ESOP Advisory and implementation

Practice — Equity & ESOPs

ESOP advisory & implementation for Indian and foreign-owned companies.

From drafting the scheme and setting up the option pool to granting options and maintaining statutory registers — we manage the full ESOP lifecycle under the Companies Act, 2013.

Quick answer

ESOP implementation happens in two legal phases: setting up the pool, then granting options. Pool creation needs board and shareholder approval plus an MGT-14 filing — typically 3–4 weeks including the mandatory 21-day shareholder notice. Granting options to specific employees, once the pool exists, takes about a week.

Understanding the options

ESOP, Sweat Equity, or Advisory Shares — which one fits?

Companies often confuse these three equity-compensation tools. They serve different people for different reasons, and the legal route differs for each.

Feature	ESOP	Sweat Equity	Advisory Shares
Who receives it	Permanent employees and eligible directors	Employees or directors with specific IP/know-how	External mentors, consultants, board members
What is given	A right to buy shares later, at a fixed price	Actual shares issued immediately	Equity in exchange for advisory time
Payment	Employee pays a strike price on exercise	Given for know-how — no cash needed	No cash — tied to an advisory agreement
Lock-in	Usually none once vested and exercised	Mandatory 3-year lock-in	Milestone-based vesting, no fixed lock-in
Typical vesting	3–4 years, to encourage retention	Not applicable — issued upfront	1–2 years or tied to deliverables

How implementation works

Two legal phases: set up the pool, then grant the options.

Before any employee can be given options, the pool must be legally created. Only then can individual grants happen.

Phase 1

Setting up the ESOP pool

Drafting the scheme. We draft your ESOP policy, including the cliff (minimum 1-year wait before vesting starts), the vesting schedule, and the exercise price.
Board approval. A board meeting approves the draft scheme and the size of the pool — usually 5–15% of the company.
Shareholder approval. A Special Resolution (75% majority) is passed at an EGM to formally adopt the plan.
ROC filing. Form MGT-14 is filed with the Registrar of Companies within 30 days to make the pool legally valid.

Phase 2

Granting & managing options

Valuation. A Registered Valuer report fixes the Fair Market Value, needed for accounting and future tax calculations.
Grant letters. Individual grant letters go out to employees, stating option count and vesting schedule.
Statutory register. We set up and maintain the Register of Employee Stock Options (Form SH-6), tracking every option granted, vested, or cancelled.
Allotment. When an employee exercises vested options, we handle the board resolution and file Form PAS-3 to issue the actual shares.

Typical timeline

Pool creation takes 3–4 weeks. Grants take about a week once it's active.

The 21-day statutory notice period for the shareholder meeting is the main driver of Phase 1's timeline.

Pool creation (Phase 1)	3–4 weeks Includes the mandatory 21-day EGM notice
Granting options (Phase 2)	1 week Once the pool is active

DPIIT startups get more flexibility

Recognised startups get real advantages here.

If your company is registered as a DPIIT startup, two rules loosen considerably compared to a standard private limited company — worth checking before you finalise your scheme.

Promoter eligibility

DPIIT startups can issue ESOPs to promoters and directors holding more than 10% for the first 10 years — a benefit not available to regular companies.

Standard eligibility

Only permanent employees and directors (excluding independent directors) are eligible to receive ESOPs under the general rule.

What you need in place

Common requirements before we start.

Cap table — current shareholding structure, to size the pool correctly.

Employee list — names, roles, and proposed option counts for the first grant round.

Latest valuation — a recent Registered Valuer report, if available, speeds up the FMV process.

DPIIT status — confirmation of startup recognition, if applicable, to unlock promoter eligibility.

Frequently asked questions

Common questions about ESOP implementation.

What is the minimum vesting period for an ESOP in India?

The law mandates a minimum 1-year cliff between the grant date and the first vesting date. Beyond that, the full vesting schedule (commonly 3–4 years) is set by your company's own ESOP policy.

How big can the ESOP pool be?

Most companies set aside 5–15% of their total share capital for the ESOP pool. There is no statutory cap — the size is a commercial decision approved by the board and shareholders.

Can independent directors receive ESOPs?

No. Under the Companies Act, independent directors are specifically excluded from ESOP eligibility to preserve their independence from the company's equity outcomes.

Do we need a valuation before granting options?

Yes. A Registered Valuer's Fair Market Value report is required at the grant stage — it sets the accounting expense and later determines the tax treatment when options are exercised.

What happens when an employee exercises their options?

We handle the board resolution approving the allotment and file Form PAS-3 with the ROC to formally issue the shares — updating the Register of Employee Stock Options (Form SH-6) at the same time.

Ready to set up your ESOP scheme?

Schedule a no-obligation discovery call. We'll review your cap table and outline a clear pool-to-grant timeline.

Schedule a consultation Write to rohit@krprassociates.com