ESOP economics for founders: when to top up, how to model the dilution

ESOPs are a topic where founders' instincts mostly serve them well. Generous grants for senior hires, fair grants for engineers, vesting on a standard four-year cliff. Where the math goes off is in how the pool gets refilled and when.

The standard convention is that the ESOP pool size should be enough to cover the company's hiring through the next round. So if you are raising Series A and plan to hire 30 people over the next 18 months — including a CFO, a head of sales, and senior engineering hires — you size the pool accordingly. The pool sits on the cap-table as 'unallocated', and grants get carved out of it as hires happen.

Here's where founders give away value. The investor in a Series A typically asks for the pool to be 'topped up' to the target size BEFORE the round closes. This is called a pre-money top-up. The economic effect: the top-up dilutes the founders and existing shareholders entirely, with no contribution from the new investor. The post-money valuation is calculated against a cap-table that already includes the larger pool.

What this means practically: if your pool was at 8% and the investor asks for a top-up to 12%, that 4% comes entirely from the founders and existing investors. On a $25M post-money round, that's $1M of value transferred from founders to the (new and old) common-stock pool. The investor's percentage is unaffected.

The negotiable point is whether the top-up is pre-money or post-money. Post-money top-up means the dilution is shared across the new investor too — and proportionally, that's a lot fairer to the founders. Most institutional investors will push for pre-money; some will accept post-money or a 50-50 split if you negotiate it.

How to think about pool size: model what you actually need over the next 18 months. Senior hires get larger grants (1-3% range for C-level, 0.5-1.5% for VPs). Mid-level engineering hires might get 0.1-0.3%. Senior individual contributors get 0.2-0.5%. Add it up. Add 30% buffer for unplanned hires. That's your real pool need.

Investors will usually quote a higher pool size than this analysis suggests. Their reasoning is reasonable — they don't want to be diluted by a top-up six months after the round closes. The pushback is to model the actual hiring plan and back the pool into it. A 10% pool is often defensible against a 15% ask.

One more thing — refresh grants. Most ESOP plans contemplate refresh grants for tenured employees, typically every two to three years, in addition to the initial grant. These come out of the pool too, but they don't show up in initial cap-table modeling. Plan for them. A 30-person team three years in will absorb 2-3% of pool refresh, easily.

ESOP economics is the cleanest place where partner-led readiness work pays for itself. The right pool size, the right top-up timing, the right grant structure — the dilution swing between an inexperienced founder negotiation and a partner-supported one is usually 1-3 percentage points of founder ownership. On a typical Indian Series A, that's $2-5M of value.