is exotic. What makes it expensive later is not complexity — it is reconstruction. Paper created today is cheap. Paper recreated under diligence is not.

What breaks in diligence?

The pool shuffle. This is the trickiest part of ESOP economics, so let me put it plainly.

Think of the option pool as extra chairs set out before guests arrive for dinner. The investor will insist the chairs come out of your side of the table — the pre-money valuation — not theirs. If you already set out ten chairs yourself, the negotiation is about whether ten is the right number. If you set out none, the investor sets out fifteen and hands you the bill. Same dinner. Very different seating plan.

Questions founders ask

10% is the market standard investors expect at Series A. Create it before the round so you control the number.

No. The rules exclude promoters and independent directors from employee stock option schemes. Founders hold equity; ESOPs are for the team.

Four years with a one-year cliff. Leave in year one and you get nothing; after that, vesting is usually monthly or quarterly.

No. Tax hits at exercise — as a perquisite, on the gap between fair value and exercise price — and again at sale as capital gains. Price the exercise correctly; it matters twice.

You need a defensible fair value at every grant and every exercise. An annual valuer engagement is the clean way to do it.

Planning a scheme before your round? We'll design it, document it, and value it — so diligence finds nothing to fix.

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