ESOP Corner: Equity Insights For Growing Businesses

The Equity Promise Came First — Now What?

For an early-stage start up, an Employee Stock Option Scheme (“ESOP Scheme”) may not be a priority, but this can change when a key hire — a CTO or another executive—seeks equity as part of their compensation.

The company may agree to an equity-linked incentive and record it in the employment agreement, intending to formalize the arrangement later. But what happens when the promise comes first and the ESOP Scheme is yet to be put in place?

When a promise of equity becomes a dispute

In Waterfield Advisors Private Limited v. Sridhar Kurpad (5 August 2026), a former employee sought allotment of shares promised as part of his remuneration. The employee’s appointment letter had provided for equity allocations linked to continued employment, and a subsequent grant letter specified an entitlement to 31,878 shares of the company.

The company refused to allot the shares, primarily relying on the absence of a formal ESOP policy and the employee’s departure. The employee invoked the arbitration clause of his appointment letter. Subsequently, the arbitral tribunal directed the company to allot the shares (“Award”). The company had challenged this Award before the Bombay High Court (“Court”). The Court dismissed the company’s challenge to the Award under Section 34 of the Arbitration and Conciliation Act, 1996.

The Court noted that while Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 contemplate an ESOP Scheme, a special resolution and disclosures, the employee’s appointment letter and grant letter had “by and large” defined the conditions of vesting and lapse. Hence, the company could not rely only on the failure to comply with the statutory requirement to negate the offer of equity as part of the employee’s remuneration.

While this decision servers as a reminder to the consequences of promising equity without a framework in place, it should not be read as dispensing with statutory requirements or establishing that every informal promise of equity is automatically enforceable.

Can the paperwork catch up later?

Adopting an ESOP Scheme and issuing a grant letter after the hiring decision may not, by themselves, resolve an earlier commitment. Much depends on what the employment agreement promises. Is the employee being promised a specific number of options or a percentage of the company’s share capital? Is the proposed grant subject to the ESOP Scheme’s terms and requisite corporate approvals? Have vesting, exercise and departure conditions been addressed?

For Indian companies, statutory ESOP grants must comply with the applicable framework under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. The ESOP Scheme, the employment agreement and the individual grant documentation should therefore be structured to work together – not leave the company and employee with different understandings of the same promise.

What should founders consider before making the offer?

Before including an equity component in an offer letter, founders should consider:

• Define the promise: Specify the intended incentive and, where relevant, the basis for calculating the number or percentage of options.

• Identify the conditions: Clarify the role of the scheme terms, corporate approvals and other applicable requirements.

• Agree on commercial terms: Address vesting, exercise and the consequences of resignation or termination.

• Align the documents: Ensure that the employment agreement, the ESOP Scheme and the grant letter reflect a consistent arrangement.

The Takeaway

An early-stage start up does not necessarily need to establish an ESOP Scheme simply because it has been incorporated. But when equity becomes part of a hiring negotiation, the company should consider the intended structure and implementation requirements before committing to specific terms.

The objective is not merely to document an equity promise after the event, but to ensure from the outset that the promise is clear, appropriately authorised and capable of implementation within the applicable legal framework.