Build an employee ownership plan with clear terms, proper approvals and practical compliance support.

An Employee Stock Option Plan (ESOP) allows eligible employees to acquire company shares after meeting agreed conditions. For startups, it can support recruitment and retention while giving employees an opportunity to participate in the company’s growth.

Remind Legal helps startups assess ESOP applicability, structure their scheme, prepare approval documents and manage compliance from grant to share allotment.

Planning to Offer ESOPs? Start With Clear Terms

An ESOP promise in an offer letter needs a properly approved scheme behind it. Unclear vesting schedules, incomplete approvals or poorly drafted exit terms can create uncertainty for the employees, founders and investors. 

Before granting options, your startup should understand who qualifies, how much dilution is proposed, when employees can exercise their options and what tax obligations may arise.

Get an ESOP Applicability and Scheme Assessment with Remind Legal.

Quick Facts About ESOPs for Startups

The company law and various tax frameworks must be applied separately; startup recognition does not automatically establish eligibility for every benefit.

What Is an Employee Stock Option Plan?

An ESOP gives an eligible employee the right, without an obligation, to acquire company shares at a predetermined exercise price, subject to the scheme’s conditions.

The main stages are: -

Employees do not receive shareholder voting or dividend rights merely because options have been granted. Shareholder rights arise when shares are issued on exercise.

Example: A startup grants an employee 1,000 options that vest in stages. The employee can exercise only the options that have vested, within the applicable exercise window. Their eventual financial benefit depends on the exercise cost, taxes, share value and availability of a permitted sale.

Which Startups Should Consider an ESOP?

An ESOP may be useful for startups that want to: -

• Attract employees for important technical, operational or leadership roles.
• Reward continued service and performance.
• Establish a consistent employee ownership policy.
• Prepare for investor discussions about an employee option pool.
• Replace informal equity promises with documented arrangements.

An ESOP should fit the startup’s hiring plans, ownership structure and financial capacity. Employees should receive a clear explanation of its costs and conditions before accepting a grant.

Who Is Eligible for ESOPs in India?

For unlisted companies governed by Rule 12, eligible participants generally include: -

• Permanent employees working in India or outside India.
• Directors, whether whole-time or otherwise, excluding independent directors.
• Eligible employees and directors of holding or subsidiary companies.

Promoters, persons belonging to the promoter group and directors holding more than 10% of outstanding equity, directly or indirectly through the specified relationships, are ordinarily excluded.

Qualifying startup companies have a relaxation from these promoter and director-shareholding exclusions for up to 10 years from incorporation or registration. The relaxation does not remove the exclusion for independent directors.

Consultants, freelancers and external advisers do not qualify merely because they provide services. Any proposed equity arrangement for them requires a separate legal assessment.

An LLP or proprietorship cannot issue company shares through the Companies Act ESOP route. Alternative incentive arrangements require different structuring.

What Legal Requirements Must a Startup Follow?

Obtain the appropriate corporate approvals

An ESOP requires shareholder approval and proper corporate documentation.

Section 62(1)(b) ordinarily requires a special resolution. The private-company exemption notification substitutes an ordinary resolution for eligible private companies, subject to the applicable conditions, including the filing-default restriction introduced in 2017.

However, Rule 12 continues to refer to a special resolution. The approval route should therefore be reviewed alongside the exemption, articles and investor agreements. Passing a special resolution is a practical approach where available; it should not be described as universally mandatory for every private company.

Define the scheme before issuing grants

The scheme should address: -

• Option pool and eligible employee categories.
• Exercise price or pricing formula.
• Vesting conditions and exercise windows.
• Resignation, termination, death and permanent incapacity.
• Treatment during restructuring or an exit.
• Administration, adjustments and amendment procedures.

The shareholder notice must include the prescribed explanatory disclosures. Separate shareholder approval is required for specified grants, including grants to holding or subsidiary company employees and grants reaching the prescribed individual threshold.

Review tax and the valuation separately

For the shares allotted or transferred under an ESOP, the taxable salary perquisite is usually the fair market value on the exercise date minus the amount paid by the employee. A subsequent sale may attract capital gains tax, with the fair market value used to calculate the perquisite treated as the cost of acquisition.

For the unlisted equity shares, the prescribed ESOP tax valuation requires a SEBI-registered Category I merchant banker under the Rule 15 of the Income-tax Rules, 2026. A fundraising valuation should not automatically be reused for this purpose.

What Documents Are Required to Set Up an ESOP?

The checklist basically depends on whether you are creating a new scheme or correcting an existing one.

Not every document is filed with the Registrar of Companies. Some support eligibility checks, drafting, valuation and internal records.

What Is the Process to Implement an ESOP?

1. Assess eligibility and existing commitments

Review and examine the company’s status, proposed participants, startup relaxations and any equity commitments already made.

2. Decide the option pool and commercial terms

Model potential dilution and agree on the proposed grants, vesting conditions, exercise costs and treatment of departing employees.

3. Draft the scheme and grant documents

Prepare and organise the ESOP scheme, grant letter, acceptance terms and various supporting procedures. Align these with the employment and investor documents.

4. Complete approvals

Prepare the board papers, shareholder notices, explanatory statements and the resolutions. Obtain the investor consent where contractually required.

5. Complete applicable filings and issue grants

File the resolutions where required, issue the approved grant documents and establish the option register.

