ESOP for Startups: A Founder's Guide

The short answer

An ESOP (employee stock option plan) is a pool of equity a company sets aside so it can pay people partly in future ownership, not only in salary. For an early-stage startup it is the main way to compete for talent when cash is tight, and investors expect to see one by the first institutional round.

Credit where it is due: Index Ventures. Their Rewarding Talent handbook is, in my view, one of the best resources on employee equity for startups. Its research informs the pool and grant benchmarks in this guide. I highly recommend reading the original alongside this guide and exploring OptionPlan when designing awards for your team.

This guide explains ESOPs for startups in general, in the order most people need them:

1. The basics: what an ESOP is, a worked story of one option from grant to payout, and the choice of instrument.
2. The mechanics: sizing the pool, vesting, exercise price and leaver rules, with a worked example.
3. The employee's side: how equity differs in Europe and the US, whether it actually motivates, and how a candidate should read an offer.
4. The math of an exit: how a sale price becomes a payout, what a grant is worth on average, and what can go wrong.
5. Running it: setting a plan up, common mistakes and what investors check.

Three decisions shape everything else:

1. How big and for whom. The size of the pool, and how it is split between future hires and the people you already have.
2. Which terms. Vesting, cliff, exercise price, what happens when someone leaves, and what happens at an exit.
3. Which instrument, under which law. Real options, virtual (cash-settled) options or shares. In practice this is a tax decision, and the one that varies most from country to country.

Do you need one now? If you have no employees beyond the founders, not yet. Once you are about to make your first key hire, or about to raise a round, write down the plan: a verbal promise of "some equity" is the most common source of later disputes.

A note on the numbers. The pool and grant benchmarks come from the Index Ventures Rewarding Talent handbook, whose figures date from around 2018, so treat them as orientation, not as a market quote. Tax rules differ by country and change often, so check them locally. The sources are listed at the end, and anything marked verify should be confirmed with a licensed adviser.

What an ESOP is and why startups use one

An ESOP gives employees the right to receive a share of the company's future value, usually by letting them buy shares later at a price fixed today. If the company grows, the shares are worth more than the fixed price and the employee keeps the difference. If it does not, the option is worth nothing and the employee has lost nothing except the upside.

That asymmetry is the point. A seed-stage startup cannot match a large company's salary, but it can offer a share in an outcome that a large company cannot. The trade is explicit: lower cash today in exchange for a chance at a much larger payout later. Employees who accept it should understand both halves of that sentence.

What an ESOP is not

• Not ownership today. An option holder is usually not a shareholder: no vote, no dividends, no seat at the general meeting until the option is exercised.
• Not a guaranteed bonus. The value depends on an exit (a sale or listing) or a later share sale that may never happen, or may pay little after investors' preferences.
• Not a substitute for a fair salary. Pay below market with a vague equity promise is the quickest route to a resentful team and, in some countries, a tax reclassification.
• Not free of cost to founders. Every option dilutes the founders and earlier investors when exercised.

The vocabulary you will need

Who should get options

Employees and, depending on local law, executives and advisers. Co-founders normally hold ordinary shares with their own vesting arrangements, not options from the pool, so keep founder equity and the ESOP separate in your documents. Check with your lawyer whether freelancers and contractors can receive options in your country: they often can, but the tax treatment differs.

A life of an option, in seven moments

Before the rules, the story. Anna joins a seed-stage startup and is granted options. The numbers are the ones used in the worked examples later in this guide, so you can follow the same person all the way through.

Three things stand out. Nothing is paid until the very end: for years the options are a promise, not money. Every step carries a decision or a risk: leave before month 12 and everything is lost, funding rounds shrink the stake, and investors are paid before common holders. And the money only moves when the company is sold, and then only after the deductions the rest of this guide explains.

The sections that follow take each moment in turn.

Choosing the instrument

"ESOP" is a family name, not one product. The same business goal can be reached in four common ways, and the right one depends mostly on your company form, your country's tax rules and your investors' preferences.

