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How large is your ESOP pool?
Here’s what they mean…
ESOP is short for Employee Share Ownership Plan. It’s a pool of options you reserve to issue to employees. Before every round of finance you raise, investors will ask you to either create an ESOP (your first round) or increase that pool. “How large is your ESOP pool?” is important to VCs because they understand that your team needs to have benefits for you to be able to retain them.
At Series-A and beyond, you will be required to have an ESOP. This will vary between 10-15%. If you want to learn more about ESOP, then I have the most material on the internet. It’s not simple but you can learn. I also have a training course. If you want to learn more you should read a couple of blogs.
VCs know that your team is all that matters and that you will need to issue equity to attract and retain them. VCs also don’t really want to get diluted to create one.
The ESOP comes out of the pre-money, meaning you the founders and previous investors are the ones getting diluted. You want to make an ESOP only as large as you need to get to the next round.
If you don’t have an ESOP, or it is very small, they will just tell you how large they expect it to be in the term sheet. The way you manage this is through making a hiring plan and being forward about it to control the narrative.
When VCs ask this question, they are trying to figure out how large they need to tell you to make the ESOP before they will invest.
What you need to say
“We set up an ESOP of 10% in the last round. We have issued staff 2%, so there is 8% left. According to our hiring plan in this round, we will need to give 6% to staff, so our ESOP has us covered already. We checked some comps and this seems in line with the market.”