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Learn how to create a clear, compelling ESOP grant letter that aligns with the company’s equity strategy. This step-by-step guide uses real-world examples and practical drafting tips to help you make a strong offer that attracts top technical talent.

Introduction

If you have been following my series on the ESOP, you will recall that in Part 1, I focused on laying the groundwork for a robust ESOP scheme. 

I discussed the importance of clear purpose statements, well-defined eligibility criteria, precise definitions, and calculating the optimal pool size. 

In Part 2, I explored the operational mechanics, how options are granted, vest, and can be exercised, along with termination scenarios and dispute resolution frameworks. 

Most recently, in Part 3, I outlined the step-by-step approval process required to transform your ESOP scheme from a document into a legally binding reality, including board meetings, shareholder approvals, and regulatory filings. 

But even with a perfectly drafted and properly approved ESOP scheme, companies can still fail to attract top talent if they neglect one critical document, and that is ‘the grant letter’.

Let me share something that happened a few months ago. 

I was having dinner with the founders of a promising edtech startup. Due to confidentiality, I cannot name them.

Anyways, they had just lost a stellar Chief Technology Officer (CTO) candidate despite offering a generous equity package. When I asked to see the grant letter they had sent to the CTO, the problem became immediately obvious to me. 

The one-paragraph document vaguely mentioned “stock options” without specifying the number of shares, vesting schedule, or exercise terms. 

“We thought the verbal offer was enough. The grant letter was just a formality,” one founder told me. 

This is a common and costly misconception. 

The ESOP grant letter is a critical document in the suite of agreements (including the ESOP scheme and employment contract) that C-suite hires will scrutinize. 

While the ESOP scheme establishes the framework for an equity compensation program, the grant letter is where theory meets practice. It is where abstract promises transform into concrete terms that can make or break your hiring success.

Therefore, in this article, I will walk you through the essential elements every grant letter should contain. I will explain why each clause matters, share practical drafting tips, and help you avoid the mistakes I have seen too many startups make. 

By the end of this article, you will have a template you can customize for drafting your own grant letters for effective hiring.

As with previous articles in this series, I will continue using our fictional example—TechSolve, a B2B SaaS startup gearing up for its pre-Series A round. 

With a valuation of around ₹40 crore, TechSolve is looking to hire a CTO to scale their tech leadership without straining their cash compensation budget. A well-crafted grant letter will be essential for TechSolve to attract the right talent.

Understanding the ESOP grant letter

How about we understand the legal framework and significance of the ESOP Grant letter before diving into the specifics?

In India, ESOP grant letters must comply with specific regulatory frameworks – 

• Section 62(1)(b) of the Companies Act, 2013, 
• Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014 for private companies, and 
• SEBI (Share Based Employee Benefits) Regulations for listed entities. 

These regulations establish requirements for documentation, shareholder approval, and valuation procedures.

While an ESOP scheme sets the rules for all participants, the grant letter applies those rules to an individual, specifying:

• The number of options granted
• The exercise price
• The vesting schedule
• The conditions attached to the grant
• The procedure for exercising options

The grant letter serves several critical purposes:

1. Legal documentation: It creates a clear record of what was offered and accepted
2. Setting expectations: It ensures the employee fully understands the terms of their equity compensation
3. Preventing disputes: It reduces the risk of future misunderstandings about vesting, exercise rights, or other conditions
4. Compliance: It fulfills regulatory requirements for documenting equity grants

For a senior role like a CTO, the grant letter takes on even greater importance. 

Technical leaders often have extensive experience with equity compensation and will scrutinize these documents carefully. A clear, well-structured grant letter signals professionalism and transparency—qualities that matter tremendously when recruiting executive talent.

With that being said, let me teach you step by step how to prepare a comprehensive grant letter that aligns with the ESOP scheme approved by the company.

Step 1: Setting the stage for the Grant Letter

The opening section of the grant letter you draft should establish context and set the tone for the offer. Take this as an opportunity to frame the equity grant as part of the company’s or your client’s broader relationship with the CTO.

Have a look at how I drafted the opening part of the grant letter to a promising CTO candidate named Aanya Sharma:

Date: April 16, 2025

To: Aanya Sharma

Subject: Grant of Employee Stock Options

Dear Aanya,

We are pleased to inform you that the ESOP Committee of TechSolve Private Limited (“Company”) has approved a grant of Employee Stock Options (“Options”) to you under the TechSolve Employee Stock Option Plan 2023 (“Plan”). This grant recognizes your anticipated contributions to the Company as our Chief Technology Officer and demonstrates our commitment to your long-term partnership with TechSolve.

