The ESOP rules that actually bind you: Rule 12 in plain language

ESOPs feel informal — a promise in an offer letter. Legally they are anything but: Section 62(1)(b) and Rule 12 of the Companies (Share Capital and Debentures) Rules prescribe exactly how a scheme is created and who may benefit.

The scheme needs shareholder approval. For private companies an ordinary resolution suffices (a 2015 exemption; public companies need a special resolution and an MGT-14 filing). Separate approvals are needed for grants to employees of holding or subsidiary companies, and for any single-year grant of 1% or more of issued capital to one employee.

The eligibility exclusions are the part founders trip on. Promoters and members of the promoter group cannot receive ESOPs at all — their shareholding is irrelevant. Directors who hold more than 10% of equity — counting shares held by relatives and through body corporates — are also excluded. DPIIT-recognised startups have a window of exemption from these two exclusions, but it must actually apply and be documented.

And the cliff: at least one year must pass between grant and the first vesting. This is absolute. No scheme design, no board resolution, no exemption notification gets around it — a vesting schedule that starts earlier is simply invalid.