We are granting ESOPs to our first ten employees. How are they taxed, and what does the company need to do under company law?

At exercise: the difference between the fair market value of the shares on the exercise date and the exercise price is a perquisite taxed as salary. For an unlisted company the FMV must be certified by a SEBI-registered merchant banker (Rule 3(8)). Because you are DPIIT recognised and eligible under section 80-IAC, the TDS on this perquisite is deferred to the earliest of 48 months from the end of the assessment year of exercise, the sale of the shares, or the employee leaving. The tax is still computed at exercise-year rates; only the payment is postponed.

At sale: the gain over that FMV is a capital gain. Unlisted shares held more than 24 months are long-term at 12.5%; otherwise the gain is taxed at slab rates. If the company lists or is acquired, the same rule applies to the exit price.

Company side: a scheme approved by special resolution (MGT-14 within 30 days), a minimum one-year gap between grant and vesting, grants only to employees and directors (promoters and directors holding over 10% are excluded, except in a DPIIT startup for ten years from incorporation), a register in Form SH-6, disclosure in the board's report, and PAS-3 within 30 days of each allotment on exercise. Investors' consent under the shareholders' agreement is usually required for the pool size.