Yes it will.
At the stage of encryption, Espionage calculates the max capacity of the disk image according to the size of the source folder.
But why do you bother with this?
Here is what the manual says:
When a folder is first encrypted, Espionage decides on the folder's capacity using the Minimum Image Capacity (MIC) like so:
if 10 times the size of the folder is greater than the MIC folder capacity = 10 times the size of the folder
otherwise,
folder capacity = MIC
The capacity of the disk image is significantly larger then the amount of data you protect initially, so you are not likely to run out of space, you are free to add files into it, and only once it complains that there are no more space left, then you can do what you just said, decrypt the whole thing and then add it new to Espionage.
Rgds
Zsolt