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Continuing our series on creating ESOP policies, Part 2 explores the critical operational clauses, including grant provisions, vesting schedules, exercise mechanics, and termination scenarios. Get practical drafting advice and real-world examples to create a legally sound and attractive ESOP scheme.

Introduction

Hey,

Welcome back to Part 2 of our guide on drafting an ESOP scheme.

Previously on How to Draft an ESOP Scheme (Part 1) – The Foundational Clauses, I laid the groundwork for TechSolve’s ESOP structure.

I covered the purpose clause (the “why” behind your ESOP), crafted precise definitions (the language that prevents misunderstandings), established eligibility criteria (who gets options), and determined the pool size (how much equity to set aside).

You need to know that for any company implementing an ESOP scheme, getting these operational clauses right is very important. 

If you remember, Vikram, Priya, and Arjun, the top management of TechSolve, were not just trying to retain their existing 15-member team. But they were trying to attract that CTO, those AI engineers, and the VP of Sales who will take their company to the next funding round. 

The top management of TechSolve was anticipating that these experienced hires would scrutinize not just how many options they are getting but the mechanics of how those options work.

In this part of our series, I will walk you through the operational clauses that will bring ESOP scheme of TechSolve to life by working on the terms namely: 

• grant provisions, 
• vesting schedules, 
• exercise mechanics, 
• termination scenarios, and more. 

For each term, I will provide practical sample language tailored to TechSolve’s needs, explain why certain provisions matter, and share hard-earned drafting tips to help you avoid the kinds of mistakes I have witnessed throughout my career.

Let’s start with how options actually get into employees’ hands, i.e., the grant provisions.

Grant of options

If you remember, in the first part of the series, I established TechSolve’s ESOP pool size at 9% of their fully diluted equity. Now, I need to determine exactly how these options will be granted to the employees. 

Let us recall that TechSolve is planning to hire a CTO, VP of Sales, and other senior roles. These hires will expect substantial equity packages, potentially 1-2% each. 

If I make every grant of options require full board approval and extensive paperwork, it would slow down the hiring process. On the other hand, if I don’t include proper oversight, Vikram or Priya might end up promising more equity than the company can afford.

What TechSolve needed was a streamlined process with appropriate checks and balances. 

So, I decided to set clear guidelines on: 

• who can approve grants, 
• what documentation is required, and 
• how these grants are recorded. 

This becomes even more critical for me as TechSolve is approaching its pre-Series A funding, which means that the investors will scrutinize the ESOP scheme to determine how equity within the company has been allocated.

Here is the grant clause I crafted for TechSolve:

5. GRANT OF OPTIONS

5.1 The Committee shall have the authority to grant Options to Eligible Employees under this Plan, subject to the terms and conditions of the Plan and any additional terms and conditions as the Committee may determine.

5.2 The Committee shall determine:

(a) The Eligible Employees to whom Options may be granted;

(b) The number of Options to be granted to each Eligible Employee;

(c) The Exercise Price for each grant;

(d) The vesting schedule applicable to each grant; and

(e) Any specific terms and conditions applicable to the grant.

5.3 Each grant of Options shall be evidenced by a Grant Letter issued to the Eligible Employee, which shall set forth the number of Options granted, the Exercise Price, the vesting schedule, the Exercise Period, and any other terms and conditions as the Committee may determine.

5.4 The Company shall maintain a register of all Options granted, vested, exercised, lapsed, cancelled, or surrendered under the Plan. Such register shall be maintained by the Company Secretary or any other person authorized by the Committee.

5.5 No Employee shall have any right to receive a grant of Options under the Plan, and the decision of the Committee regarding any grant shall be final and binding.

5.6 The maximum number of Options that may be granted to any individual Eligible Employee under this Plan shall not exceed 2% of the paid-up equity share capital of the Company, except with the approval of the Board.

5.7 Notwithstanding anything contained in this Plan, the Company shall obtain separate approval of shareholders by way of a special resolution for: (a) Granting Options to employees of any subsidiary or holding company of the Company; and (b) Granting Options to any identified Employee during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the Company at the time of grant.