How to choose

• Start from the law and the tax, not from the term sheet. Whether an instrument is tax-efficient is a legal fact in your country. The same plan can cost the employee 15% in one country and over 40% in another.
• Prefer the standard if your investors will be foreign. A venture investor will recognise a classic option plan on sight. A homemade structure, however clever, adds legal fees and negotiation time to every round.
• Use virtual options as a bridge, not as a destination. They are a legitimate way to start rewarding people before you can run a full plan. Be honest with employees that the value is a cash bonus linked to an exit, not ownership.
• Ask what happens at exit. The question is how the employee actually gets paid. Options need a mechanism to exercise and sell in a sale. Virtual plans need the company (or the buyer) to have the cash and the contractual duty to pay.
• Keep the instrument consistent. Mixing instruments across employees is allowed but doubles the paperwork and creates fairness questions. Pick one and use it for everyone unless there is a legal reason not to.

Sizing the pool and splitting it up

Most European seed-stage pools sit around 10% of the fully diluted company. Index Ventures' Rewarding Talent research found that European pools tend to stay near 10% as rounds go on, because they are topped up after each round, while US pools grow to about 15% at Series A and 20-25% by Series D. Index modelled 12% at Series A, 14% at Series B and 16% at Series C as the targets for successful European startups. These figures date from around 2018: use them as a sanity check, not as a rule.

What matters more than the benchmark is what the pool has to pay for. Size it from the hiring plan, then round.

A bottom-up method

1. List the people already on the team who should receive options.
2. List the hires you expect over the next 12 to 18 months (roughly the time to your next round) by role and seniority.
3. Assign each a grant size using the ranges below.
4. Add a reserve for unplanned hires and retention grants.
5. Add it up, then round to a figure your investors will recognise.

An illustrative seed-stage example (the numbers are made up for the exercise):

Typical grant sizes

The Index handbook gives these orders of magnitude for European startups, as a share of the fully diluted company. They are the grant at the time of joining, not the total over the person's career. Index built them from the largest dataset of its kind: over 20,000 option grants from more than 1,650 startups across the US and Europe. Their OptionPlan tool lets you design awards for your whole team against that data.

Where the pool sits in the round

The pool is usually created or topped up before the investor's money goes in, which means the existing holders (founders) bear the dilution, not the new investor. Take a round where the investor buys 20% and the pool is 10%:

• Pool created before the round (typical investor ask): investor 20%, pool 10%, founders 70%.
• Pool created after the round, diluting everyone: founders 80% x 0.9 = 72%, investor 20% x 0.9 = 18%, pool 10%.

A two-point difference for the founders is small in this example, but it grows with the size of the pool and the number of rounds. Index's worked case at Series A showed a 20% pool, compared with a 10% pool, cutting founders' stake from 47% to 40%. A bigger pool is not free: only create the pool you can plausibly spend before the next round, and negotiate the timing of the top-up as part of the term sheet.

Vesting, exercise price and leaver rules

The terms of the grant decide whether an ESOP is fair, and whether it survives due diligence. Four of them do most of the work: the vesting schedule, the exercise price, what happens when someone leaves, and what happens at an exit.

Vesting

Vesting is how options are earned. The market standard described by Index Ventures is a four-year schedule with a one-year cliff: nothing vests during the first twelve months, 25% vests on the cliff date, and the remaining 75% vests evenly over the following 36 months.

The cliff protects the company from granting equity to someone who leaves after a few weeks, and it protects the employee's colleagues from watching that happen. It also means that leaving at month 11 is the most expensive moment for the employee, so say so explicitly when you make the offer.

Variations you will meet:

• Monthly, quarterly or annual vesting after the cliff. In the US it is almost always monthly. In Europe it is often monthly but quarterly and annual schedules are common.
• Back-loaded schedules, for example 10%, 20%, 30% and 40% in years one to four. Index notes that large technology companies have used them; they reward people who stay but are harder to sell to a candidate.
• Performance conditions for senior, revenue-linked roles. The handbook suggests time-based vesting for at most about half of their grant, with the rest tied to results.
• Vesting start date earlier than the signing date. Fair for someone who has already been working for you informally. Write the date down.

Exercise price

The exercise (strike) price is normally the fair market value of a share on the grant date, supported by an independent valuation or by the price of the latest round. The lower the price, the more the employee keeps. Index's view is that the price should be as low as the law and tax rules allow. In many countries that is a trap: if the price is below fair value, the discount can be taxed as salary, so check your local tax rules before fixing a price. Never set it by instinct.

