The six-stage ESOP lifecycle (and where most companies trip)

Ask five advisors what an ESOP engagement covers and you will get five different answers. That is the problem. An employee stock option plan is not one document — it is a six-stage lifecycle, and most companies discover the missing stages at the worst possible moment.

The six stages

1. Scheme design. Who gets what, how vesting works, what the exercise price is. This is where the incentives get set right — or don't. A scheme copied from another company's template usually does neither.

2. Trust setup. The vehicle that holds the shares behind the scheme, with its own deed, trustees and compliance. Skip it or botch it and everything downstream wobbles.

3. Valuation. A defensible fair market value at grant — the number every tax and accounting treatment hangs on. It needs a proper report, not a back-of-the-envelope figure.

4. Ind AS 102 accounting. The options have to be expensed correctly in the books, year after year. Companies that leave this to year-end accounting almost always get it wrong.

5. Exercise-window FMV reports. Every time employees exercise, you need a fresh valuation. Not the old one. A current one.

6. Liquidity events. Buybacks, secondary sales, the IPO — the moment the paper becomes money. If the first five stages were clean, this is straightforward. If they weren't, this is where it hurts.

What good looks like

Done well, the lifecycle is boring — and that is the point. The scheme is designed before the first grant, not after. The trust is set up once, properly. Valuations are refreshed on schedule, never scrambled for. Ind AS 102 is handled as part of the regular close, not discovered at year-end. Exercise windows run like clockwork. And when the liquidity event comes, the paperwork is already clean — so the event is about price, not repair.

Where companies trip

Here is the honest pattern we see: a lawyer drafts the scheme, someone does a one-off valuation, accounting figures out Ind AS 102 at year-end, and nobody owns the chain. Each piece was done by someone competent. Nothing connects them.

The cracks surface during Series A or B due diligence — when an investor's team goes through the ESOP paperwork line by line. Fixing a broken scheme mid-fundraise is expensive, slow, and can delay the round. We have watched it happen. It is always cheaper to build the chain properly at the start than to repair it under a term-sheet deadline.

That is the whole argument for treating ESOPs as one managed lifecycle instead of six disconnected purchases: one firm owns the chain, from design to liquidity. When diligence comes — and it will — there is nothing to fix.