Drafting tips:

1. Delegate but with limits: Take note of how I created a Committee structure in section 5.1 that can make decisions without requiring full Board approval for every grant. However, in section 5.6,  I have capped individual grants at 2% without Board approval. This gives TechSolve operational flexibility while ensuring that significant equity allocations get appropriate scrutiny.
2. Formalise with documentation: The Grant Letter requirement in section 5.3 ensures that every option grant is properly documented. This might seem bureaucratic to you, but I have seen too many startups make verbal promises about equity that are later disputed because nothing was written down. For TechSolve, with their ambitious hiring plans, formal documentation will prevent misunderstandings with those senior hires.
3. Create a record-keeping mandate: I purposefully included a requirement for a register of options in section 5.4. This will help the management to have visibility into the ESOP pool’s utilization. As TechSolve scales from 15 to 30+ employees, keeping track of who has what becomes increasingly complex. This register will be invaluable during due diligence for their funding round.
4. Set expectations clearly: In section 5.5, I have made it explicit that no employee has an automatic right to receive options. This gives TechSolve’s management team the discretion to use options strategically rather than as an expected part of every compensation package.

I always tell junior associates that a good grant clause is not just about how options are given. It’s also about setting up a system that makes things run smoothly but still keeps everyone accountable. For TechSolve, getting that balance right matters, especially since they are counting on their ESOP to power their next phase of growth.

Vesting schedule and conditions

Once I established how TechSolve will grant options, the next logical question to address was when the employees actually get to exercise these options. 

This is where vesting comes in. 

If you do not know what vesting is? 

Let me put this in simple words. Vesting is the process that transforms a promise of future ownership into actual rights. In other words, it is the process by which employees earn their right to exercise options over time. 

To draft this clause, I sat down with Vikram, Priya, and Arjun to figure out the vesting schedule. We were trying to balance two competing interests: 

• the founders desire to retain talent for as long as possible, 
• employees hope for quicker ownership of their stock options.

Considering the above, below is the vesting clause I developed for TechSolve:

6. VESTING SCHEDULE AND CONDITIONS

6.1 Options granted under this Plan shall vest according to the schedule specified in the Grant Letter of each Participant, subject to continued employment with the Company and satisfaction of any performance conditions that may be specified.

6.2 Unless otherwise specified in the Grant Letter, Options shall typically vest as follows:

(a) 25% of the Options shall vest after completion of 12 months from the Date of Grant (“Cliff Period”); and

(b) The remaining 75% of the Options shall vest on a quarterly basis over the next 36 months (i.e., 6.25% per quarter).

6.3 The Committee may, in special circumstances, approve different vesting schedules for specific employees based on:

(a) Strategic importance of the role;

(b) Market conditions for talent acquisition;

(c) Prior experience and expertise of the employee; or

(d) Any other factor the Committee deems relevant.

6.4 In the event of a Change of Control or Initial Public Offering of the Company, the unvested Options may accelerate and vest immediately prior to such event, subject to the terms specified in the Grant Letter and any approval required from the Board.

6.5 During periods of approved leave of absence exceeding 90 consecutive days, vesting shall be suspended and will resume upon the Participant’s return to active employment. The vesting schedule shall be extended by the duration of the suspension period.

6.6 No fractional vesting shall be permitted. Any fractional Options that would vest on a particular vesting date will be rounded to the nearest whole number, with 0.5 rounded up.

Drafting tips:

1. Start with a standard, then allow exceptions: I started with a default 4-year vesting schedule with a 1-year cliff in section 6.2. This is an industry standard that most investors will be comfortable with. But in section 6.3, I built in flexibility for TechSolve to offer different terms to special hires. If they find an amazing CTO who asks for a 3-year schedule instead of 4, they won’t need to rewrite their whole ESOP plan.
2. Consider change of control: In section 6.4, I addressed what happens during an acquisition or IPO. This might seem premature for TechSolve now, but they are in a hot space (inventory management SaaS), and exits can happen faster than expected. So, I thought it was better to have this clause ready than to scramble to add it later.
3. Don’t forget leave of absence: Many startups mess this up. In section 6.5, I have clarified what happens when someone takes extended leave. Without this, TechSolve might face awkward situations if someone takes a six-month sabbatical or parental leave and expects their options to keep vesting.
4. Address the little details: That fractional vesting clause in 6.6 might seem trivial, but trust me, it prevents headaches. I once saw a company spend hours debating whether someone had vested 37.5 or 38 options when their quarterly vesting date arrived.

