What is an ESOP grant letter?

The letter that tells one employee what they have been granted: how many options, at what exercise price, vesting on what schedule, and how long they have to exercise after leaving. It is issued under an approved employee stock option scheme and is subject to it.

What is a standard ESOP vesting schedule in India?

Four years with a one-year cliff, vesting monthly or quarterly thereafter, is the market norm. A minimum vesting period of one year from the date of grant is prescribed under the Companies (Share Capital and Debentures) Rules, 2014, so a shorter cliff is not simply a commercial choice.

How are ESOPs taxed in India?

Tax arises twice. On exercise, the difference between the fair market value on the exercise date and the exercise price is taxable as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961, and the employer deducts tax at source. On a later sale, any further gain is taxable as capital gains. Eligible start-ups within Section 80-IAC can defer the tax on the perquisite under Section 192(1C).

Why does the exercise window after leaving matter so much?

Because it decides whether the ESOP is worth anything to anyone who leaves. A ninety-day window means a departing employee must fund both the exercise price and the perquisite tax within three months, on shares in a private company they cannot sell. Many cannot, and their vested options simply lapse.

What happens to unvested options when an employee resigns?

Unvested options lapse immediately on cessation of employment. Vested options can be exercised within the window the scheme provides, after which they lapse too. Schemes usually treat death, permanent incapacity and termination for cause differently.

Do option holders get voting rights or dividends?

No. An option carries no rights of a shareholder — no dividend, no vote — until it is exercised and shares are actually allotted. This is worth stating explicitly in the letter, and the generated letter does.

I received an ESOP grant letter. What should I check?

Five things: the number of options and what share of the company that is on a fully diluted basis; the exercise price; the cliff and vesting schedule; how long you have to exercise after you leave; and what happens if the company is sold. Ask for a copy of the scheme — the letter is subject to it.

Does each grant need board approval?

Grants are made under the approved scheme, usually by the board or a committee the scheme names. Record the approval — our board resolution generator can draft one — and keep an option register so every letter matches a decision.

How many options should I grant, and how do I express it?

Grant a number of options under the scheme rather than promising a percentage, and tell the employee the fully diluted denominator so the number means something. A percentage promised in an offer letter dilutes with every round and says nothing about vesting, exercise price or the window.

ESOP Grant Letter Format — Free Sample with Vesting Schedule

Generate an employee stock option grant letter with the vesting schedule worked out. Enter the grant date, cliff and period, and every tranche date and cumulative total is computed — no 'insert schedule here'.

This is a starting template, not legal or tax advice. A grant letter operates UNDER an employee stock option scheme that your shareholders have already approved — it cannot create options on its own, and where the two conflict the scheme governs. ESOPs also carry tax consequences for the employee on exercise. Have both the scheme and this letter reviewed by a company secretary and a tax adviser. Startup Grants India is not a law firm and accepts no liability for how this document is used.

Sample esop grant letter format — edit it live

The document on the right is a ready format. Change the details on the left and it updates as you type. Copy the text or download it as a Word file — free, no sign-up.

Your details

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Company name

Name of the approved ESOP scheme

The letter grants options UNDER a scheme; it does not create one. The scheme must already be approved by the shareholders.

Date of the letter

Employee's name

Number of options granted

Exercise price per option (₹)

The price the employee pays per share on exercise. Often the face value in an early-stage company; it is a board decision under the scheme.

Vesting start date

Usually the grant date or the employee's joining date. Every tranche date below is computed from this.

Company & signatory

Designation

Signing on behalf of the company

Signatory's title

Vesting

Vesting period (years)

Cliff (months)

A minimum vesting period of one year from grant is prescribed for options under the Companies (Share Capital and Debentures) Rules, 2014.

Vesting frequency after the cliff

Exercise window after leaving (months)

How long a departing employee has to exercise vested options before they lapse. This single number decides whether your ESOPs are worth anything to the people who leave.

