ESOP Implementation Checklist in 2025

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Starting a company is exciting, but keeping your best people? That’s the real challenge. One of the smartest ways to attract and keep top talent is by offering them a piece of your company through Employee Stock Option Plans (ESOPs). Think of it as giving your employees a ticket to share in your startup’s success story.

If you’re a startup founder in India wondering how to set up ESOPs the right way, this guide will walk you through a step-by-step, actionable ESOP implementation checklist tailored for Indian startups in 2025.

ESOPs (have transformed India’s startup ecosystem, creating millionaires out of employees and driving a true sense of ownership in the workplace. For example, Flipkart’s Walmart acquisition created over 4,000 crorepatis overnight in 2018.

What is an ESOP, and why do Indian startups need it?

ESOPs give your employees the right to buy company shares at a fixed price after working for a certain period. It’s like telling your team, “Work with us for four years, and you can buy these shares for ₹10 each, even if they’re worth ₹100 by then.”

This creates a win-win situation: employees are motivated to help the company grow because they’ll directly benefit from its success, and you get committed team members who think like owners.

This also helps with;

Retain top talent without burning cash

Incentivize high performance and long-term commitment

Create wealth for employees and founders together

Why Should You Care About Getting ESOPs Right?

Setting up ESOPs isn’t just about being generous to your employees. Done correctly, it can transform your startup. Done wrong, it can create legal headaches, tax troubles, and frustrated employees who feel misled.

Many startups rush into ESOPs without proper planning, only to discover they’ve made costly mistakes that are difficult to fix later. The good news? With proper planning, you can avoid these pitfalls entirely.

The Step-by-Step Process

Phase 1: Planning Your ESOP Strategy

Before jumping into paperwork, you need a clear strategy. Start by answering these questions:

Define Your Goals: Are you trying to attract new talent, keep current employees from leaving, or prepare for future growth? Your answer will shape everything else.

Decide How Much to Share: Most startups set aside 10-20% of their total company shares for employees. Early-stage companies often go higher (15-20%), while more mature startups might use 10-15%.

Check Who’s Eligible: In India, you can offer ESOPs to full time employees, directors (except independent ones), and employees of related companies.

Phase 2: Creating Your ESOP Document

This is where many startups stumble. Your ESOP document is like a rulebook that covers everything: who gets options, when they can use them, and what happens in different situations.

Key elements to include:

How many total options you’re creating

Which employees can participate

How options will vest (typically over 4 years with a 1-year waiting period)

The price employees will pay

What happens when someone leaves the company

How you’ll value the options

What happens when you have to let go of an employee for reasons such as fraud etc

Phase 3: Getting Legal Approval

Here’s where things get official. You need approval from both your board of directors and shareholders.

Board Meeting: Your directors must formally approve the ESOP plan and call a shareholders meeting.

Shareholder Approval: You need at least 75% of voting shareholders to say yes. This usually means calling a special meeting with proper notice.

Government Filing: Within 30 days of shareholder approval, you must file form MGT-14 with the MCA to adopt the ESOP scheme. Missing this deadline can result in penalties.

Phase 4: Valuation and Granting Options

Before giving options to employees, you need to know what they’re worth. For private companies, this means hiring a professional valuer to determine your company’s value.

Once you have this valuation, you can start granting options to employees. Each employee should receive a formal grant letter along with the ESOP scheme explaining their options, including how many they’re getting, the price, and when they can exercise them.

Phase 5: Ongoing Management

Setting up ESOPs isn’t a one-time task. You need to maintain proper records, handle tax compliance, and keep employees informed about their options.

The government requires you to maintain an ESOP register (Form SH-6) that tracks every option granted, exercised, or cancelled. You’ll also need to handle tax deductions when employees exercise their options.

ESOP Success Stories: Flipkart, Infosys, Paytm

Flipkart: Walmart’s $16B buyout led to current and former Flipkart employees cashing out over $800 million via ESOPs. The largest ESOP liquidity event in Indian history saw some staff receiving up to ₹20 crore, including ex-delivery boys and warehouse workers.
Infosys: Infosys was one of the first Indian companies to offer ESOPs. In the 1990s, it created over 400 employee-crorepatis, including drivers and office staff, initiating the ESOP model in Indian tech.
Paytm: More than 200 employees became millionaires when Paytm expanded its ESOP pool and allowed buybacks, showing that ESOPs benefit not just founders and CXOs but staff at all levels

Banner – Want expert help to draft your next great ESOP story? Visit The Startup Zone for professional guidance on equity plans.

Common Mistakes That Cost Startups

Mistake 1: Rushing the Process

Many founders try to set up ESOPs quickly without proper documentation. This often leads to legal issues later.

Mistake 2: Poor Communication

Even the best ESOP plan fails if employees don’t understand it. Many startups grant options but never explain how they work or their potential value.

Mistake 3: Unrealistic Vesting Periods

Setting vesting periods longer than 4 years often backfires, as employees may leave before earning their options.

Mistake 4: Ignoring Tax Planning

When employees exercise options, they face immediate tax on the difference between the option price and current value. Poor planning can create financial hardship for your team.

Mistake 5: Inadequate Record

Keeping Failing to maintain proper ESOP registers and compliance records can lead to regulatory issues and disputes.

Making ESOPs Work for Your Team

The success of your ESOP program depends heavily on how well you communicate with your employees. Here’s how to get it right:

Education is Key: Hold sessions to explain how ESOPs work, what they mean for employees, and how they could benefit from company growth.

Regular Updates: Keep employees informed about the company’s progress and how it might affect their option values.

Plan for Different Scenarios: Explain what happens to options if the company gets acquired, goes public, or if an employee leaves.

Be Transparent: Share information about company valuations and growth prospects so employees understand their potential upside.

Your ESOP Implementation Checklist

Before You Start:

Define clear objectives for your ESOP program

Decide on equity allocation (10-20% of total shares)

Verify company and employee eligibility

Set aside budget for legal and valuation costs

Documentation Phase:

Draft comprehensive ESOP scheme document

Include all mandatory legal requirements

Set appropriate vesting schedules (4-year standard)

Determine fair exercise price

Legal Approval:

Pass board resolution approving ESOP scheme

Call extraordinary general meeting (EGM)

Obtain 75% shareholder approval through special resolution

File MGT-14 form within 30 days

Implementation:

Obtain professional company valuation

Create individual grant letters for employees

Set up ESOP register (Form SH-6)

Establish ongoing compliance systems

Ongoing Management:

Maintain updated ESOP records

Handle tax compliance and TDS deductions

Conduct regular employee education sessions

Plan for different exit scenarios

Review and update program annually

Conclusion

ESOPs can be one of your startup’s most powerful tools for building a committed, motivated team. However, they require careful planning, proper legal compliance, and ongoing management to work effectively.

The investment you make in setting up ESOPs correctly will pay off through better talent retention, increased employee motivation, and a stronger foundation for growth. Remember, you’re not just creating a legal document, you’re building a system that aligns your team’s success with your company’s success.

Take the time to do it right, get professional help when needed, and communicate clearly with your team. For more insights on building successful startups and implementing effective employee equity programs, visit The Startup Zone, where we share practical guidance for entrepreneurs navigating the complexities of startup growth.

Your future self (and your employees) will thank you for making the right ESOP decisions today. When employees truly feel like owners, they don’t just work for your company they help build its future.

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