Our sixth and final instalment of the Pre-IPO Guide to ESOPs moves beyond the mathematics and focuses on what safeguards your plan - risk mitigation through scheme rules.

In our work with high-growth and IPO-bound companies, one lesson stands out - the best ESOP plans fail without flexible, founder-friendly rules. With IPO timelines often fluid, building smart, well-governed flexibility into your ESOP scheme becomes essential.

The key is not to over-engineer. It is to build controlled flexibility, so your Board retains freedom to act in the company’s and shareholders’ best interest, while giving employees clarity and confidence.

Here are the three key considerations when designing ESOP scheme rules:

 
Liquidity Event Rules
(Managing outcomes at IPO or sale)
  • - Cover all types of exit events, not just IPO, and retain Board discretion to define treatment.
  • - Avoid setting up expectations of automatic liquidity in every scenario i.e. preserve optionality for shareholders.
Regulatory and Structural Flexibility
(Preparing for listing environment)
  • - If IPO is close, incorporate SEBI SBEB-compliant rules now to ensure a seamless transition.
  • - If IPO is 4 to 5 years ahead, enable future amendments while offering transparency to employees.
Governance and Exit Treatment
(Ensuring fairness and flexibility)
  • - Clearly define treatment of resignations and separations, especially for vested ESOPs.
  • - Choose rules that avoid putting employees on cap table before IPO, whilst allowing employees retain the value they created whilst in service.

The best ESOP structures blend strong math with smart governance. Even a well-designed plan can falter if rules are too rigid. Your scheme should support decision making at key inflection points and not restrict it.

Should you have any comments or thoughts or feedback, please feel free to share write to us. We would love to hear from you!

Vichitra Malhotra, FIAI

Founder and Consulting Actuary

v.malhotra@veritas-india.com

+91-9372876627

Disclaimer: The above content has been furnished solely for information and must not be reproduced or redistributed. It should be noted that we are not soliciting any action based upon it. Also, it does not constitute any. In particular, the information above is for general purposes only and is not advice on employee stock option solutions valuations or preference of one scheme over another. The information given above is in summary form and does not purport to be complete. We have reviewed the above so far as it includes information or facts, it is believed to be reliable though its accuracy or completeness cannot be guaranteed.