ESOP plan design: India (Companies Act rules) vs US (ISOs and NSOs)

1. The core idea#

An ESOP is two things: a pool (how much of the company is set aside, 5.01) and a plan (the legal document that says who can get options, on what terms, and what happens when they leave, sell or the company is bought). This playbook is about the plan.

The plan matters more than founders expect, because it is hard to change once grants are out. Every option holder's rights are fixed by the plan in force when they got their grant. A badly drafted plan can mean employees owe tax on paper gains with no way to sell, leavers keep options for years and clog the cap table, or an acquisition stalls because the plan doesn't say what happens to unvested options.

The rules differ sharply by country:

• India: ESOPs are governed by the Companies Act 2013 (s.62(1)(b)) and Rule 12 of the Share Capital and Debentures Rules. Options can go only to employees and directors, need a shareholders' special resolution, and must vest over at least one year. DPIITrecognised startups get some exceptions, including grants to founder-promoters.
• US: a Delaware company's equity plan can grant incentive stock options (ISOs), which have tax advantages but strict rules and are for employees only, and nonqualified stock options (NSOs), which are flexible and can go to anyone. Strike prices must be at or above 409A fair market value (5.07).
• UK: EMI options are among the most generous employee schemes anywhere, and from 6 April 2026 far more companies qualify. CSOP and unapproved options fill the gaps.

For a flipped company (a Delaware or Singapore parent with an Indian subsidiary), the plan sits at the parent, and the Indian team's options must also work under Indian tax and FEMA rules.

Who this is for: founders setting up their first option plan, or revisiting one before a priced round; anyone with employees in more than one country.

Pairs with: 5.01 (pool size), 5.06 (vesting), 5.07 (strike price), 5.08 (tax), 5.09 (leavers), 5.18 (international employees).

2. The rules side by side#

India's startup exceptions. Since 2016 a proviso to Rule 12 has let DPIIT-recognised startups grant ESOPs to promoters, promoter-group members and directors holding more than 10%, for up to 10 years from incorporation. In September 2025 SEBI also amended its share-based benefits regulations so that founders reclassified as promoters before an IPO can keep and exercise options granted at least one year before filing the draft offer document, which matters for reverse-flipped companies heading to Indian listings.

UK reform. HMRC's policy paper confirms that the 15-year exercise limit can also apply to existing EMI options that have not expired or been exercised, if the agreements are amended in line with the legislation. From 6 April 2027, late notification of an EMI grant will no longer by itself cost the options their tax advantages.

Tax is the reason the scheme type matters.

• In India, the gain at exercise is taxed as salary (perquisite) whatever the plan says. Employees of eligible DPIIT startups can defer that tax (5.08).
• In the US, ISOs can turn the whole gain into long-term capital gain if holding periods are met, but can trigger AMT. NSOs are taxed as income at exercise.
• In the UK, EMI typically means no income tax at exercise (if granted at market value) and capital gains tax on sale, often with Business Asset Disposal Relief.

3. The method: design choices that matter#

Step 1: Put the plan where the equity is

Options are granted by the company whose shares investors buy. If you have flipped, that is the parent (Delaware, Singapore or UK), and the plan sits there, with sub-plans or country addenda for employees elsewhere (section 4). If you have not, it is the Indian company.

Step 2: Decide the core terms#

Step 3: Choose instruments by country and person#

• US employees: ISOs where possible, NSOs above the $100,000 limit or for nonemployees.
• UK employees: EMI if the company qualifies. With the April 2026 limits most venturebacked UK startups do. CSOP or unapproved options if not.
• Indian employees: options under the Indian company's ESOP scheme, or under the parent's plan with an Indian sub-plan.
• Founders: usually restricted shares with reverse vesting rather than options. In India, DPIIT startups can grant founders ESOPs within 10 years of incorporation if needed. Advisors and contractors: NSOs (US), unapproved options (UK), phantom stock or SARs (India) (4.11, 5.15).

Step 4: Get the approvals and paperwork right#

• India: board approval of the scheme, shareholders' special resolution (MGT-14 filing within 30 days), disclosures in the explanatory statement, a grant letter for each employee, a register of options, and board report disclosures each year. Allot shares with PAS-3 on exercise.
• US: board adoption, shareholder approval within 12 months, a 409A valuation before grants, an option agreement per grant, and Rule 701 tracking.
• UK: board approval; EMI valuation agreed with HMRC (recommended); EMI option agreements with the required declarations; HMRC notification by 6 July after the tax year of grant.

Step 5: Explain it#

Hand each employee a one-page summary of their grant: number of options, strike price, vesting, what happens if they leave, tax at exercise and sale, and how to exercise (5.11).

Worked example#

AetherLab has a Delaware parent with 30 staff: 18 in Bengaluru (Indian subsidiary), 8 in the US, and 4 in the UK.

1. One plan, three addenda. The parent adopts a 2026 Equity Incentive Plan with a 12% pool, plus an India sub-plan (options governed by the parent's plan, with Indian tax and FEMA terms) and a UK EMI schedule.
2. Instruments. US staff get ISOs; one senior US hire's grant exceeds the $100,000 limit, so part is NSOs. UK staff get EMI options: the company has 30 employees and gross assets well below £120 million, so it qualifies. Indian staff get options in the parent under the India sub-plan.
3. Terms. 4-year vesting, 1-year cliff; 12-month exercise window for good leavers (accepting that US options become NSOs after 3 months and UK options lose EMI relief after 90 days); double-trigger acceleration for executives only; express sale treatment clause.

