Introduction to ESOP Pool

An ESOP pool is a reserve of company shares set aside for employee stock ownership plans, designed to incentivise, and retain employees by granting them ownership stakes in the company.
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3 mins read
29-September-2025

Think of an ESOP pool as a dedicated basket of company shares, created solely to reward employees. In simple terms, it is a slice of ownership set aside to attract, retain, and motivate talent. For growing companies and startups, an ESOP pool is not just a perk, it is a smart way to compete with bigger firms, build loyalty, and give employees a genuine stake in the company’s journey.

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How ESOP pool works?

An ESOP pool may sound complex, but the flow is quite straightforward:

  • Creation: A company sets aside a percentage of its total shares for the pool.

  • Distribution: Employees receive stock options, often based on performance, role, or tenure.

  • Vesting: Options unlock gradually, linked to tenure or milestones.

  • Exercise: Employees buy shares at a fixed price, gaining from any rise in value.

This cycle ensures employees not only contribute to growth but also benefit directly from it.

Legal and regulatory aspects

In India, ESOP pools are governed by the Companies Act, 2013, and SEBI regulations. These rules ensure fair creation, transparent distribution, and proper disclosure. From shareholder approvals to tax compliance, every step must be followed carefully. Staying aligned with these laws safeguards both the company and its employees.

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Managing an ESOP pool

For an ESOP pool to succeed, careful management is key. This involves:

  • Reviewing the pool size to match business growth.

  • Clear communication with employees on how ESOPs benefit them.

  • Maintaining accurate records of grants, vesting, and exercises.

  • Ensuring compliance with tax and governance norms.

Companies often seek expert advice to handle these aspects, ensuring the ESOP pool remains a true motivator.

Accounting treatment of ESOP pool

From an accounting perspective, the fair value of stock options is recorded as a compensation expense over the vesting period. This means:

  • Equity adjustments are made when shares are issued.

  • Financial statements reflect the real cost of ESOPs.

  • Disclosures include total compensation, granted options, and valuation methods.

Proper accounting not only ensures compliance but also builds trust with investors and employees alike.

Benefits of an ESOP pool for employees

An ESOP pool offers employees more than stock, it creates lasting financial security and strengthens workplace commitment.

  • Creates wealth over the long term.

  • Builds a sense of ownership and accountability.

  • Increases motivation and productivity.

  • Provides employees with a direct share in the company’s growth.

Benefits of an ESOP pool for companies

For companies, an ESOP pool is a strategic advantage, helping attract, retain, and motivate top-performing professionals.

  • Attracts and retains high-quality talent.

  • Reduces attrition by building loyalty.

  • Compensates for lower cash salaries in startups.

  • Enhances the company’s employer brand.

Conclusion

An ESOP pool is much more than a stock option reserve, it is a strategic tool for building loyalty, rewarding performance, and fuelling company growth. From creation to compliance, every stage matters. For employees, the real win is turning stock options into wealth, but exercising them often requires funds.

Have vested ESOPs but short on cash to exercise them? ESOP financing helps you unlock liquidity today without losing ownership of your shares. Apply for ESOP financing today!

Frequently asked questions

How to calculate ESOP pool?
The ESOP pool is calculated by determining a percentage of the company's total outstanding shares. This percentage is allocated to be distributed as stock options to employees over time.

How big should an ESOP pool be?
An ESOP pool should generally be around 10% to 20% of the company’s total outstanding shares. The exact size depends on the company’s goals, stage of growth, and the need to attract and retain key talent.

What is an employee stock option pool?
An employee stock option pool (ESOP pool) is a reserve of company shares set aside specifically for granting stock options to employees, incentivizing them and aligning their interests with the company's success.

How to increase the ESOP pool?
To increase the ESOP pool, the company needs to obtain approval from its board of directors and shareholders. This process typically involves issuing additional shares and amending the company's stock option plan.

How much ESOP is good?
The ideal amount of ESOP varies but typically ranges from 10% to 20% of the total outstanding shares. The appropriate size depends on the company’s stage, growth strategy, and the need to incentivize and retain employees.

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