What is Employee Stock Option Pool (ESOP)?
Nexa Consultancy | Startup & Finance Glossary
An Employee Stock Option Pool (ESOP) is a block of common stock that a company reserves for issuance to its employees and advisors. It is the primary tool used by startups to attract, motivate, and retain talent when they cannot compete with the high cash salaries offered by larger corporations.
Base Term for Startups: Creating an ESOP is a standard practice for any startup that plans to hire a team. The size of the pool is typically 10-20% of the company's total equity. You can use our ESOP Dilution Calculator to model the impact.
How it Works: Employees are granted "options," which are the right to buy a certain number of shares at a predetermined, fixed price (the "strike price") after a vesting period. If the company's value increases, the employee can buy the shares at the low strike price and sell them at the higher market price, realizing a profit.
Base Term Example: A startup creates an ESOP pool of 15% of its shares to attract its first five key engineering hires.