The Options granted to you represent the right to purchase equity shares in the Company, subject to the terms and conditions outlined in this Grant Letter and the Plan. In case of any conflict between this Grant Letter and the Plan, the terms of the Plan shall prevail.

Drafting tips:

1. Personalise the introduction: Notice how I addressed the candidate by name and specifically mentioned her role as CTO. This personalization signals that the equity grant is tailored to her unique value to the company, not a generic offering.
2. Establish the hierarchy of documents: The line about the Plan prevailing over the Grant Letter is critical from a legal standpoint. It ensures that you do not inadvertently create terms that conflict with your ESOP scheme. The Plan is the governing document approved by both the board and shareholders, which is why it takes precedence over individual grant letters. 
3. Set a positive, forward-looking tone: Phrases like “anticipated contributions” and “long-term partnership” frame the equity grant as part of a broader relationship, not just compensation.
4. Keep it concise but warm: The opening should be professional but not coldly legalistic. Remember, this document is both a legal instrument and a recruiting tool.

I have seen many startups use overly casual language in their grant letters, thinking it feels more accessible. However, for a CTO-level hire, professionalism matters. Your opening should convey that you take this grant seriously and respect the candidate’s business acumen.

Step 2: Detailing the number of options granted

Once you have set the stage, you need to clearly specify exactly what you are offering. 

This is where precision becomes crucial, and ambiguity about the size of the grant can derail your entire recruiting effort.

For TechSolve’s CTO offer, here is how I structured this section:

GRANT DETAILS

1. Number of Options: 2,000 (Two Thousand) Options, representing 2% of the Company’s fully diluted share capital (which includes all issued shares, outstanding options, warrants, and convertible securities) as of the date of this Grant Letter.

2. Date of Grant: April 16, 2025

3. Exercise Price: Rs. 500 (Rupees Five Hundred Only) per Option, which is the Fair Market Value of the Company’s shares as determined by a registered valuer appointed under Section 247 of the Companies Act, 2013, and approved by the Board as of the Date of Grant.

4. Each Option entitles you to purchase one equity share (1:1) of the Company upon exercise.

Drafting tips:

1. Specify both number and percentage: By stating both the absolute number (2,000) and the percentage (2%), I tried to provide complete clarity on the size of the grant. This is especially important for a CTO-level hire who will want to understand their ownership stake.
2. Write out numbers in words and figures: This prevents any confusion or typographical errors from changing the meaning. It is these small details that significantly reduce the risk of misunderstandings.
3. Reference how the exercise price was determined: For a pre-Series A company like TechSolve, explaining that the price represents Fair Market Value as determined by the Board provides transparency about how the strike price was set.
4. Clarify the conversion ratio: While a 1:1 ratio of options to shares is common, explicitly stating this prevents any confusion, especially if your ESOP scheme allows for different ratios in special circumstances.

One mistake I frequently see is companies being vague about the percentage of equity being granted. For example, saying “up to 2%” creates uncertainty. For a C-level hire, this ambiguity can be a major red flag. Be specific and precise about exactly what you’re offering.

Step 3: Vesting schedule and conditions

The vesting schedule is arguably the most scrutinized part of any grant letter, especially for senior hires. It dictates when and how the recipient earns the right to exercise their options, essentially setting the timeline for their equity compensation.

For TechSolve’s CTO, here is how I structured the vesting provisions:

VESTING SCHEDULE

5. Vesting Period: Subject to your continued employment with the Company, your Options will vest over a period of 4 (four) years from the Date of Grant as follows:

   a) 25% of the Options (500 Options) will vest after 12 months from the Date of Grant (“Cliff Period”).

   b) Following the Cliff Period, 6.25% of the Options (125 Options) will vest at the end of each subsequent quarter (i.e., every three months) for the next 36 months.

6. Vesting Conditions: Vesting is contingent upon your continued employment with the Company in the capacity of Chief Technology Officer as of each vesting date. Any leaves of absence exceeding 90 consecutive days may result in an adjustment to your vesting schedule as per Section 6.5 of the Plan.

7. Accelerated Vesting: In the event of a Change of Control or Initial Public Offering of the Company, any unvested Options may accelerate and vest immediately prior to such event, subject to the approval of the Board.