Leaver rules

What happens to an employee's options when they leave is the most negotiated part of any plan. The usual structure:

The Index survey describes two practices. In the US, leavers typically have 90 days to exercise vested options before they are forfeited, although some companies extend the window, for instance by a year for each year of service after the cliff. In Europe almost half of the surveyed startups let leavers keep their vested options but exercise them only at an exit, and some cancel all options on departure. The handbook's guidance is to be generous to leavers without letting them keep the full upside for free.

Whatever you choose, write it down. "Good leaver" and "bad leaver" must be defined in the plan, not left to judgement after a dispute.

Exit and acceleration

• Single trigger: all options vest when the company is sold. Employees like it; buyers and investors usually dislike it because the team can walk away the next day.
• Double trigger: options vest only if the company is sold and the employee is dismissed (without cause) within a set period after the sale. This is the common compromise.
• Drag-along and cash-out: the plan should say how options are exercised or cancelled in a sale so that a buyer can acquire 100% of the company.
• Expiry: options normally lapse after a fixed term, commonly ten years, and are non-transferable.

A worked example: one employee from grant to exit

The numbers below are invented, in euros, to show how dilution and vesting shape what an employee actually receives. They ignore tax, investor preferences and debt, all of which reduce the payout in real life.

The setup

• The company has 10,000,000 fully diluted shares when Anna joins at the seed stage.
• Anna is granted 50,000 options (0.5%) at an exercise price of EUR 0.50 per share, the fair value on the grant date. Vesting is four years with a one-year cliff.
• Two later rounds issue new shares: Series A dilutes existing holders by 20% and Series B by 15%. Combined, each existing holder keeps 0.8 x 0.85 = 68% of their percentage.
• Five years after Anna joins, the company is sold for EUR 60 million.

What happens to the share count. To dilute everyone to 68%, the company needs 10,000,000 / 0.68 = about 14,705,882 shares at exit. The sale price per share is EUR 60,000,000 / 14,705,882 = about EUR 4.08.

What to take from it

• A 0.5% grant at the start is worth 0.34% at exit, not 0.5%. Employees should hear this before they sign, not discover it at the sale.
• Leaving after two years halves the result, because half the options never vest. The cliff and schedule are real money.
• The gain is the difference between the sale price and the exercise price. If the sale price per share had stayed below EUR 0.50, the options would be worth nothing.
• The result depends on the exit price. Selling for EUR 20 million instead of EUR 60 million would cut the pre-tax gain in the longer case from EUR 179,000 to about EUR 43,000, and a sale below the investors' preferences can leave common holders with much less still.
• None of this is tax. In many countries the exercise or the sale triggers a tax bill on top, so get local tax advice.

The employee's view: Europe versus the United States

The same offer is worth different amounts in different places, and good candidates know it. A founder who understands why can design a plan that closes the gap.

Who owns what

The Index Ventures Rewarding Talent handbook (data from around 2018) found that late-stage employees in Europe owned about 10% of their company, against about 20% in the US, and that roughly two-thirds of European option allocations went to executives, the reverse of the US pattern. The Not Optional campaign reported in February 2023 that late-stage employee ownership in Europe had risen from 12% in 2017 to 16%, against 20% in the US, narrowing the gap from eight percentage points to four. The gap is closing, not closed.

What differs in the rules

Country snapshots

The national picture moves quickly. These are the datable facts I could confirm, with their sources.

