How to Review an ESOP Agreement: A Clause-by-Clause Checklist

How to review an ESOP agreement before you sign Most ESOP disappointment comes down to four questions the documents should answer without argument: how many options and at what price, how fast they vest, what it costs and how long you have to exercise them, and what happens to them when you leave. Read the grant letter and the scheme with those four in hand and the clauses that decide real value stand out quickly. Work through the checklist below clause by clause. Whether you are the employee receiving options or the company running the plan, the test for each clause is the same: is the rule clear enough that a departure or an exit could be settled by reading it? This is general information, not legal advice. Because ESOPs engage company law, securities rules and tax, have a lawyer and a tax adviser review the documents. ## The clause-by-clause checklist ### 1. Read the scheme, not just the grant letter

• Does the grant letter reference the shareholder-approved scheme, and have you seen the scheme itself?
• Red flag: a grant letter that points to a scheme you have never been shown, so the rules that actually govern your options are hidden. ### 2. Number of options and what they convert to
• Is the number of options clear, and does each convert to one share? Is the current total share count known, so you can gauge the percentage?
• Red flag: a headline number of options with no sense of the fully diluted share count, so the stake is impossible to value. ### 3. Exercise price
• Is the exercise price (what you pay per share on exercise) stated and reasonable relative to current value?
• Red flag (employee): an exercise price set at a high fair value, so the options have little built-in gain and a large cost to exercise. ### 4. Vesting schedule and cliff
• Is the schedule clear, with at least the one-year minimum cliff required in India, and does each tranche depend on continued employment?
• Red flag (employee): a very long schedule or back-loaded vesting, so most value only arrives years out. Red flag (company): a vesting start that breaches the one-year minimum. ### 5. Exercise mechanics and window
• How long after vesting can you exercise, and by what method (cash, cashless, net settlement)?
• Red flag: a short or vague exercise window, and no cashless option, so you must find real money to exercise or lose the options. ### 6. Leaver treatment
• What happens to vested and unvested options on resignation, termination, termination for cause, death and disability?
• Red flag (employee): a very short window to exercise vested options after leaving, or a broad "cause" definition that lets the company cancel vested options. Red flag (company): no clear lapse of unvested options on exit. ### 7. Exercise window after leaving
• Is the post-termination exercise period long enough to be usable, especially where the shares are illiquid and you must fund the exercise price yourself?
• Red flag: a 30-day window on an illiquid private company, which in practice forces many leavers to abandon vested options. ### 8. Transfer and liquidity
• Are options non-transferable (normal), and is there any route to liquidity (buy-back, secondary sale on an event)?
• Red flag: no path to ever realise value, so vested shares could sit illiquid indefinitely. ### 9. Adjustment and dilution
• Does the scheme protect options on a bonus issue, split or consolidation, and how are they treated in future rounds?
• Red flag: no adjustment mechanism, so a corporate action quietly changes what the options are worth. ### 10. Acceleration on exit
• Do options accelerate on a change of control or liquidity event, in full or in part?
• Red flag (employee): no acceleration, so an acquisition can leave unvested options behind. ### 11. Tax treatment
• Does the grant flag the perquisite tax on exercise and capital-gains tax on sale, and any startup deferral, with TDS handled?
• Red flag: silence on tax, leaving a surprise liability on exercise, sometimes before any cash is received. ### 12. Consistency with the Articles and SHA
• Do the ESOP terms sit cleanly with the Articles and Shareholders' Agreement on issue of shares and transfer?
• Red flag: a conflict with no clause saying which prevails. ## Read it in this order Do not review an ESOP top to bottom. Start with the number, exercise price and vesting (clauses 2, 3 and 4), because they decide what you are getting and what it costs. Then read the leaver and exercise-window clauses together (5, 6 and 7), because they decide whether you keep anything when you leave. Then check acceleration and liquidity (8 and 10), because they decide whether the options ever turn into cash. Only then confirm tax and consistency. Reviewing in that order keeps your attention on the clauses that decide real value. ## A quick note on the law ESOPs in India are governed by the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014 for unlisted companies, by SEBI's share-based employee benefits regulations for listed companies, and by the Income-tax Act, 1961 for perquisite and capital-gains tax, with a deferral available to eligible recognised startups. Other jurisdictions have their own very different schemes, such as UK EMI options or US ISOs and NSOs, so for the UK, Ireland, Singapore, Australia or the US, check local share-scheme and tax rules. This is not legal or tax advice; take professional advice before signing. ## Where a contract workspace helps Reviewing one grant letter by hand is manageable. The strain shows when you run a whole programme: tracking each employee's grant, vesting and exercise status, keeping grant letters consistent with the scheme and the Articles, and managing exercise windows as people leave. Drafting, reviewing, tracking and governing ESOP grants can live in one AI workspace tuned to how your company runs its option pool. Adira is one tool made to work this way.