I always try to make sure that the vesting schedule is attractive enough to recruit and retain talent but structured enough to protect the company. For TechSolve, this balanced approach is going to help them use their precious 9% ESOP pool effectively as they grow.

Exercise of Options

Now that I was done outlining when TechSolve’s employees would earn their options through vesting, I had to address another critical question that was how and when can they actually turn these options into shares? 

This is the exercise process, and getting it right is crucial for both the company and its option holders.

For TechSolve, this was particularly important given their growth stage. 

As I mentioned before, they were pre-Series A, which meant liquidity events like an IPO were likely years away. If their exercise terms are too restrictive, those options might never translate into actual value for employees—especially the CTO and VP of Sales TechSolve were hoping to attract.

I have seen many startups make their exercise periods too short or their processes too complicated. One fintech company I advised gave departing employees just 30 days to exercise their options—a period so brief that most could not arrange the funds in time, effectively forfeiting equity they had earned over years of hard work. That company later had a successful exit, but many early employees missed out entirely.

Nevertheless, here is the exercise clause I designed for TechSolve:

7. EXERCISE OF OPTIONS

7.1 Vested Options may be exercised by the Participant during the Exercise Period by submitting an Exercise Application to the Company along with payment of the Exercise Price and applicable taxes.

7.2 Unless otherwise specified in the Grant Letter, the Exercise Period shall be:

(a) For current employees: Any time after vesting until 10 years from the Date of Grant;

(b) For employees who leave the Company: Within 5 years from the date of separation, provided the Options have vested before separation.

7.3 The Exercise Price shall be determined by the Committee at the time of grant and specified in the Grant Letter. Unless otherwise determined by the Committee, the Exercise Price shall be the Fair Market Value of the Shares as determined by the Board at the time of grant.

7.3.1 The Fair Market Value of Shares for determining the Exercise Price shall be calculated using [specify valuation method, e.g., “the Discounted Cash Flow method” or “the Price Earnings Multiple method” or “Black-Scholes model”], in accordance with applicable accounting standards.

7.4 The Exercise Application shall be in the format prescribed by the Committee and shall specify the number of Options being exercised and the method of payment of the Exercise Price.

7.5 Payment of the Exercise Price may be made by:

(a) Cash or check;

(b) Electronic funds transfer;

(c) With the approval of the Committee, by a net exercise arrangement whereby the number of Shares to be issued shall be reduced by the smallest number of whole Shares that has a Fair Market Value equal to or exceeding the aggregate Exercise Price; or

(d) Any combination of the above methods.

7.6 Partial exercise of vested Options is permitted, provided that no fractional Shares shall be issued and any fraction shall be rounded down to the nearest whole Share.

7.7 Upon valid exercise of Options and payment of the Exercise Price, the Company shall, subject to compliance with applicable laws, issue the corresponding number of Shares to the Participant within 30 days of exercise.

7.8 Options that are not exercised within the applicable Exercise Period shall automatically lapse and be canceled without any payment to the Participant.

7A. NON-TRANSFERABILITY OF OPTIONS 

7A.1 Options granted under this Plan shall be personal to the Participant and shall not be transferable, assignable, pledgeable, or otherwise alienable in any manner whatsoever, whether voluntarily or by operation of law. 

7A.2 No Participant shall attempt to sell, transfer, assign, pledge, or otherwise encumber or dispose of any Options granted under this Plan, and any purported sale, transfer, assignment, pledge, or encumbrance shall be void and unenforceable against the Company. 

7A.3 Options may be exercised only by the Participant to whom they are granted, except in case of the Participant’s death or permanent incapacity, as specified in Section 8.4 of this Plan.

