This short guide demonstrates one common way that founders can calculate the number of options to include in their ESOP pool.

Many founders set up an ESOP pool on a fully diluted basis. This means that the founders decide on the size of the ESOP based on the number of shares the company has on issue and assuming that all options (including options in the ESOP) have been fully exercised.

example

For the purposes of this example we have assumed that the founders are setting up a customary 10% ESOP pool.  If you are intending to calculate the size of your ESOP pool on a fully diluted basis, the ESOP should be equal to 10% of all shares and options on issue (including the ESOP).  Looking at a company with 1,000,000 shares on issue:

tool

If you are experiencing some arithmetic fatigue, we have you covered.  Available for download here is a spreadsheet tool that incorporates the above formula.  All you need to do is plug in your total number of shares and options on issue, your ESOP pool size as a percentage, and the tool will generate the relevant number of ESOP pool shares on a fully diluted basis.