• Ranking. The Not Optional campaign scores 24 national schemes on six criteria (plan scope, strike price, minority shareholder bureaucracy, employee tax timing, employee tax rate, employer taxation). Latvia, Estonia and Lithuania score the maximum on every criterion; Finland, Belgium and the Netherlands rank lowest. Index separately described the UK's EMI scheme and France's BSPCE as better than the US offer, and Germany as lagging (around 2018).
• Germany. Since 2024, according to Carta, the annual tax-free allowance for employee equity is EUR 2,000 if the offer goes to all employees with at least a year of service, and tax on qualifying equity can be deferred for up to 15 years. Income tax on the value at transfer can still approach 50%, gains on virtual options are still taxed as income, and notarisation is still needed for shares and options.
• Netherlands. A proposal expected to apply from 1 January 2027 would tax options at the sale of the shares, not at exercise, and only 65% of the benefit would be taxable (about 32% at the top rate). It is not yet enacted and the eligibility rules are unpublished.
• Ireland and Spain (Not Optional, 2023). Ireland extended its KEEP scheme and raised its lifetime company limit to EUR 6 million. Spain raised its annual tax-exempt limit for options from EUR 12,000 to EUR 50,000, with tax due only at liquidity. Both dates are old, so check for later changes.

The dry-tax problem in one example

Suppose an employee lives in a country that taxes the gain at exercise at a 40% rate. She holds 50,000 vested options with a strike of EUR 0.50, and the company's latest share value is EUR 3.00.

• Cost of the shares: 50,000 x EUR 0.50 = EUR 25,000.
• Taxable gain: 50,000 x (EUR 3.00 - EUR 0.50) = EUR 125,000, so tax of EUR 50,000.
• Cash needed to exercise: EUR 75,000, for shares she cannot yet sell.

In a country that taxes only at sale, she pays nothing until there is cash to pay with. This is why many employees never exercise: Carta reports that about two-thirds of US startup employees do not exercise their equity, and that only 33% of in-the-money options were exercised in 2024, down from about 43% in 2019, citing the 90-day window after leaving and the upfront cost among the reasons.

What it means for you as a founder

• Prefer the route that taxes later, where your country allows it, and tell candidates which one you chose.
• Give leavers a fair window. A 90-day window can force a departing employee to pay thousands for shares in a company that just let them go.
• Show the net number. Candidates compare offers after tax and dilution. Give them the calculation in the sections below, with your own assumptions.

Does equity actually motivate?

Founders often assume that giving people equity makes them work harder. The evidence is more careful than that. Equity is a reliable tool for keeping people, a plausible but unproven tool for motivating them, and an unreliable tool when employees do not understand it or cannot afford to use it.

What the research says

• Productivity, but not proven cause. A Rutgers study by Blasi, Kruse, Sesil and Kroumova (around 2000) compared 490 US public companies with broad-based option plans, plans covering most non-management staff, with other public companies. In 1997 these companies had about 28% higher productivity after controls. But their productivity was already higher before they adopted the plans, and the authors state plainly that they are "not saying that the broad-based stock option plans caused improved performance". It covered a strong bull market, and only 105 of the companies answered the survey.
• Retention was the plans' stated purpose. In the same study, retaining key employees was the top objective of the companies, and only 3% said the plans did not meet it. That is self-reported by firms, not measured on staff.
• Many employees never cash in. Carta's data on US startups shows only 33% of in-the-money options were exercised in 2024, down from about 43% in 2019. The author describes equity compensation as having lost some appeal among startup employees, and notes poor employee education about equity as a possible factor.

Treat all of this as evidence from a particular period, mostly from the US and from large companies, not as a guarantee for a ten-person startup in Budapest.

Why the motivation effect is weaker than it looks

These are reasons from economics and common experience, not findings from the sources above.

• A tiny stake. One employee's extra effort moves the company's value by a small amount, and she receives 0.1% to 0.5% of it. The direct reward for working an extra hour is almost nothing.
• A distant, uncertain payout. Years away, probably zero, and discounted heavily by people who pay rent now (see the expected value section below).
• The lottery-ticket effect. Some employees overvalue it, which feels motivating until the first disappointment. Others undervalue it, so it motivates nobody.
• Fairness matters more than size. Equity that feels arbitrarily distributed damages motivation more than a small pool helps it.

What makes equity work

1. A fair cash salary. Equity added to a below-market salary becomes a source of resentment when the first rent rise arrives.
2. Understanding. Employees who can say what they own, what it could be worth and when they can cash it in value it more accurately. Explain it in writing and in person.
3. Visibility. Share the company's progress, funding and the preference stack (see below) so the equity feels connected to something real.
4. A believable path to liquidity. Options in a company that will never be sold motivate nobody. Talk about tender offers or a partial buy-back where you can.
5. Terms that do not punish leaving. An exercise window long enough to be usable means the plan rewards past work and does not trap people.
6. Fresh grants. Four years of vesting is also four years of declining incentive; refresh grants for people who keep performing.