Drafting tips:

1. Be generous with exercise periods: Notice how I have given TechSolve employees a full 10 years to exercise while employed and 5 years after leaving the company. This might seem long, but it is actually increasingly common in the Indian startup ecosystem. The extended period acknowledges that liquidity can take time, especially for early-stage companies like TechSolve. Those key hires they are trying to attract will appreciate this flexibility.
2. Offer multiple payment methods: The variety of payment options in section 7.5 gives employees flexibility. The net exercise provision (7.5(c)) is particularly important. It allows employees to exercise without coming up with any cash upfront, which removes a major barrier. I have seen many employees lose their options simply because they could not afford the exercise price.
3. Allow partial exercise: The section 7.6 provision for partial exercise is more important than it might seem. Let us say one of TechSolve’s engineers has 1,000 vested options but can only afford to exercise 250. Without this clause, they’d face an all-or-nothing choice. With it, they can exercise what they can afford now and wait on the rest.
4. Put a time limit on share issuance: Section 7.7’s 30-day issuance requirement creates accountability for the company. Without a specified timeframe, I have seen share issuances drag on for months after exercise, creating unnecessary anxiety for employees who have already paid their exercise price.

For TechSolve, an employee-friendly exercise scheme makes their ESOP more valuable without costing them additional equity. Those critical hires they need for their next growth phase will scrutinise these terms closely. A flexible exercise policy signals that the company truly wants employees to benefit from the value they help create, not just on paper but in reality.

Termination of employment and impact on ESOPs

Now, I come to a clause that I see founders getting uncomfortable with. 

That clause is what happens to options when employees leave. Every company, even one with the best culture, will experience employee departures. Some will leave on good terms, others will not.

I often remind founders like Vikram, Priya, and Arjun that how they handle equity when people leave speaks volumes about their company values. Being fair to departing employees does not mean giving away the farm. It means honoring the contributions they have made while protecting the company’s interests.

Based on the above, this is the termination clause I crafted for TechSolve:

8. TERMINATION OF EMPLOYMENT AND IMPACT ON OPTIONS

8.1 In the event of termination of employment of a Participant, their Options shall be treated as follows:

8.2 Resignation or Termination Without Cause:

(a) All unvested Options shall lapse as of the date of resignation or termination.

(b) All vested Options may be exercised within 5 years from the date of resignation or termination.

(c) Any vested Options not exercised within this period shall automatically lapse without any payment to the Participant.

8.3 Termination for Cause:

(a) All unvested Options shall lapse as of the date of termination.

(b) All vested Options may be exercised within 90 days from the date of termination.

(c) Any vested Options not exercised within this period shall automatically lapse without any payment to the Participant.

8.4 Good Leaver Events:

(a) In case of termination due to death or permanent disability:

 (i) All unvested Options shall vest immediately on the date of such event.

(ii) All vested Options may be exercised by the Participant or their legal heirs/representatives within 2 years from the date of such event.

(b) In case of retirement:

(i) All unvested Options shall continue to vest according to the original vesting schedule.

(ii) All vested Options may be exercised within 5 years from the date of retirement.

8.5 Company Restructuring or Redundancy:

(a) In case of termination due to company restructuring, redundancy, or other similar circumstances not attributable to the Participant’s performance:

(i) Pro-rata vesting may be applied to unvested Options based on the period of service.

(ii) All vested Options may be exercised within 1 year from the date of termination.

8.6 The Committee shall have the discretion to determine the category of termination and to modify the treatment of Options in special circumstances, subject to Board approval.

Drafting tips:

1. Distinguish between different exit scenarios: You should notice how I created separate provisions for voluntary resignation (8.2), termination for cause (8.3), good leaver events (8.4), and company restructuring (8.5). This nuanced approach recognises that not all departures are the same. TechSolve will appreciate this flexibility as they navigate different employee exit scenarios.
2. Be generous with good leavers: You will acknowledge that section 8.4 is particularly employee-friendly for those who might leave TechSolve due to circumstances beyond their control. Immediate vesting upon death or disability is both compassionate and practical. It acknowledges the contribution made and simplifies administration for the company.
3. Include a restructuring provision: I included section 8.5 because I have seen many ESOP schemes missing it. As TechSolve grows, it may need to restructure its teams or pivot its business model. Having clear provisions for handling equity during layoffs or redundancies prevents ad hoc decisions during already difficult times.
4. Preserve committee discretion:  I once worked with a startup where a key employee had to leave to care for his ill parent. The termination clause did not cover this scenario, but a discretion provision like 8.6 allowed them to treat this person as a “good leaver” despite not fitting the standard definition. Therefore, I added section 8.6 which gives TechSolve’s ESOP committee flexibility to handle unique situations.
5. Balance exercise periods by scenario: Notice the different exercise windows: 5 years for regular departures, 90 days for termination with cause, 2 years for death/disability, and 1 year for restructuring. These differentiated periods balance fairness with appropriate consequences.

