ESOP for Startups

 On the other hand companies can attract and retain employees through ESOPs and they can increase their cash flow by paying a part of the remuneration in the form of stocks instead of cash. This way, the company can payer higher remuneration to employees even when they cannot afford to pay high compensation packages in the form of cash and attract productive assets

The legal framework governing ESOPs in India

S.62: Further issue of share capital.—(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered –

(b) to employees under a scheme of employees‘ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

What kinds of employees are eligible for ESOPs?

(a) a permanent employee of the company who has been working in India or outside India; or 

(b) a director of the company, whether a whole-time director or not but excluding an independent director; or 

(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company

but does not include— 

(i) an employee who is a promoter or a person belonging to the promoter group; or (ii) a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company. 

However, in the case of a start-up company[1], the conditions mentioned in sub-clauses (i) and (ii) shall not apply up to five years from the date of its incorporation or registration.

 As defined in notification number GSR 180(E), dated 17th February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry Government of India.