Drafting tips:

1. Be precise about the timeline: Take note of how I clearly specified both the cliff period (12 months) and the subsequent quarterly vesting. For a CTO, this level of detail is expected and appreciated.
2. Break down the math: By specifying the exact number of options that vest at each milestone (500 at cliff, 125 per quarter thereafter), you eliminate any potential for confusion about the vesting calculation.
   
3. Reference continued employment: The contingency on continued employment is critical—it’s the core principle that makes ESOPs effective retention tools. For a CTO, this should be tied specifically to their continued service in that role.
4. Address potential acceleration: The accelerated vesting provision addresses a question that experienced executives will almost certainly ask: “What happens if the company is acquired?” This provision signals that TechSolve has considered this scenario and has a fair approach in place.

For senior hires like CTOs, vesting schedules sometimes become negotiation points. 

While standard practice is a one-year cliff with quarterly vesting thereafter, I have seen successful companies offer shorter cliffs (6 months) or monthly vesting after the cliff for exceptional candidates. Whatever schedule you choose, the key is presenting it with crystal clarity.

Step 4: Exercise price and terms

The exercise provisions explain how and when the CTO can convert their vested options into actual shares. This section is critical because it establishes the practical pathway from paper value to real ownership.

This is how I prepared this section for TechSolve’s CTO grant letter:

EXERCISE TERMS

8. Exercise Period: You may exercise your vested Options during the following periods:

   a) While employed by the Company: Any time after vesting until 10 years from the Date of Grant.

   b) After termination of employment: Within 1 year from the date of separation (rather than 5 years), provided the Options have vested before separation and subject to the terms of Section 8 of the Plan regarding different termination scenarios.

9. Exercise Process: To exercise your vested Options, you must submit an Exercise Application to the Company in the prescribed format, along with payment of the Exercise Price and applicable taxes.

10. Payment Methods: The Exercise Price may be paid by:

    a) Cash or check

    b) Electronic funds transfer

    c) With the approval of the Committee, by a net exercise arrangement as described in Section 7.5(c) of the Plan

    d) Any combination of the above methods

11. Issuance of Shares: Upon valid exercise and payment, the Company shall issue the corresponding number of equity shares to you within 30 days, subject to compliance with applicable laws.

Drafting tips:

1. Differentiate between employment scenarios: The different exercise periods for current vs. former employees reflect TechSolve’s employee-friendly approach while maintaining appropriate incentives for continued employment.
2. Reference the Plan for termination scenarios: Rather than detailing every possible termination scenario, I referenced Section 8 of the Plan. This keeps the grant letter focused while ensuring the CTO is aware that different separation circumstances have different implications.
3. Include the net exercise option: The net exercise provision (allowing the CTO to “pay” the exercise price by receiving fewer shares) is particularly important for senior hires who might face substantial cash requirements otherwise. This employee-friendly provision removes a major barrier to exercise.
4. Set a clear timeline for share issuance: The 30-day commitment for issuing shares creates accountability and certainty for the CTO after they’ve paid the exercise price.
   

I have seen companies create unnecessary friction by offering overly restrictive exercise terms, like 90-day post-termination exercise windows that effectively force departing employees to either come up with substantial cash or forfeit their equity. For a CTO-level hire, such restrictive terms can be a deal-breaker. TechSolve’s more generous 5-year post-separation window demonstrates confidence and fairness.

Step 5: Termination and exit scenarios

While an ESOP scheme must contain detailed provisions about various termination scenarios, it’s important to highlight key points in the grant letter. This ensures that the candidate you are hiring understands what happens to their equity if they leave the company under different circumstances.

Sample clause I drafted for TechSolve’s CTO:

TERMINATION PROVISIONS

12. Impact of Termination on Unvested Options:

    a) Resignation or Termination Without Cause: All unvested Options shall lapse as of the date of resignation or termination.

    b) Termination for Cause: All Options, whether vested or unvested, shall lapse as of the date of termination, in alignment with standard industry practice for misconduct scenarios.

   c) Good Leaver Events: In case of termination due to death, permanent disability, or retirement, special provisions apply including possible acceleration of unvested options and extended exercise periods for vested options, as detailed in Section 8.4 of the Plan.

13. Impact of Termination on Vested Options:

    a) Resignation or Termination Without Cause: All vested Options may be exercised within 5 years from the date of separation.

    b) Termination for Cause: All vested Options may be exercised within 90 days from the date of termination.

    c) For details on Good Leaver scenarios, please refer to Section 8.4 of the Plan.

14. Definition of “Cause” and “Good Leaver”: For definitions of “Cause” and “Good Leaver,” please refer to Section 2 of the Plan.