[COMPANY NAME]

LETTER OF GRANT OF EMPLOYEE STOCK OPTIONS

Date	[Date]
To	[Employee Name]
Designation	[Designation]

Dear [Employee Name],

We are pleased to inform you that the Board of Directors of [Company Name] (the "Company") has granted you options to acquire equity shares of the Company under the [Company] Employee Stock Option Plan [Year] (the "Scheme"), on the terms set out below and subject in all respects to the terms of the Scheme.

Grant details

Term	Detail
Options granted	10,000
Exercise price per option	₹10
Vesting start date	[Vesting start date]
Vesting period	4 year(s)
Cliff	12 month(s)
Vesting frequency after cliff	Monthly
Exercise window after cessation	3 month(s)

Grant: You are granted 10,000 options, each entitling you to acquire one equity share of the Company at an exercise price of ₹10 per share, subject to the terms of the Scheme.
Vesting: Your options vest in accordance with the schedule above. No option vests before the cliff, and vesting is conditional on your continuing to be in the employment of the Company on each vesting date.
Exercise: Vested options may be exercised in accordance with the Scheme by delivering the prescribed exercise notice together with payment of the exercise price. Options carry no right to dividends, no voting rights and no rights of a shareholder until they are exercised and shares are allotted to you.
Cessation of employment: On your ceasing to be employed by the Company, all unvested options lapse immediately. Vested options may be exercised within 3 month(s) of the date of cessation, after which they lapse. The Scheme may provide different treatment where cessation is by reason of death, permanent incapacity or termination for cause, and the Scheme prevails.
Non-transferability: Options are personal to you and may not be transferred, pledged or encumbered, save as expressly permitted by the Scheme.
Corporate actions: In the event of a bonus issue, share split, consolidation, rights issue, merger or similar corporate action, the number of options and the exercise price shall be adjusted in the manner provided by the Scheme, so that your entitlement is neither enhanced nor diminished.
Tax: The grant, vesting and exercise of options and the subsequent sale of shares carry tax consequences for you. The difference between the fair market value of the shares on the date of exercise and the exercise price is taxable as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961, and the Company will deduct tax at source as required by law. Any gain on a subsequent sale is taxable separately as capital gains. You are advised to take your own tax advice; the Company does not provide it.
Scheme prevails: This letter records your grant. In the event of any inconsistency between this letter and the Scheme, the terms of the Scheme prevail. A copy of the Scheme is available from the Company on request.
No right to employment: Nothing in this letter or the Scheme confers any right to continued employment with the Company, or affects the Company's right to terminate your employment in accordance with your employment contract.

Please confirm your acceptance of this grant by signing and returning a copy of this letter.

_______________________________

[Name], Director

For and on behalf of [Company Name]

_______________________________

[Employee Name]

Accepted and agreed

How to issue an ESOP grant letter

1
Make sure a scheme exists
Options can only be granted under an ESOP scheme your shareholders have approved.
2
Approve the grant
The board, or the committee the scheme names, approves the grant to the employee.
3
Fill in the grant terms
Number of options, exercise price, grant date, vesting start, cliff and vesting period.
4
Set out the vesting schedule
List each vesting date and the options that vest on it, so there is nothing to argue about later.
5
State the exercise window
Say how long the employee has to exercise vested options after leaving.
6
Get it accepted
The employee signs and returns the letter; record the grant in the company's option register.

What a grant letter is — and what it is not

A grant letter tells one employee what they have been given: how many options, at what exercise price, vesting on what schedule, exercisable for how long after they leave. It is the document the employee keeps, and in practice it is the only ESOP document most employees ever read.

It is not the scheme. The options themselves exist under an employee stock option plan that the company has adopted and its shareholders have approved — for a company, under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. The grant letter operates under that scheme and is subject to it; where the two conflict, the scheme governs.

This matters because founders routinely promise options in an offer letter before any scheme exists. A promise with no approved plan behind it is not a grant, and the gap tends to be discovered during a funding round when the cap table is reconciled line by line. Adopt the scheme first, then grant under it.

The five terms that decide whether an ESOP is worth anything

Employees, and often founders, focus on the number of options. It is the least informative of the five.

