Your ESOP pool may not legally exist

Here is a test that takes two minutes.

Can you produce, right now, the shareholder resolution that created your employee stock option pool? The written scheme that governs it? A signed grant letter for every person holding options?

In our experience most companies below Series B can produce one of those three. Usually the grant letters, because those went to employees. Sometimes nothing at all.

If that is you, this is common and it is repairable. It is also far cheaper to repair now than in the middle of a raise. Here is what is actually required, how the gap opens, and the order in which to close it.

01What actually makes an option pool real?

An option pool is not a decision you take. It is an approval you obtain, plus documents that exist.

One: the shareholder resolution. Issuing shares to employees under an option scheme runs through section 62(1)(b) of the Companies Act, 2013. For an unlisted company the detail sits in Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. That rule asks for a special resolution: three votes in favour for every one against.

Not a board resolution. Not a line in a term sheet. A shareholder resolution, properly convened, properly recorded and filed. For how the board meeting and the shareholder meeting are supposed to run, see the board governance guide.

Two: the written scheme. One document, setting out who is eligible, the size of the pool, how options vest, and the exercise price. It also fixes the exercise period and what happens when someone leaves. The resolution approves the scheme. The scheme is the rulebook.

Three: the signed grant letters. For each person: how many options, at what price, vesting from what date, on what schedule. Signed by both sides, and matching an option register the company keeps.

Without all three, what your employees hold is a promise from the company. It may be morally binding. It is not an option.

If any of this is new, how ESOPs work end to end covers the approvals, the vesting and the tax in one place.

03What does it cost you if nobody notices?

It is a first-week finding in diligence. Option records are among the first files a diligence team opens. Finding this here means everything after it gets examined more closely, which is a cost of its own. What else a diligence team opens early explains how that calibration works.

Fixing it mid-round means renegotiating with your team. The pool has to be approved properly and every grant reissued under the new scheme. That is a conversation with each employee about why their options are being reissued. Reasonable people ask reasonable questions.

Some will ask for the vesting clock to run from the original date, which is usually fair and which you will probably concede. A few negotiate harder the second time.

Your word is on the line. This is the part that matters beyond the transaction. You told people they own something. Having to ask them to sign for it again costs trust in a way that is hard to quantify and easy to feel.

It can move the deal economics. If the pool was represented as existing and does not, the fix can produce dilution nobody modelled. Or a warranty and indemnity you carry personally.

05Fix it in this order, starting today

The good news: this is routine work when there is no deadline attached to it.

Establish the facts. List every person who has been promised or granted options, when, how many, at what price and on what vesting. Include people who have left. Include verbal promises, especially those, because they appear nowhere and they do not go away.

Reconcile against the cap table. Total the promises and compare them with the pool in your cap table. The two rarely match, and the gap tells you what size pool you actually need to approve.

Draft the scheme properly. Eligibility, vesting, acceleration, exercise price and period, leaver treatment, administration. You will live with this document for years, so treat it as a design exercise rather than a formality.

Get the approvals. Board approval, then the shareholder special resolution, then the filing. If investors already sit on your cap table they vote, so bring them in early rather than presenting a fix to a problem they will then ask about.

Reissue the grants. Fresh grant letters referencing the approved scheme, preserving the original vesting commencement dates where that is what was promised. Explain the position honestly. People respond well to "we are formalising something that should have been formalised earlier" and badly to finding out themselves.

Build the register and keep it. One sheet, updated at every grant, exercise, lapse and exit. This is what a diligence team will ask for, and maintaining it takes minutes a month.

Tell your team about the tax. Separate from the fix, but the right moment for it. Most option holders have no idea that tax falls due at exercise, on a paper gain, in cash. The tax your team will owe at exercise sets it out, and a one-page note with every grant letter prevents years of confusion.

07Frequently asked questions

What documents are needed to create an ESOP pool in India?

Three. A special resolution of shareholders approving the issue of shares under an option scheme. That sits in section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A written scheme covering eligibility, vesting, exercise price, exercise period and leaver treatment. And a signed grant letter for each option holder, supported by an option register. A pool that appears only in a cap table has not been created.

What happens if an ESOP pool was never formally approved?

The options are not legally valid options. Employees hold a promise rather than a right. It is typically found during due diligence, where it becomes a condition to be satisfied before closing. The fix means approving the pool properly and reissuing every grant under the new scheme, which reopens terms with each holder at an unhelpful moment.

Can an ESOP pool be created retrospectively?

The pool can be approved and the grants reissued under the new scheme, with vesting commencement dates preserved to reflect what was originally promised. What cannot be done is backdating documents to suggest the approval existed earlier. Diligence teams identify backdated records readily, and doing so casts doubt on every other document the company produces.

If you want the resolution, scheme, grant letters and option register checked and put right in one pass, our compliance and governance work starts there.

Current as at September 2026. Requirements and eligibility conditions change. This is general guidance, not legal advice: take advice on your own position.