I try to be extra cautious while drafting termination clauses in ESOP schemen because a carefully drafted termination clause protects a company’s equity while treating departing employees fairly based on their circumstances. 

Buyback of shares or options

The most challenging conversation I repeatedly have with founders is asking them, “What happens when your employees with vested equity need cash before your company exits?” The typical response is often stunned silence followed by, “We had not thought that far ahead.”

This is precisely why I insisted on adding robust buyback provisions to TechSolve’s ESOP scheme. 

As mentioned previously, TechSolve was pre-Series A, and an IPO was years away, but life does not wait for liquidity events. 

I have watched talented employees forced to leave promising startups simply because they needed to cash out some equity for a down payment on a home or to handle unexpected medical bills, and their companies had no mechanism to accommodate them.

Let me tell you, experienced executives understand that paper wealth is different from actual wealth, and they would want to know if and how they can convert some of their equity to cash before a company-wide exit. 

Therefore, here is how I designed the buyback clause for TechSolve:

9. BUYBACK OF SHARES OR OPTIONS

9.1 The Company shall have the right, but not the obligation, to repurchase vested Options or Shares issued upon exercise of Options under the following circumstances:

9.2 Regular Buyback Window:

• (a) The Company may, at its discretion, announce a buyback window once every 12 months.
• (b) During this window, Participants may offer some or all of their vested Options or Shares for repurchase by the Company.
• (c) The Company may accept or reject such offers in whole or in part based on its financial position and other relevant factors.

9.3 Special Circumstances:

• (a) In case of financial hardship of a Participant, including but not limited to medical emergencies or education expenses, the Participant may request the Company to repurchase vested Options or Shares outside the regular buyback window.
• (b) The approval of such requests shall be at the sole discretion of the Committee.

9.4 Buyback Price:

• (a) For buybacks announced under Section 9.2, the buyback price shall be the Fair Market Value of the Shares as determined by the Board based on the most recent valuation of the Company.
• (b) For buybacks approved under Section 9.3, the buyback price may be determined on a case-by-case basis by the Committee, but shall not be less than 80% of the Fair Market Value.

9.5 Right of First Refusal:

• (a) No Participant shall sell, transfer, or otherwise dispose of any Shares acquired through the exercise of Options to any third party unless such Shares are first offered to the Company.
• (b) The Company shall have 30 days from receipt of the Participant’s written offer to exercise its right of first refusal to purchase the Shares at the price offered by the third party.
• (c) If the Company declines to purchase the Shares, the Participant may sell the Shares to the third party at a price not less than the price offered to the Company and on terms no more favorable than those offered to the Company.

9.6 Buyback Pool:

• (a) The Company may, with approval from the Board, create a dedicated buyback pool funded from its profits or through specific investor allocations.
• (b) The size and utilisation of this buyback pool shall be determined by the Board based on the Company’s financial position and liquidity requirements.

Drafting tips:

1. Create regular liquidity opportunities: As you may see, section 9.2’s annual buyback window gives TechSolve a structured way to provide liquidity without the pressure of ad hoc requests. This predictability benefits both the company (which can plan financially) and employees (who can make personal financial plans accordingly). TechSolve can choose when to open this window, ideally coinciding with funding rounds or strong financial periods.
2. Allow for hardship exceptions: That special circumstances provision in Section 9.3 is something I always recommend including. I have seen too many cases where rigid ESOP terms forced employees to make painful choices during personal emergencies. This compassionate exception builds goodwill while still preserving company control through the approval process.
3. Define the pricing mechanism: Did you notice how I tied the buyback price to Fair Market Value in Section 9.4? I included this because I know that an objective standard prevents disputes and ensures fair treatment. For TechSolve, this will typically be based on their most recent funding round valuation, which makes the process transparent and understandable for all parties.
4. Include a right of first refusal: Section 9.5 ensures TechSolve maintains control over who becomes a shareholder. Without this provision, employees could potentially sell shares to competitors or problematic investors. This protection will be particularly important as TechSolve grows and more employees exercise their options.
5. Suggest a formal buyback pool: The optional buyback pool in Section 9.6 gives TechSolve a structured way to fund these repurchases. I’ve seen companies that proactively set aside a portion of each funding round (typically 1-2%) specifically for ESOP liquidity. This shows employees and investors alike that the company is serious about making its equity valuable.

