# ESOP Scheme Design & Documentation

> A private company issues ESOPs under Section 62(1)(b) of the Companies Act with a special resolution, a written scheme, a minimum one-year vesting period and a register in Form SH-6. Promoters and directors holding over 10% can't get options — except in DPIIT-recognised startups for ten years from incorporation. Employees pay tax as salary on the gain at exercise; employees of 80-IAC startups can defer it.

Practice: Startup Funding, ESOP & Valuation — https://www.industax.com/services/startup-funding/

Design decisions drive value: pool size, vesting and cliff, exercise price, exercise window after leaving, and what happens on an acquisition. We set these to match your hiring plan and investor expectations, then draft the scheme, grant letters and approvals.

Alternatives such as phantom stock or stock appreciation rights give cash-based rewards without issuing shares. For foreign employees, the company also reports the issue in Form ESOP under FEMA within 30 days.

## Key facts

| Item | Detail |
| --- | --- |
| Law | Section 62(1)(b), Companies Act; Rule 12, Share Capital Rules |
| Approval | Special resolution |
| Minimum vesting | 1 year |
| Promoters / 10%+ directors | Not eligible, except DPIIT startups for 10 years |
| Tax | Perquisite at exercise; deferral for 80-IAC startups |

## Who needs this

- Startups creating a first ESOP pool
- Companies expanding or revising a scheme
- Companies granting options to foreign employees

## What's included

- Scheme design
- Scheme document and grant letters
- Resolutions, MGT-14 and SH-6 register
- Employee tax and TDS guidance

## Documents

- Articles and cap table
- Hiring plan and grant list
- Board and shareholder approvals

## Process

1. **Design** — Pool, vesting and exercise terms set.
2. **Approve** — Special resolution and filings completed.
3. **Operate** — Grants, vesting and exercises administered.

## Also covers

- **ESOP scheme** — Design and approval of the scheme.
- **ESOP documentation** — Scheme, grant letters, registers and filings.

## FAQs

### Can founders get ESOPs?

Not if they are promoters or directors holding over 10%, unless the company is a DPIIT-recognised startup within ten years of incorporation.

### When do employees pay tax on ESOPs?

On exercise, on the difference between the share's fair market value and the exercise price; and again as capital gains on sale.

### What happens to options if an employee dies?

All options granted till then vest immediately in the legal heirs or nominees.

## Official sources

- Ministry of Corporate Affairs — MCA21: https://www.mca.gov.in/
- Income Tax e-Filing portal: https://www.incometax.gov.in/

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Publisher: Indus Tax — CA-led tax and compliance firm (https://www.industax.com). Contact: info@industax.com, 9059139258.
This is general information, not advice for your specific facts.