Drafting tips:

1. Separate unvested from vested treatment: By clearly distinguishing between how termination affects unvested versus vested options, you prevent confusion about what equity rights the CTO retains after departure.
2. Highlight key termination scenarios: While referring to the Plan for full details, I’ve highlighted the most common scenarios directly in the grant letter—resignation, termination without cause, and termination for cause.
3. Reference definitions: Rather than reproducing the full definitions of “Cause” and “Good Leaver,” I referenced Section 2 of the Plan. This ensures consistency while keeping the grant letter concise.
4. Use simple language: Notice how I avoided dense legal jargon in favor of clear, straightforward statements. Technical executives like CTOs appreciate precision, but that doesn’t require unnecessarily complex language.
   

For senior hires, termination provisions can become negotiation points. 

For instance, some companies offer partial accelerated vesting for executives who are terminated without cause, particularly after they have been with the company for a certain period. While TechSolve’s approach is standard, be prepared to discuss these terms with sophisticated candidates who may propose modifications.

Step 6: Tax implications

Tax considerations are among the most complex aspects of equity compensation, yet many grant letters gloss over them entirely. While you can not provide personalized tax advice, you should ensure your CTO is aware of the general tax implications of their equity grant.

Here is how I addressed tax implications in TechSolve’s CTO grant letter:

TAX CONSIDERATIONS

15. Tax Liability: You will be solely responsible for all taxes arising from the grant, vesting, exercise, sale, or any other disposition of the Options or resulting shares.

16. Tax Withholding: As required by section 17(2) of the Income Tax Act, 1961, the Company must withhold taxes on the perquisite value arising from the exercise of Options and will deduct such amounts before delivering shares upon exercise.

17. Potential Tax Events: You should be aware that tax obligations may arise at various points, including: 

a) At the time of exercise of the Options; 

b) At the time of the sale of shares acquired upon exercise.

18. Tax Guidance: The Company will provide a general overview of the tax implications through a separate information document. However, this should not be considered tax advice, and you are strongly encouraged to consult your own tax advisor regarding your personal tax situation.

Drafting tips:

1. Be clear about responsibility: The explicit statement that the CTO bears sole responsibility for tax obligations prevents any misconception that the company will handle its tax liabilities.
2. Highlight key tax trigger points: By listing the major events that might trigger tax obligations, you ensure your CTO candidate understands the basic tax landscape without providing individualized advice.
3. Mention the withholding right: The company’s right to withhold taxes is an important protection that should be explicitly stated in the grant letter.
4. Promise information but recommend professional advice: The commitment to provide general tax information shows good faith, while the encouragement to seek personal tax advice appropriately places specialized tax planning in the hands of professionals.

Tax implications can vary significantly based on the CTO’s personal circumstances, the company’s valuation trajectory, and changes in tax laws. 

You might see candidates walking away from otherwise attractive offers because they were not given enough information to properly evaluate the tax consequences of their equity.

While you cannot be their tax advisor, providing a framework for understanding these implications demonstrates transparency and respect for the complexity of their decision.

Step 7: Miscellaneous provisions

The final section of your grant letter should address a few additional considerations that don’t fit neatly into the previous categories but are nonetheless important to document.

Sample of the provisions I created for TechSolve’s CTO:

ADDITIONAL PROVISIONS

19. Confidentiality: The terms of this Grant Letter are confidential between you and the Company and should not be disclosed to third parties except as required by law or for the purpose of obtaining professional advice.

20. Non-Transferability: The Options granted to you are personal and non-transferable, except in the case of death or permanent incapacity, where they may be transferred to your legal heirs or nominees as specifically provided in Section 7A of the Plan.

21. Shareholder Rights: Until shares are issued upon exercise of your Options, you will not have any rights as a shareholder, including voting rights or rights to dividends.

22. Buyback Opportunities: The Company may, at its discretion and subject to compliance with section 68 of the Companies Act, 2013, offer to repurchase shares issued upon exercise. Such buybacks are not guaranteed and would require proper corporate approvals as detailed in Section 9 of the Plan.

23. Governing Law and Dispute Resolution: This Grant Letter is governed by the laws of India, and any disputes shall be subject to the exclusive jurisdiction of the courts in Bengaluru, Karnataka, India, as outlined in Section 12 of the Plan.

24. Complete Copy of the Plan: A complete copy of the Plan is attached to this Grant Letter. You should read the Plan carefully as it contains important details about your rights and obligations with respect to your Options.

