ESOP

An Employee Stock Option Plan (ESOP) is a scheme under which a company grants its employees the option to acquire equity shares of the company in the future, at a pre-determined exercise price. Governed by Section 62(1)(b) of the Companies Act 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules 2014 (for unlisted companies) and SEBI (SBEB & SE) Regulations 2021 (for listed companies).

The four lifecycle events:

1. Grant — Board issues a grant letter specifying number of options, exercise price, vesting schedule, cliff, expiry. Approved at a board meeting (with shareholder special resolution required for the plan and for grants above thresholds — Rule 12). 2. Vest — options become exercisable after the cliff and per the vesting schedule. Minimum gap between grant and first vest: 1 year (Rule 12(1)). Vesting itself is not a tax event. 3. Exercise — employee pays the exercise price and receives equity shares. Tax event #1: difference between Fair Market Value on date of exercise and exercise price taxed as perquisite under Section 17(2)(vi) of the Income Tax Act — included in salary, TDS deducted by employer under Section 192. 4. Sale — employee sells the shares. Tax event #2: difference between sale price and FMV at exercise taxed as capital gain (long-term if held >24 months for unlisted, >12 months for listed equity).

Eligibility (Rule 12(1)):

• Permanent employees (Indian or working abroad)
• Directors (except independent directors and promoters — though startup carve-outs exist)
• Employees of subsidiary / holding company
• Excluded: promoters or persons belonging to promoter group; directors holding > 10% directly or beneficially (with carve-outs for DPIIT-recognised startups for 10 years from incorporation)

Compliance & filings:

• Special resolution for ESOP scheme; MGT-14 filed within 30 days.
• On allotment after exercise: PAS-3 within 30 days.
• Annual ESOP disclosure in the Board's Report (Rule 12(9)).
• For listed entities, additional SEBI disclosures and trustee compliance.

Key levers for startup founders: ESOP pool sizing (typically 10–15% post-money), accelerated vesting on change of control, post-termination exercise windows, and cashless exercise mechanics for liquidity events / buybacks.