Number of options — and the denominator: Ten thousand options means nothing without knowing the total number of shares. Percentage of the fully diluted capital is the only figure that carries information, and a company that will not share the denominator is telling you something.
Exercise price: What the employee pays per share on exercise. Often the face value in an early-stage company. The lower it is relative to the eventual value, the more of the upside the employee keeps — and the larger the perquisite on exercise.
Vesting schedule and cliff: Four years with a one-year cliff is the norm. A minimum vesting period of one year from the date of grant is prescribed under the Companies (Share Capital and Debentures) Rules, 2014, so a cliff shorter than twelve months is not simply a commercial choice.
The exercise window after leaving: The most consequential term and the least discussed. A ninety-day window means an employee who leaves must find the cash to exercise — and the tax on exercise — within three months, on shares they cannot sell. Many simply cannot, and their vested options lapse. Some companies now offer far longer windows precisely because a ninety-day window quietly converts 'equity' into nothing for most leavers.
What happens on an exit: Whether unvested options accelerate on an acquisition, and whether vested options are bought out or rolled over, is set by the scheme. Employees rarely ask; it determines what the whole arrangement is worth.

How ESOPs are taxed in India — the two-point event

Tax arises twice, and the first occasion surprises people because no money has changed hands in their favour.

On EXERCISE, the difference between the fair market value of the share on the exercise date and the exercise price paid is taxable as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961. It is treated as salary income, and the employer deducts tax at source on it. The employee therefore owes cash tax on a paper gain, on shares in a private company that they usually cannot sell to fund it — which is the single biggest practical problem with ESOPs in India.

On SALE, any further gain over the fair market value used at exercise is taxable as capital gains, with the holding period determining the character of the gain.

There is relief for a narrow class of companies: eligible start-ups within Section 80-IAC can defer the deduction and payment of tax on the perquisite under the mechanism introduced in Section 192(1C), which shifts the tax point to the earliest of a set of later events. Eligibility is restrictive, so confirm whether you actually qualify rather than assuming it. Rates, thresholds and the current form of the relief change — take advice rather than relying on any figure you read on a template page, including this one.

Why the schedule in this generator is computed

Most ESOP templates leave the vesting schedule as a sentence — 'vesting over four years with a one-year cliff' — and leave both sides to work out the dates. That is where disputes start, because the company's spreadsheet and the employee's arithmetic diverge, particularly around the cliff and around rounding.

The generator computes every tranche date from the vesting start date you enter, and shows the cumulative total against each one, so the letter itself is unambiguous. Rounding remainders are added to the final tranche rather than spread across the schedule, which guarantees the cumulative column ends exactly at the number of options granted — an employee left with 9,999 of 10,000 options is a conversation nobody needs.

The dates account for month-end rollovers: a grant dated the 31st vests on the last day of a shorter month rather than sliding into the next one.

What goes wrong

Granting options with no approved scheme behind them: A letter cannot create options on its own. Adopt the plan, get the shareholder approval, then grant under it.
Promising a percentage in an offer letter: '0.5% after a year' says nothing about the denominator, the vesting, the exercise price or the window — and the percentage will dilute with every round. Grant a number of options under a scheme, in a grant letter.
A short exercise window nobody explains: Ninety days is the default in most schemes, and most leavers cannot fund the exercise plus the tax in that time. If you are going to use a short window, at least tell people what it means.
No cap table record of the grant: Options granted by letter and never entered in the option register are a diligence problem and, occasionally, a double-granting problem.
Silence on the tax at exercise: Employees exercise expecting a windfall and discover a perquisite tax bill on an illiquid share. Set the expectation in advance; the generated letter states the position expressly.
Treating the letter as negotiable line by line: The scheme governs. A grant letter that contradicts it creates an inconsistency the company will have to resolve in the employee's favour or litigate.

Sample ESOP vesting schedule

An illustration of the market-norm schedule — 4,800 options over four years with a one-year cliff, vesting monthly after the cliff. The numbers are arithmetic, not a recommendation. The generator above works out real dates from your own grant date.