6. Administer vesting and exercise

Track vesting, employee departures and exercise deadlines. Before allotment, coordinate the applicable valuation, payroll tax, capital and various dematerialisation requirements.

7. Allot shares and update records

Complete the allotment documentation and various applicable returns. For ordinary ESOP share allotments, PAS-3 is generally due within 30 days of allotment.

Get assistance with ESOP drafting, corporate approvals and implementation.

What Does ESOP Implementation Cost?

There is no single government charge covering the entire ESOP lifecycle.

Remind Legal can provide a scope-based proposal after reviewing your requirements. Government charges, valuation costs and third-party expenses should be identified separately.

How Long Does It Take to Set Up an ESOP?

The implementation period depends on document readiness, scheme complexity, investor consent and corporate meeting requirements.

Rule 12 generally requires at least one year between grant and vesting, subject to its prescribed exceptions. A startup can complete its scheme documentation before employees become entitled to exercise options.

Does an ESOP Require Renewal?

An ESOP is a corporate scheme rather than a periodically renewable government licence. Its duration, grant period and exercise deadlines are governed by its approved terms and applicable law. The company should review the scheme when ownership, hiring plans, investor arrangements or legal requirements change.

Amendments require the applicable approvals. Changes to unexercised options must comply with the protections prescribed under Rule 12.

What Exceptions and Special Cases Need Additional Review?

ESOP tax deferral for eligible startups

DPIIT recognition alone does not establish the eligibility for the ESOP tax deferral. The employer must meet the various relevant tax-law requirements, including the eligible-startup conditions under the section 140 of the Income-tax Act, 2025.

Under sections 289(3) and 392(3), qualifying deferred ESOP tax becomes payable or deductible within 14 days of the earliest applicable trigger: -

• Expiry of 60 months from the end of the relevant tax year.
• Sale of the relevant shares.
• Cessation of employment with the employer that allotted or transferred them.

This postpones payment; it does not exempt the benefit from tax. Earlier transactions require a review of the applicable transitional provisions.

Employees resident outside India

The Non-resident participation requires the FEMA assessment, including the sectoral caps and various approval conditions. Applicable Form ESOP reporting is due within 30 days of issuing the options; companies should not wait until the exercise to assess this obligation. Reporting on the subsequent share allotment must also be examined.

Death, incapacity and employee departures

Rule 12 contains the specific treatment for the death and permanent incapacity. Resignation and termination also require careful distinction between vested and unvested options. Scheme terms must be consistent with these requirements.

Listed companies and overseas parent schemes

Listed-company ESOPs fall under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, as amended. Options in an overseas parent involve a different cross-border analysis from options in an Indian startup.

What Compliance Continues After Scheme Approval?

After approval, establish a system to: -

• Maintain the Form SH-6 register and supporting grant records.
• Reconcile grants, vesting, lapses and exercises.
• Monitor the available pool and ownership dilution.
• Complete prescribed Board’s Report disclosures.
• Coordinate accounting, payroll and tax treatment.
• File applicable allotment and cross-border returns.
• Update the shareholder records following allotment.
• Review or examine amendments before implementing them.

A compliance calendar should assign responsibility for each event, rather than relying only on annual filing reminders.

What Common ESOP Mistakes Should Startups Avoid?

• Promising equity before agreeing on the scheme and the approval process.
• Treating granted options as shares already owned.
• Offering standard ESOP grants to the ineligible participants.
• Assuming DPIIT recognition automatically allows tax deferral.
• Leaving resignation and exercise deadlines unclear.
• Using the same valuation for every legal, tax and accounting purpose.
• Ignoring investor consent or the effect of future fundraising.
• Describing employee liquidity or returns as guaranteed.
• Allowing grant records and the cap table to differ.

Employees should understand both the ownership opportunity and the money they may need for exercise and taxes.

Why Choose Remind Legal for ESOP Assistance?

Remind Legal helps connect your startup’s employee incentive objectives with the documentation and compliance needed to implement them.

Depending on the agreed scope, assistance can include: -

• Company and participant applicability assessment.
• Scheme drafting and review.
• Approval papers and the grant documentation.
• Alignment with employment and investor arrangements.
• Review of existing ESOP commitments.
• Filing and compliance coordination.
• Coordination with tax, accounting and valuation professionals.

The engagement scope is confirmed after reviewing your company records and proposed structure.

What Do We Need from You?

To begin, share: -

• Company name, CIN and the incorporation date.
• Current cap table and investor agreements.
• DPIIT recognition details, where it’s available.
• Proposed pool size and the participant list.
• Preferred vesting and exercise terms.
• Details of overseas participants.
• Existing schemes, grant letters or equity promises.
• Any proposed fundraising or employee exit event.

These details help identify the approvals, drafting work and specialist inputs your startup needs.

Put Your Startup’s ESOP Plan into Action

Create clear employee ownership terms before issuing grants. Remind Legal can help you assess eligibility, prepare the scheme and coordinate implementation.

Request Your ESOP Scheme Assessment and Drafting Proposal.

Legal Disclaimer

This page provides the general information and does not constitute advice for a particular company, employee or transaction. ESOP requirements basically depend on company status, participant eligibility, residency, scheme terms and applicable law. Obtain professional legal and tax review before granting options, changing a scheme or allotting shares.