How to tell whether yours works

Track the simple things: how many offers you lose to a competitor's equity, how many people leave before and just after the cliff, how many leavers exercise, and what employees say when you ask what their options are worth. If the last answer is "no idea", you have an education problem, not an equity problem.

How an employee should read an offer

Candidates increasingly ask sharp questions about equity. If you can answer these without hesitating, you look like a founder who knows what they are offering. If you cannot, expect the equity to be valued at zero.

A recipe for putting a value on a grant

The next two sections do this with numbers. The steps are:

1. Find your stake at exit. Your percentage today, reduced for the dilution of future funding rounds.
2. Choose a few exit prices. A small, a medium and a large outcome, plus the case where nothing is left.
3. Take out what is paid first. Debt, and investors' liquidation preferences.
4. Subtract what you pay. The exercise price on the options you hold.
5. Weigh the outcomes by how likely they are. Honest estimates, not hopes.
6. Reduce for time and tax. A payout in five to seven years is worth less today, and tax is due in your country.

The number at the end is usually a small fraction of the number that appeared on the offer letter, and that is a more honest basis for a decision.

The math behind an exit

The headline sale price is not what the people holding common shares divide between them. Several claims come before them, and they are the reason a 0.5% grant can pay nothing in a sale that sounds large.

From sale price to payout

1. From the headline price to the equity value. The buyer's price, minus the company's debt, plus its cash, minus deal costs. Part of the price may be held back in escrow or paid later (an earn-out), and employees are paid on the same schedule.
2. Investors are paid according to their preferences. Preferred shares carry a liquidation preference: a right to receive money before common shareholders do. The next table shows the usual kinds.
3. What is left goes to common shares. Founders, employees who exercised, and option holders share it according to their number of shares.
4. Option holders pay their exercise price. The payout per option is the value of a common share minus the strike, and never less than zero because nobody has to exercise.
5. Tax comes last, and depends on your country.

The kinds of preference

Terms vary from deal to deal. The only reliable source is the company's articles of association and the shareholders' agreement.

A worked waterfall

We continue the earlier example and add investors. The assumptions:

• Anna holds 50,000 fully vested options with an exercise price of EUR 0.50, as before. The company has 14,705,882 fully diluted shares at exit.
• Investors have put in EUR 15 million in total. They hold preferred shares with a 1x non-participating preference and own 40% of the shares as converted (5,882,353 shares). Everyone else, including founders, employees and the pool, holds the other 60% (8,823,529 shares).
• Investors take whichever is higher: EUR 15 million, or 40% of the sale price. These are equal at a sale price of EUR 37.5 million, and above that they convert.
• To keep it readable, we ignore other option holders' exercise prices (which would slightly raise payouts), and debt, escrow and fees.

Anna's payout on 50,000 options is 50,000 x (value per share - EUR 0.50), or zero if that is negative. The chart compares it with the shortcut most people use: their percentage of the sale price, minus the cost of exercising (the dashed line).

Below EUR 15 million the investors take everything. Between EUR 15 million and about EUR 19.4 million common shares receive money, but each is worth less than the EUR 0.50 strike, so Anna would not exercise and gets nothing. Above EUR 37.5 million the investors convert, the preference stops mattering, and the shortcut matches the real figure.

In between, the shortcut misleads. At a EUR 30 million sale it says EUR 77,000 where the real payout is EUR 60,000; at EUR 20 million it says EUR 43,000 where the real payout is about EUR 3,300.

The same company with a participating preference

Suppose the same investors had negotiated participating preferred instead. At a EUR 60 million sale they would take EUR 15 million back, plus 40% of the remaining EUR 45 million: EUR 33 million in total. That leaves EUR 27 million for common shares, or EUR 3.06 per share, and Anna receives 50,000 x (EUR 3.06 - EUR 0.50) = EUR 128,000, against EUR 179,000 under the plain preference. The type of preference alone costs her EUR 51,000.