Tax treatment and compliance

Let me tell you why I lose sleep over the tax provisions in ESOP schemes. 

A few years ago, I watched a star engineer at a client’s company exercise his options at what seemed like a great time. The company’s valuation had just doubled. Six months later, the market crashed. His share value plummeted, but his tax bill—based on that pre-crash valuation—remained. He ended up with nearly worthless shares and a tax liability that exceeded his annual salary.

That experience taught me that tax provisions are not just technical formalities. They are critical protections for both the company and employees. For TechSolve, with their plans to use equity to attract senior talent, the tax clause needs to accomplish two things simultaneously: 

• protect the company from employees’ tax liabilities and 
• provide enough clarity that those new hires understand exactly what they are getting into.

I was particularly worried about this for TechSolve because they plan to offer significant equity packages to offset below-market salaries. If their ESOP created unexpected tax burdens, it would undermine the very purpose of their equity program.

Accordingly, this is what I drafted for them:

10. TAX TREATMENT AND COMPLIANCE

10.1 Tax Liability:

(a) The Participant shall be responsible for all taxes in connection with the grant, vesting, exercise, sale, or any other disposition of Options or Shares under this Plan.

(b) The Company shall have the right to deduct or withhold, or require the Participant to remit to the Company, an amount sufficient to satisfy any tax withholding obligations before delivering Shares upon exercise of Options.

10.2 Tax Guidance:

(a) The Company shall provide Participants with a general overview of the tax implications of the Plan through an information document that shall be updated periodically.

(b) This overview is not intended as tax advice, and Participants are strongly encouraged to consult their own tax advisors regarding their personal tax situation.

10.3 Reporting Requirements:

(a) The Company shall fulfill all employer reporting obligations related to the Plan as required by applicable tax laws.

(b) Participants shall promptly provide the Company with any information requested to enable the Company to comply with its reporting obligations.

10.4 Changes in Tax Laws:

(a) The Committee shall monitor changes in applicable tax laws that may affect the Plan.

(b) The Committee may, with approval from the Board, modify the Plan to address changes in tax laws, provided such modifications do not materially reduce the value of Options already granted.

10.5 Indemnification:

(a) Each Participant shall indemnify the Company against any tax liability that the Company may incur as a result of the Participant’s failure to comply with tax laws or to pay taxes when due in connection with the Plan.

(b) The Company’s remedies for such failure may include, but are not limited to, deducting amounts from the Participant’s salary or other compensation or requiring the surrender of Shares acquired under the Plan.

10.6 Accounting Policies: 

(a) The Company shall comply with all applicable accounting standards, including but not limited to Ind AS 102 (Share-based Payment) or equivalent standards, in the implementation and accounting treatment of this Plan. 

(b) The Company shall disclose appropriate information regarding the Plan in its financial statements and Directors’ Report in accordance with applicable accounting standards and regulatory requirements.

Drafting tips:

1. Be explicit about liability: Check section 10.1 and see how I made it crystal clear that participants bear all tax responsibility. This is non-negotiable protection for TechSolve. 
2. Create an education obligation: Section 10.2 requires TechSolve to provide tax information to participants. If you are thinking the company is just being nice, it’s not. It’s a strategic move. When employees understand the tax implications of their options, they make better decisions about when to exercise, which reduces tension and misunderstandings. I made this mandatory after seeing too many companies blindside employees with tax consequences that were never explained.
3. Address regulatory compliance: Sections 10.3 and 10.4 ensure that both parties fulfill their legal obligations. As Indian tax laws around ESOPs may evolve, having a mechanism to monitor and adapt to these changes (as in 10.4) prevents the scheme from becoming outdated or non-compliant.
4. Include indemnification language: That indemnification clause in Section 10.5 might seem harsh, but it gives TechSolve concrete remedies if an employee’s tax non-compliance creates liability for the company. 

The tax clause is admittedly the least exciting part of an ESOP scheme, but it’s often where the biggest practical problems emerge. For TechSolve, a comprehensive tax provision will give them the confidence to offer substantial equity packages to those key hires without fearing unforeseen tax consequences down the road.