Drafting tips:

1. Address confidentiality: The confidentiality provision is particularly relevant for a CTO, who might otherwise inadvertently create morale issues by sharing their (likely larger) equity package with other team members.
2. Clarify shareholder rights: Many option holders mistakenly believe they have voting rights or other shareholder privileges before exercise. This provision prevents such misunderstandings.
3. Highlight buyback opportunities: By mentioning the possibility of buybacks, you remind the CTO that there may be liquidity opportunities before a full company exit—an attractive feature for many senior hires.
4. Reference the full Plan: Attaching the complete ESOP scheme and explicitly recommending that the CTO read it ensures they have access to all the details that are not practicable to include in the grant letter itself.
5. Keep miscellaneous provisions brief: These provisions should be included for completeness, but do not need extensive elaboration in the grant letter since they’re fully detailed in the Plan.

These miscellaneous provisions address important legal and practical matters that sophisticated candidates will expect to see addressed. While they may seem like formalities, they help prevent misunderstandings and establish a professional framework for the equity relationship.

Step 8: Finalising the Grant Letter

The final step in creating an effective grant letter is providing clear instructions for acceptance and ensuring proper execution of the document. This section transforms the offer into a binding agreement between TechSolve and its new CTO.

This is the closing section for TechSolve:

ACCEPTANCE AND ACKNOWLEDGMENT

By signing below, you acknowledge that:

1. You have received and reviewed a copy of the Plan.

2. You understand and agree to be bound by the terms and conditions of this Grant Letter and the Plan.

3. You have had an opportunity to obtain independent legal and tax advice regarding this grant of Options and have either obtained such advice or voluntarily elected not to do so.

To accept this grant of Options, please sign both copies of this Grant Letter and return one original copy to the HR department within 30 days of receipt, or such extended period as may be mutually agreed. The other copy is for your records.

For TechSolve Private Limited:

________________________

Vikram Mehta

CEO & Co-founder

________________________

Date

Accepted and Agreed:

________________________

Aanya Sharma

________________________

Date

Drafting tips:

1. Require explicit acknowledgment: The acknowledgment statements create a clear record that the CTO has received, reviewed, and understood both the grant letter and the Plan. This prevents future claims of misunderstanding.
2. Mention opportunity for independent advice: Acknowledging that the CTO had the opportunity to seek independent legal and tax advice protects the company from claims that they should have provided more guidance.
3. Include a deadline for acceptance: The 30-day return deadline creates clarity about how long the offer remains open and encourages timely decision-making.
   
4. Provide a copy for records: Instructing the CTO to keep one copy for their records encourages good documentation practices on both sides.
5. Have a senior executive sign: Having the CEO sign the letter signals the importance of the grant and the company’s commitment to the CTO hire.

I have seen many startups treat the signing process as an afterthought, sending grant letters via email with vague instructions like “let me know if you have questions.” 

For a C-level hire, this approach is insufficient. A formal acceptance process with proper documentation demonstrates professionalism and ensures both parties are clear about their commitments.

Conclusion

I hope this walkthrough has given you a clear roadmap for crafting effective ESOP grant letters. 

Remember, a well-drafted grant letter is a crucial tool for attracting and retaining top technical talent like our CTO Aanya.

I have covered everything from personalising the introduction to detailing grant specifics, creating clear vesting schedules, explaining exercise terms, addressing termination scenarios, highlighting tax implications, and finalizing the document professionally.

With this article, I have completed a comprehensive ESOP journey from 

• drafting ESOP scheme, 
• navigating the approval process, and now, 
• crafting compelling grant letters. 

Together, these four articles form a helpful guide for beginners who want to understand the end-to-end process of how ESOPs are structured and implemented.

Now it is your turn!

Try drafting a grant letter yourself by assuming facts for a hypothetical startup client. You can also use this sample template for your clients. Challenge yourself to balance legal precision with the warmth and clarity needed for recruitment.

By mastering these ESOP skills, you will distinguish yourself in interviews for prestigious law firm positions or coveted in-house roles. While other candidates might have theoretical knowledge, you will be able to demonstrate practical expertise in designing, implementing, and operationalizing equity plans that actually work. 

This comprehensive understanding transforms you from a document drafter into a strategic advisor who can help startups and corporate clients secure the talent they need to thrive, navigate complex funding rounds, and build sustainable businesses. In today’s competitive legal market, this practical expertise in equity compensation can truly differentiate your practice and make you an indispensable part of your clients’ growth journey.