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ESOP Pool Setup: Pre-money vs Post-money Structuring

June 19, 2025
10:40 am

ESOP Pool Setup: Pre-money vs Post-money Structuring

What Founders Get Wrong About ESOPs

ESOP Pool Setup: Pre-money vs Post-money Structuring is one of the most misunderstood aspects of startup funding. It sounds like jargon—but it can cost you lakhs or even your control in the startup.

And that’s exactly what happened with Dev Mishra.

Dilution Wreckage

Dev Mishra, a bright IITian with a mission to build India’s next edtech giant, was in talks with his first VC. His startup had five early employees, and they’d agreed to give them 10% in ESOPs.

The VC liked Dev’s pitch but said,
“We’ll go ahead, just create a 10% ESOP pool before our investment.”

Dev nodded. Done.

He didn’t realise what that meant—he was creating the ESOP pool from his own share, not the VC’s.

The 10% ESOP was created pre-money, meaning before the VC’s investment, and that pushed his own equity down more than he’d calculated. He thought he’d hold 70% post-deal; he ended up with 60%. That 10% dilution came out of his pocket—not the investor’s.

And when his co-founder saw the final cap table?
Chaos. Accusations. Broken trust. Dev spent weeks patching things up.

All because of one mistake: misunderstanding ESOP Pool Setup: Pre-money vs Post-money Structuring.

Investors & Red Flags

What happened to Dev isn’t rare—it’s almost a startup rite of passage.

Investors, especially institutional ones, will often insist on a pre-money ESOP pool, because it’s favorable to them. But for the founder? It creates two problems:

Higher Dilution: If the pool is created pre-money, the founder bears the full dilution.

Negotiation Blind Spots: Founders don’t always model dilution scenarios before the term sheet. They don’t see how ESOP Pool Setup: Pre-money vs Post-money Structuring can shift percentages by 5–15%.

Worse, some founders mix up post-money vs pre-money completely and end up over-promising equity to early hires. A mismanaged ESOP pool also spooks future investors—it shows weak financial leadership.

Structuring ESOP Pool Right

Here’s the fix—one that could’ve saved Dev a ton of headaches:

Negotiate a Post-Money ESOP Pool.

If you set up the ESOP pool after the investor’s money is in, the dilution is shared proportionally. So instead of Dev bearing the full 10% loss, both he and the investor would take a 5% hit.

Smart founders’ model multiple cap table scenarios before signing term sheets. They use tools, advisors, or professionals who understand ESOP Pool Setup: Pre-money vs Post-money Structuring in the Indian context.

A clean cap table = higher valuation, better employee trust, and investor confidence.

Align ESOP Pool with Funding Strategy

Here’s the real magic:

Structure your ESOP pool in alignment with your funding stage and hiring goals.

Pre-Seed/Seed: Keep the ESOP pool lean (5–7%). Use sweat equity carefully.

Pre-Series A: Push for post-money structuring. Have a 10–15% pool only if you have a hiring roadmap.

Series A+: Build an ESOP policy with vesting, cliffs, and clarity. This is where compliance and documentation matter most.

Bonus: If you structure right, unused ESOPs can be reabsorbed into your equity later. That’s like a secret weapon on your cap table.

At Legal Suvidha, we’ve helped 300+ startups get this right. We simulate dilution, help in investor negotiations, and ensure your ESOP Pool Setup: Pre-money vs Post-money Structuring is founder-friendly and investor-aligned.