4. Approvals. Board adopts; shareholders approve within 12 months; a 409A valuation sets the strike at $0.42; HMRC agrees the EMI valuation; Indian CA confirms the India sub-plan's tax and reporting.

5. Result. At the Series A, the lead's counsel reviews the plan and finds nothing to fix. The expected 2027 reverse flip to India is noted, so the plan includes a clause for converting options into options over the Indian holding company's shares.

4. Cross-border and flipped structures#

Indian employees holding options in a foreign parent.

• FEMA: Indian resident employees and directors may acquire shares of a foreign parent under an ESOP scheme as overseas portfolio investment, under the 2022 overseas investment rules. The Indian subsidiary reports grants and allotments to its bank (4.19).
• Tax: the perquisite at exercise is taxed in India as salary, and the Indian employer must withhold TDS. Fair value is set under Indian rules (a merchant banker valuation for unlisted shares), not the US 409A. On sale, the gain is foreign capital gains taxable in India. Employees must also report foreign assets in their tax returns.
• The DPIIT deferral for perquisite tax (5.08) applies to eligible Indian startups' own ESOPs. It does not generally help options in a foreign parent.
• Cost recharge: if the parent recharges the cost of options to the Indian subsidiary, transfer pricing documentation is needed, and the recharge can affect the subsidiary's tax deduction.

US employees of an Indian company. Options in an Indian private company are NSOs for US tax purposes; ISOs are only available from a corporation's own qualifying plan. US tax applies at exercise. Many companies with a significant US team flip partly for this reason (4.03).

UK employees of a non-UK parent. EMI is available for options over the parent's shares if the parent (and group) meets the EMI conditions, including that the employer is a UKtaxable company or a qualifying subsidiary with a UK permanent establishment. Check with an adviser before promising EMI.

Employees elsewhere. Many countries tax options at grant or vesting rather than exercise, or require securities filings. Use country addenda prepared by counsel, or an employer of record's equity service (5.18).

Reverse flips. When moving the holding company back to India, existing parent options must be swapped into options over the Indian company's shares. Plan for:

• Indian ESOP rules applying from the swap: employees and directors only; promoters only within DPIIT startups' 10-year window or under the SEBI pre-IPO carve-out.
• A new valuation and a tax analysis of whether the swap triggers tax.
• Approvals in both jurisdictions and clear communication to employees.

SEBI's 2025 amendment helps here: founders who become promoters can keep options granted at least a year before an IPO filing.

5. Scripts, mistakes, related playbooks, sources#

Scripts#

Briefing counsel on a new plan:

"We're a [entity] with employees in [countries]. We want one plan at [parent], with country addenda for [countries], a [x]% pool, 4-year vesting with a 1-year cliff, a [12month] post-termination exercise window, double-trigger acceleration for executives, and clear treatment on a sale. Please confirm which tax-advantaged schemes each group of employees can use."

Explaining instrument differences to the team:

"Everyone's options work the same way commercially: same vesting, same price per share. The legal wrapper differs by country because tax rules differ. In the UK they're EMI options, in the US mostly ISOs, and in India they're under our India sub-plan. Each of you will get a one-page note on how tax works where you live."

Common mistakes#

1. Granting before the plan is approved, or before the shareholders' special resolution in India.
2. No 409A (US) or valuation (India, UK) before grants, so strike prices are challenged.
3. Promising ISOs or EMI to people who don't qualify (contractors, advisors, parttimers).
4. Ignoring the $100,000 ISO limit, then being surprised by NSO tax.
5. Granting Indian ESOPs to founders or 10%+ holders outside the DPIIT exception.
6. Plans silent on a sale, causing friction at acquisition.
7. A 90-day exercise window by default without considering employees' ability to pay.
8. Missing the EMI notification (relief at risk until April 2027 rules apply).
9. Options in a foreign parent for Indian staff without FEMA reporting or Indian TDS at exercise.
10. No plain-language summary, so employees misunderstand what they hold.

Related playbooks#

• 4.03 Flipping to a Delaware holding company, and reverse-flipping back to India
• 4.08 Setting up the cap table and choosing a tool
• 4.11 Advisor agreements (FAST template)
• 4.19 FEMA, FDI and ODI rules for foreign money
• 5.01 Sizing the ESOP pool at each stage
• 5.06 Vesting schedules, cliffs and back-loaded vesting
• 5.07 Setting the strike price: US 409A and Indian valuations by a merchant banker
• 5.08 ESOP tax: Indian perquisite tax and the deferral for DPIIT startups; US ISO and AMT
• 5.09 Exercise windows and what happens when people leave
• 5.18 Equity for employees in other countries

Sources#

• India: Companies Act 2013 s.62(1)(b); Companies (Share Capital and Debentures) Rules 2014, rule 12 and the startup proviso; SEBI (Share Based Employee Benefits and Sweat Equity) (Amendment) Regulations 2025, notified 8 September 2025 (Bar & Bench, Business Standard).
• US: Internal Revenue Code ss.409A, 422; Securities Act Rule 701 (17 CFR 230.701).
• UK: ITEPA 2003 Sch.5 (EMI) and Sch.4 (CSOP); HMRC policy paper, Expanding the eligibility limits of the EMI scheme; HMRC ETASSUM50500; Weil on the 2027 notification change.