Your ESOP pool in diligence

First: what does the pool do to my stake? The unissued portion of the pool dilutes on a fully diluted basis, so it must appear as its own line. Folding it into “others” is the most common way a cap table misleads without anyone intending it.

Second: are the grants real? A grant letter without a governing scheme, or a scheme never properly approved, is a promise the company may not be able to honour, and an employee who discovers that during an exit becomes a problem the investor inherits.

The grant letter says how many options someone has. The scheme says what an option actually is: vesting, cliff, exercise period, exercise price, treatment on resignation, on termination for cause, on death, on a change of control, and what happens to unvested options in an acquisition.

Without it, vesting cannot be verified and none of those outcomes can be priced. So “send the ESOP scheme” is usually one of the first legal requests, and “we don’t have one written down” is a finding.

1. Grants exceeding the approved pool. The pool was approved at one size, grants were made against a larger intended size, and nobody re-approved.
2. Scheme never approved by shareholders. Issuing options to employees generally requires shareholder authorisation. A scheme the board adopted alone may need ratifying.
3. Grant letters inconsistent with the scheme. Different cliffs, different exercise windows, terms negotiated individually and never reflected anywhere. Each variation is effectively a separate contract.
4. No grant register. Who holds how many, granted when, vested how much, exercised how much. If this only exists as a founder’s memory plus some emails, it has to be rebuilt during diligence.
5. Leavers never processed. People left; their unvested options were never cancelled and their vested ones never lapsed or exercised. The pool is quietly over-committed.

Investors frequently require the pool to be increased as part of the round, and whether that increase comes out of the pre-money or post-money cap table is worth real money to you.

A top-up inside the pre-money dilutes existing shareholders, which in practice means mostly the founders. A top-up post-money dilutes everyone including the new investor. Term sheets often specify this in one clause that is easy to read past. Know which one you are agreeing to before you sign. See what a term sheet actually commits you to.

• The scheme document, and the resolution approving it
• Any amendments, with their approvals
• A grant register: holder, grant date, quantity, exercise price, vesting start, vesting schedule, vested to date, exercised, outstanding, status
• Template grant letter, plus any that deviate from it
• Pool reconciliation: approved size, granted, exercised, lapsed, available

That last line is the one investors use and the one founders most often cannot produce. If granted plus available does not equal approved, the difference is the conversation.

A grant register identifies individuals and their holdings, which makes it personal data. Share it because it is necessary to the transaction, but there is rarely a reason to include salary alongside it, and no reason at all to include home addresses or identity numbers. Strip the columns an investor does not need. Context in DPDP and your investor data room.

A practical summary, not legal, tax or financial advice. ESOP approval requirements, tax treatment and enforceability depend on your facts and current rules; take advice on your own situation.