Amendment, suspension, and termination of plan

I knew that for TechSolve, it was important to have a flexible ESOP, one that could evolve as the company grew.

The top management of TechSolve informed me that over the next few years, they will be experiencing rapid growth, potential acquisitions, new funding rounds, and perhaps even an IPO. Therefore, its ESOP needed a design that could evolve alongside these changes.

But there was one problem. 

While the company needed flexibility, employees needed security. 

The senior hires would not be comfortable if TechSolve has the option to arbitrarily change the rules after they have joined. This tension between flexibility and security was precisely what I had to address.

Accordingly,  this is how I structured this clause for TechSolve:

11. AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN

11.1 Amendment:

(a) The Board shall have the right to amend the Plan, in whole or in part, at any time.

(b) Notwithstanding the above, no amendment shall adversely affect the rights of Participants to Options already granted without their written consent, except as provided in Section 11.1(c).

(c) The Board may amend the Plan without Participant consent if necessary to comply with applicable laws or regulations or to avoid adverse tax or accounting consequences for the Company or Participants.

11.2 Suspension:

(a) The Board may suspend the operation of the Plan at any time for any period if required by applicable laws or regulations, or if the Board determines that suspension is in the best interests of the Company.

(b) During any suspension period, no new Options shall be granted, but Options previously granted shall continue to vest and be exercisable according to their terms.

(c) The Board shall promptly notify all Participants of any suspension of the Plan and its expected duration.

11.3 Termination:

(a) The Board may terminate the Plan at any time, provided that such termination shall not affect Options already granted.

(b) Upon termination of the Plan:

(i) No new Options shall be granted;

(ii) Options already granted shall continue to vest and be exercisable according to their terms; and

(iii) All provisions of the Plan necessary for administration of outstanding Options shall continue in effect.

11.4 Shareholder Approval:

(a) Any amendment that would:

(i) Increase the total number of Shares reserved for issuance under the Plan by more than 20%;

(ii) Reduce the exercise price of outstanding Options; or

(iii) Materially increasing the benefits to Participants or materially modifying eligibility requirements shall require approval by the shareholders of the Company.

11.5 Notification:

(a) The Company shall notify all affected Participants of any material amendment, suspension, or termination of the Plan within 30 days of such action.

(b) Such notification shall summarize the changes and their impact on the Participants’ rights and obligations under the Plan.

Drafting tips:

1. Protect vested rights: I made sure that section 11.1(b) explicitly protects participants’ existing rights. For TechSolve, this provision assures those senior hires that their equity would not be diminished through subsequent amendments.
2. Create a compliance exception: That section 11.1(c) gives TechSolve the flexibility to make necessary changes without unanimous consent, which can be practically impossible to obtain once you have dozens of option holders. 
3. Distinguish between suspension and termination: Sections 11.2 and 11.3 create different mechanisms for temporary suspension versus permanent termination. For TechSolve, this nuance provides options if they need to pause new grants during a funding round or acquisition talks without affecting existing grants.
4. Require shareholder approval for significant changes: Section 11.4’s requirement for shareholder approval of major changes protects both the company and participants. 
5. Mandate communication: I have seen companies making ESOP changes without clearly communicating to interested employees, leading to confusion and speculation that damaged morale. For TechSolve, with their plans to use equity as a key retention tool, transparency in any changes was essential. Therefore, I inserted section 11.5 to create a notification requirement. 

The amendment and termination provisions are often overlooked as “standard boilerplate,” but they are actually important to avoid disputes and confusion. 

Dispute resolution and governing law

After structuring all these detailed terms for TechSolve’s ESOP, I reached what I consider the safety net of any good ESOP scheme. 

The dispute resolution clause. 

I have seen that lawyers (even experienced ones) often treat this as mere boilerplate, yet in my experience, some of the most expensive problems have stemmed from poorly drafted or entirely missing dispute resolution provisions.

I structured TechSolve’s dispute resolution clause to reflect practical realities I encountered throughout my career. 

First, most option-related disputes can and should be resolved internally if possible. Second, when internal resolution fails, arbitration typically serves startups better than litigation. Third, geographic specificity prevents costly jurisdictional battles that could drain startups’ limited resources.