Point in time	Vests at this point	Total vested
Months 1–11	0	0
Month 12 (cliff)	1,200	1,200
Each month from 13 to 48	100	Rises by 100 a month
Month 24	100	2,400
Month 36	100	3,600
Month 48	100	4,800

Scheme, approvals and grant letter: what comes first

A grant letter is the last step, not the first. The company adopts an employee stock option scheme, approved by shareholders by special resolution under Section 62(1)(b) of the Companies Act, 2013. The board, or the committee the scheme names, then approves each grant. Only then does the employee get a letter.

Keep the paper trail joined up: the scheme, the approval for each grant (a board resolution our generator can draft), the signed grant letter, and an entry in the option register. A letter that cannot be matched to an approval is the kind of gap that surfaces in a funding round.

Received an ESOP grant letter? What it means for you

Options are a right to buy shares later at a fixed price, not shares today. Nothing is yours until it vests, and even vested options only become shares when you exercise them and pay the exercise price.

Number of options: Ask what share of the company this is on a fully diluted basis. A number on its own tells you little.
Exercise price: What you pay per share when you exercise. The gap between this and the share's value at exercise is taxed as salary.
Cliff and vesting: If you leave before the cliff, you usually get nothing. After it, options vest on the schedule in the letter.
Exercise window: How long you have to exercise vested options after leaving. A short window can mean paying the price and the tax quickly, or losing them.
Sale of the company: Check whether vesting speeds up if the company is acquired. Many letters say nothing, which usually means it does not.

Frequently asked questions

What is an ESOP grant letter?: The letter that tells one employee what they have been granted: how many options, at what exercise price, vesting on what schedule, and how long they have to exercise after leaving. It is issued under an approved employee stock option scheme and is subject to it.
Can I issue a grant letter without an ESOP scheme?: No. The options exist under a plan the company has adopted and its shareholders have approved — for a company, under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A letter with no scheme behind it is a promise, not a grant, and the gap surfaces during a funding round.
What is a standard ESOP vesting schedule in India?: Four years with a one-year cliff, vesting monthly or quarterly thereafter, is the market norm. A minimum vesting period of one year from the date of grant is prescribed under the Companies (Share Capital and Debentures) Rules, 2014, so a shorter cliff is not simply a commercial choice.
How are ESOPs taxed in India?: Tax arises twice. On exercise, the difference between the fair market value on the exercise date and the exercise price is taxable as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961, and the employer deducts tax at source. On a later sale, any further gain is taxable as capital gains. Eligible start-ups within Section 80-IAC can defer the tax on the perquisite under Section 192(1C).
Why does the exercise window after leaving matter so much?: Because it decides whether the ESOP is worth anything to anyone who leaves. A ninety-day window means a departing employee must fund both the exercise price and the perquisite tax within three months, on shares in a private company they cannot sell. Many cannot, and their vested options simply lapse.
What happens to unvested options when an employee resigns?: Unvested options lapse immediately on cessation of employment. Vested options can be exercised within the window the scheme provides, after which they lapse too. Schemes usually treat death, permanent incapacity and termination for cause differently.
Do option holders get voting rights or dividends?: No. An option carries no rights of a shareholder — no dividend, no vote — until it is exercised and shares are actually allotted. This is worth stating explicitly in the letter, and the generated letter does.
I received an ESOP grant letter. What should I check?: Five things: the number of options and what share of the company that is on a fully diluted basis; the exercise price; the cliff and vesting schedule; how long you have to exercise after you leave; and what happens if the company is sold. Ask for a copy of the scheme — the letter is subject to it.
Does each grant need board approval?: Grants are made under the approved scheme, usually by the board or a committee the scheme names. Record the approval — our board resolution generator can draft one — and keep an option register so every letter matches a decision.
How many options should I grant, and how do I express it?: Grant a number of options under the scheme rather than promising a percentage, and tell the employee the fully diluted denominator so the number means something. A percentage promised in an offer letter dilutes with every round and says nothing about vesting, exercise price or the window.

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