Why ESOP design decisions are hard to walk back
An ESOP scheme sets expectations with your team, and once options are granted under specific terms, changing those terms is far harder than getting them right at the outset. It's worth treating the initial scheme design as a genuinely consequential decision, not a template to fill in quickly.
Sizing the option pool
The pool needs to be large enough to make meaningful grants through your next several hires and at least one more funding round, without diluting existing shareholders more than intended. Pool sizing is also something investors will have views on during fundraising, so it's worth thinking about this in the context of your funding roadmap, not just your current headcount.
Vesting structure
A standard structure includes a cliff (typically a minimum period before any options vest at all, to filter for genuine commitment) followed by graded vesting over several years. The specific schedule should reflect how long you actually expect key roles to take to become fully productive and valuable to retain.
Strike price and valuation
The exercise price is generally set based on the fair market value of the shares at the time of grant, which requires a formal valuation. Getting this valuation done properly matters both for the accounting treatment and for the tax position of your employees when they eventually exercise.
Decisions worth thinking through early
- What happens to unvested options if someone leaves before their cliff, or after?
- Will departing employees have a limited window to exercise vested options, and how will they fund that?
- How will the scheme handle a future acquisition — accelerated vesting, or continuation under the acquirer?
Get the paperwork right from the start
A properly documented scheme — board and shareholder approvals, a formal ESOP policy, individual grant letters — protects both the company and the employees receiving options. Retrofitting proper documentation onto an informally-run scheme later is considerably more work than doing it correctly the first time.
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