Here is the dispute resolution clause I crafted for TechSolve:

12. DISPUTE RESOLUTION AND GOVERNING LAW

12.1 Governing Law:

(a) This Plan shall be governed by and construed in accordance with the laws of India.

(b) All matters relating to the interpretation and application of the Plan shall be subject to the exclusive jurisdiction of the courts in Bengaluru, Karnataka.

12.2 Internal Resolution Process:

(a) Any dispute, controversy, or claim arising out of or relating to this Plan shall first be addressed through the following escalation process:

(i) The Participant shall submit the dispute in writing to the Company’s HR department;

(ii) If unresolved within 15 days, the matter shall be escalated to the Committee;

(iii) If still unresolved within 30 days after escalation to the Committee, the matter shall be referred to the Board for final determination.

(b) The Participant shall be given a reasonable opportunity to present their case at each stage of this process.

12.3 Arbitration:

(a) If the dispute remains unresolved after completion of the process in Section 12.2, or if the Participant is not satisfied with the Board’s determination, the dispute shall be referred to arbitration.

(b) The arbitration shall be conducted by a sole arbitrator appointed by mutual agreement of the parties. If the parties cannot agree on an arbitrator within 30 days, the arbitrator shall be appointed by the Chairperson of the Karnataka Chapter of the Indian Council of Arbitration.

(c) The arbitration shall be conducted in Bengaluru in accordance with the Arbitration and Conciliation Act, 1996, as amended from time to time.

(d) The arbitration proceedings shall be conducted in English.

(e) The decision of the arbitrator shall be final and binding on all parties.

12.4 Continued Performance:

(a) During the pendency of any dispute resolution process, the Company and the Participant shall continue to perform their respective obligations under the Plan and the Grant Letter to the extent not directly affected by the dispute.

12.5 Costs:

(a) Each party shall bear its own costs in the internal resolution process.

(b) The costs of arbitration shall be borne as determined by the arbitrator.

Drafting tips:

1. Create a multi-step process: I deliberately structured Section 12.2 as a three-step escalation because I’ve learned that most disputes can be resolved informally if given the right forum. Starting with HR keeps things confidential and low-pressure while preserving the option to escalate if needed.
2. Specify the jurisdiction: The Bengaluru jurisdiction in Section 12.1 isn’t just about convenience—it prevents something I’ve seen repeatedly: employees filing cases in their hometown courts, forcing startups to hire lawyers in multiple cities. For TechSolve, this simple provision could save lakhs in legal fees.
3. Choose arbitration over litigation: After watching multiple ESOP disputes play out in open court (much to the founders’ dismay), I became a strong advocate for the arbitration approach in Section 12.3. It’s faster, more private, and typically less adversarial than court proceedings—all critical considerations for a growth-stage company like TechSolve.
4. Address ongoing obligations: Section 12.4 stems directly from a case I handled where a company frozen by indecision halted all ESOP operations during a dispute with one employee, causing unnecessary panic among the entire team. This simple provision prevents that scenario for TechSolve.
5. Clarify cost responsibility: I’ve found that ambiguity about who pays for dispute resolution often prevents parties from seeking resolution in the first place. Section 12.5’s clear allocation ensures that fear of unknown costs doesn’t become a barrier to resolving legitimate concerns.

A thoughtfully drafted dispute resolution clause isn’t just legal protection—it’s a practical tool that increases the likelihood that your ESOP will function as intended, even when disagreements arise. For TechSolve, this framework provides both the company and its option holders with confidence that if questions or conflicts occur, there’s a clear, fair, and efficient path to resolution.

Have a look at the complete ESOP scheme here.

Wrap-Up

I hope these two articles have provided you with the practical insights needed to create an ESOP scheme that actually works and does not just satisfy legal requirements.

I discussed each critical element from foundational clauses like purpose and eligibility to operational provisions covering grants, vesting, exercise, termination, and dispute resolution. The sample language I used for TechSolve could be used as a template for your ESOP scheme.

Always remember that the best ESOP is not the one with the most sophisticated legal language. It is the one that effectively aligns the interests of the company and employees while being clear enough for everyone to understand. It should protect the company while treating team members fairly.

You can use these articles as your toolkit. 

Adapt the provisions to your specific circumstances. Never forget that an ESOP is ultimately a promise about shared success. So, draft it thoughtfully, implement it carefully, and watch how it transforms a company.