What to take from it

• Ask for the preference stack, not only the valuation. A valuation tells you what investors paid, not what common holders will receive.
• Preferences hurt most in mid-sized sales. A big win makes them irrelevant; a small sale wipes out the options.
• Founders: the terms you accept from investors are, in effect, terms you impose on your employees. Say so when you negotiate.

Expected value: what a grant is really worth

The waterfall tells you what Anna receives if the company is sold at a given price. A real decision needs one more step: how likely each outcome is. Most startups do not reach a big sale, so the honest value of a grant is an average across outcomes that are mostly bad and occasionally spectacular.

The probabilities below are invented for illustration. I did not find a reliable public figure I would stand behind, and outcomes vary by sector, stage and country. Replace them with your own. The payouts come from the waterfall above: Anna's 50,000 vested options at a EUR 0.50 strike, before tax.

Reading the table

• The most likely single outcome is zero. Half the time, in this example, Anna receives nothing, however well she works.
• The average is carried by the tail. The 10% big-sale case supplies about 61% of the expected value. Change that one assumption from 10% to 5% and the expected value falls by EUR 32,750, to about EUR 74,600, a drop of almost a third.
• Time matters. A payout in five years is worth less than the same amount today. Discounting at 15% a year (a rate chosen to reflect the risk, not a rule) divides the value by about 2.0 over five years: EUR 107,350 becomes roughly EUR 53,000.
• Tax matters. Taking an illustrative 25% off, the figure is roughly EUR 40,000. Your country's actual rate and timing will differ, so get local tax advice.

So a grant that appeared to promise EUR 179,000 in a good outcome is worth something like EUR 40,000 as a present-day bet, about a fifth, because most of the time it pays nothing. That is not a reason to give less equity. It is a reason to describe it accurately.

How to use this

• As an employee: treat the equity as a bonus on top of a salary you can live on. A cautious way to compare two offers is to decide on cash alone and count the equity as upside.
• As a founder: give candidates a table like this one with your assumptions, or at least the cap table and the preference stack. It builds trust, and it protects you from the quieter damage of an employee who learns the real numbers at the exit.

What can go wrong between grant and payout

Most disappointments with equity are not dramatic. They are ordinary events that nobody explained in advance.

How to protect your team

1. Show the waterfall once a year. Tell people what the company's cap table and preferences mean for them in a few example sale prices.
2. Fix the biggest traps in advance. Exercise window, acceleration, leaver terms and the tax route. These cost nothing at the beginning and a great deal in a dispute.
3. Refresh grants. An old grant struck at a high price loses its pull. New grants for strong performers keep the incentive alive.
4. Create a path to cash. If the company grows without a sale, a tender offer or a secondary sale lets employees realise some value. Raise it with your investors early.
5. Keep the plan documents and the cap table in one place, and update them with every grant, exercise and lapse.

The goal is simple: nobody should discover the terms of their own equity for the first time on the day it matters.

Setting it up, step by step

A plan that exists only in an email thread fails in due diligence. The sequence below works in most countries; the details (who must approve what, which registry) are local, so ask your lawyer.

For the tax side of options and founder shares, read the equity section of Tax 101 for Startups, before the first grant.

1. Decide the objective and the pool size. Who is the plan for, and how much equity will you need over the next 12 to 18 months? The founders propose it; the board and the shareholders approve it. (Founders)
2. Choose the instrument with tax advice. Options, virtual options, shares or a holding vehicle: the choice depends on your company form and country. This is the most expensive decision to get wrong. (Founders, accountant and lawyer)
3. Draft the plan rules. One document that sets out eligibility, vesting, exercise, leaver rules, what happens in a sale, administration and amendment. (Lawyer)
4. Get the corporate approvals. Typically a shareholder resolution, and, depending on the company form, amendments to the articles or a capital authorisation so that shares can be issued when options are exercised. (Lawyer, founders)
5. Fix the exercise price. Use an independent valuation or the price of the latest round, and keep the evidence. (Accountant, valuer)
6. Issue individual grant letters. One per person, stating number of options, exercise price, vesting start date, vesting schedule, leaver terms and expiry, with the plan attached. Both sides sign. (Founders, lawyer)
7. Keep the cap table and the records. A single, current record of every grant, vesting date, exercise and lapse. A spreadsheet works at the start; move to a cap table tool when you have more than a few holders. (Founders, finance)
8. Explain it to the team. A one-page summary and a short conversation: what an option is, what vesting means, what the dilution does to the percentage, and that tax may apply. (Founders)
9. Review once a year. Update the cap table, refresh the pool before the next round, and re-check the tax position. (Founders, finance, advisers)

