Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
The approval steps
The sequence is: the board approves a draft ESOP scheme, then shareholders pass a special resolution adopting it. The scheme document sets out the pool size, who is eligible, the vesting period, the exercise price and what happens on exit. Private companies get some relaxations from the stricter listed-company conditions.
Designing the pool and vesting
Decide how many shares to reserve — most startups keep a pool of about 5–15% of fully-diluted equity — and a vesting schedule, commonly four years with a one-year cliff. Set the exercise price (often face value or a discount to fair value) carefully, as it drives the later tax.
Grant, records and tax
Once the scheme is approved, issue grant letters to employees, maintain the option register, and keep the board and shareholder resolutions on file. Remember the two tax points that will arise later: a perquisite at exercise (taxed as salary on the fair value minus the exercise price) and capital gains at sale. Crucially, employees of an eligible 80-IAC startup can defer the perquisite tax under Section 192(1C), easing the cash crunch of paying tax on shares they cannot yet sell. Example: a startup reserves a 10% pool, grants 1,000 options to an early hire at a ₹10 exercise price with four-year vesting and a one-year cliff — nothing is taxed until exercise. Getting the scheme document, vesting terms and exercise price right at the outset avoids painful renegotiation later. Our ESOP advisory service drafts the scheme and the grant letters.