RM Legal advises companies, founders and boards on designing and implementing employee stock option plans and other equity incentives. We prepare the scheme and grant documents, handle the corporate approvals and filings, and advise on how the plan will work on exercise, exit and investment.
Our work includes:
An ESOP gives an employee the right, but not the obligation, to buy shares of the company at a predetermined price after a vesting period. Options that have vested can be exercised within the exercise period stated in the scheme. Options are personal to the employee and cannot be transferred.
A DPIIT-recognised start-up can grant options to promoters and to directors holding more than 10% of its equity, for up to 10 years from its incorporation.
Employees are generally taxed on the difference between the fair market value on the date of exercise and the exercise price, as a perquisite forming part of salary, and again on capital gains when the shares are sold. For employees of eligible start-ups, tax on the perquisite can be deferred until the earliest of a specified period, the sale of the shares, or the employee leaving the company.
Stock appreciation rights and phantom stock plans give employees a cash or share-based reward linked to the increase in the company's value, without issuing shares on exercise. These can suit companies that wish to avoid dilution or are not structured as companies, such as LLPs.
What is the minimum vesting period for ESOPs?
One year from the date of grant.
Can promoters receive ESOPs?
Generally not. However, DPIIT-recognised start-ups can grant options to promoters and to directors holding more than 10% for up to 10 years from incorporation.
Can an LLP issue ESOPs?
No. ESOPs involve issuing shares, which an LLP does not have. LLPs can consider profit-linked or phantom incentive plans instead.
When is an employee taxed on ESOPs?
At exercise, on the difference between fair market value and the exercise price, and on capital gains when the shares are sold. Employees of eligible start-ups can defer the tax on exercise.
What happens to options when an employee leaves?
This depends on the scheme. Typically, unvested options lapse, and vested options must be exercised within a specified period after the employee leaves.
How large should the ESOP pool be?
It depends on the company's stage and hiring plans. Investors often expect a pool to be created or expanded before an investment round.
Reviewed by Richa M. Goyal, Managing Partner. Last reviewed: October 2026.