ESOP Advisory

Design and Implement Employee Stock Option Plans That Work

A well-designed Employee Stock Option Plan (ESOP) is a powerful tool for attracting and retaining talent, but a poorly structured one creates cap table confusion, tax surprises for employees, and compliance issues under the Companies Act and Income Tax Act. Getting the structure, valuation, and documentation right from the start matters.

We help companies design, implement, and administer ESOP schemes — from pool sizing and vesting structure to valuation, board and shareholder approvals, and ongoing compliance — so the plan genuinely motivates employees while staying legally sound.

Our ESOP Advisory Services

ESOP Scheme Design

Structuring pool size, vesting schedules, cliff periods, and exercise conditions aligned to company strategy and stage.

ESOP Valuation (Fair Value)

Determining fair value of options for accounting under Ind-AS 102 / Guidance Note and for tax purposes on exercise.

Legal Documentation

Drafting the ESOP scheme document, grant letters, and board/shareholder resolutions as required under the Companies Act.

Cap Table Modelling

Modelling the dilution impact of the ESOP pool across current and future funding rounds.

ESOP Trust Structuring

Setting up and administering an ESOP trust structure where appropriate for pooled option management.

Ongoing Administration & Compliance

Tracking grants, vesting, exercises, and lapses, along with related accounting and tax compliance each year.

Key Considerations Before Rolling Out an ESOP

Companies Act, 2013 requires a special resolution and specific disclosures for private company ESOP schemes
Options must have a minimum one-year gap between grant and vesting under the applicable rules
Perquisite tax arises for employees at the time of exercise, based on fair market value at that date
Promoters and promoter group members are restricted from receiving ESOPs under Companies Act rules
ESOP pool size affects post-money ownership for all shareholders and should be modelled before every round
Fair valuation of options is required for both accounting expense recognition and tax computation

Frequently Asked Questions

How are ESOPs taxed for employees in India?

ESOPs are taxed at two points: as a perquisite under the head 'salary' at the time of exercise, based on the difference between the fair market value of shares on the exercise date and the exercise price paid, and again as capital gains when the employee eventually sells the shares, based on the difference between sale price and the fair market value already taxed.

What is the minimum vesting period for ESOPs under Indian law?

Under the Companies (Share Capital and Debentures) Rules, there must be a minimum period of one year between the grant of options and their vesting, though the company has flexibility to design longer vesting schedules, cliffs, and staggered vesting tranches within that constraint.

Can promoters or directors holding more than 10% equity be given ESOPs?

For private companies, promoters and directors holding, directly or indirectly, more than 10% of the outstanding equity shares are generally not eligible to receive ESOPs, subject to certain exceptions, which is a key structuring consideration for founder-heavy cap tables.

What approvals are needed to implement an ESOP scheme?

A private company must pass a special resolution approving the ESOP scheme at a general meeting, along with specific disclosures on the scheme in the explanatory statement, followed by board approval for individual grants made under the approved scheme.

How is the size of the ESOP pool typically decided?

ESOP pool sizes are usually decided based on stage and sector benchmarks — commonly in the range of 5% to 15% of fully diluted equity for early to growth-stage companies — and are modelled against expected future funding rounds so the pool doesn't need disruptive top-ups later.

Design an ESOP That Motivates and Complies

From scheme design to valuation and compliance, we help you build an ESOP structure that works for your company and your employees.

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