Understand the 'ESOP Shuffle' and compare the exact founder equity loss when creating an employee stock option pool on a Pre-Money basis versus a Post-Money basis.
The Pre-Money vs Post-Money ESOP Shuffle
When venture capital investors offer a term sheet, they often mandate creating a 10%–15% unallocated ESOP pool:
Pre-Money ESOP (VC Preferred): The ESOP pool is carved out before the investment. This means 100% of the dilution is borne solely by existing founders, effectively lowering the real valuation.
Post-Money ESOP (Founder Preferred): The ESOP pool is created after investment, meaning new investors and founders share the dilution proportionally.
Because creating the ESOP pool pre-money ensures the new investor gets their exact target ownership percentage (e.g. 20%) without being diluted by future employee hires.
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Seed and Series A startups in India typically maintain an unallocated ESOP pool between 8% to 12% for key executive hiring.