Tip: use a cap table tool such as Ledgy. It is super handy. Most are free to start and then cost roughly USD 10 per stakeholder per year. It keeps every grant, vesting date and exercise in one place, and keeps you away from most of the issues described in this guide.

The documents

Common mistakes, and what investors check

Most ESOP problems are not exotic. They are the same handful of avoidable errors, and they tend to surface at the worst moment: during a funding round or an exit.

Ten mistakes to avoid

1. Promising equity without paper. "You will get 1%" in a chat message is not a grant. It creates an expectation, a possible legal claim and a mismatch with the cap table.
2. No written plan. Individual grants without a master plan mean every leaver, vesting or exit question is decided case by case.
3. Ignoring tax until the exit. Structure and exercise price determine the tax bill. Fixing it after grants are signed is expensive and sometimes impossible.
4. Granting options by instinct on price. An exercise price below fair value can be taxed as salary in many countries.
5. No leaver terms. Without them a person who leaves after year one can keep a stake for life, or a dispute decides it.
6. Giving too much, too early. A large first grant to an early hire leaves too little for the people who join later and may be hard to justify to investors.
7. Carving the pool from the wrong place. Not agreeing whether the pool sits before or after the new money, so the founders find out at signing.
8. A messy cap table. Options granted but not recorded, or recorded in three places, are a classic diligence finding.
9. Treating contractors like employees without checking. The legal and tax position of a freelancer's equity is different, and a contractor relationship that looks like employment can be reclassified.
10. Never explaining it. If employees do not understand what they have, the plan does not motivate them, and they may overvalue or undervalue it.

What an investor will ask for

In the diligence of a seed or Series A round, expect to be asked for:

• The ESOP plan rules and the shareholder approval.
• A list of all grants: holder, date, number, exercise price, vesting terms, status.
• The size of the pool, how much is granted, how much is left.
• Evidence for the exercise price on each grant date.
• Leaver and acceleration terms.
• Confirmation that the plan complies with local company and tax law.
• The pool size and top-up the investor expects after the round.

If these exist and agree with the cap table, diligence on this topic takes an afternoon. If they do not, it is the kind of finding that delays a closing and weakens your negotiating position.

Questions to bring to your lawyer and accountant

Take this list to the first meeting. Ask for the answers in writing, and keep them with the plan.

For the lawyer

1. Which instrument fits our company form and our investors, and what corporate approvals does it need?
2. Can the company issue the shares an option needs, and how are they issued when someone exercises?
3. What do the plan rules and grant letter need to say about leavers, a sale of the company and the exercise window?
4. How do we treat contractors, advisers and employees in other countries?
5. What will a foreign investor expect to change in the plan?

For the accountant or tax adviser

1. What is the tax at grant, at vesting, at exercise and at sale, for the employee and for the company?
2. How do we set and evidence the exercise price?
3. Do we qualify for any start-up or employee-share relief, and what does each condition require of us over time?
4. What happens to the tax position if we add a holding company, raise a round or are sold within three years?
5. Could the tax authority treat the awards as pay for work, and how do we protect against that?
6. What do we have to report, and when?

For yourselves

1. How many people will we realistically hire in the next 12 to 18 months, and at what seniority?
2. What have we already promised, in writing or not?
3. How much of the pool are we prepared to give up before the next round?

Sources

All pages below were opened and read on 18 and 19 October 2026. Pool size, grant size, vesting and leaver benchmarks are from Index Ventures and date from around 2018.

General benchmarks

• Index Ventures, Rewarding Talent: the founder's guide to employee ownership
• Index Ventures, Rewarding Talent: key findings
• Index Ventures, Rewarding Talent: ESOP size at Series A and beyond
• Index Ventures, OptionPlan: Design Awards for Your Whole Team