ESOP Valuation and Advisory Services in India

ESOP Valuation Services

When a company needs an ESOP valuation

A valuation is needed at four points in the life of a scheme:

• At grant, to measure the fair value of each option for the expense booked under Ind AS 102 or IFRS 2.
• When fixing the exercise price, so the board can set it against a supportable fair market value of the share.
• At exercise, to determine the perquisite value on which the employee is taxed.
• At each reporting date, for cash-settled schemes such as SARs, where the liability is remeasured every period.

Instruments we value

Not every employee equity plan is valued the same way.

• Stock options (ESOPs): priced with an option pricing model, as explained below.
• RSUs: fair value is the share price at grant, reduced by the present value of dividends the employee will not receive during vesting. Where no dividend is expected, it equals the share price.
• SARs and phantom stock: settled in cash, so the liability is remeasured at every reporting date until it is settled.
• Employee stock purchase schemes: the fair value of the discount at which shares are offered.
• Sweat equity: follows a separate set of rules under the Companies Act and is valued separately.

Step one: the value of the underlying equity

Before an option can be priced, the share it relates to must be valued. For listed companies this is the market price. For unlisted companies we estimate it using one or more of these approaches (more in our blog on ESOP valuation for private companies):

• Income approach: discounted cash flow on management projections, with the discount rate built up from a risk-free rate, equity risk premium, beta from listed peers and a size or company-specific premium where justified.
• Market approach: EV/EBITDA, EV/Revenue or P/E multiples from comparable listed companies, or from recent transactions in the sector.
• Asset approach: net asset value, mainly for asset-heavy or holding companies.
• Recent funding round: for startups, the last priced round is used as a calibration point. Where the cap table has preference shares or CCPS, equity value is allocated across share classes using an option pricing or waterfall model.

A discount for lack of marketability (DLOM) is considered for unlisted shares, and the reasoning behind the percentage is stated in the report.

Step two: the fair value of the option

Once the share value is fixed, we price the option. The model depends on the terms of the scheme.

• Black-Scholes-Merton suits plain options with a single vesting date and a European-style exercise.
• Binomial lattice is used when options vest in tranches, can be exercised early, or are forfeited after vesting.
• Monte Carlo simulation is used where vesting or exercise depends on a market condition, such as a share price target or relative total shareholder return. Our blog on Black-Scholes / Ind AS 102 option valuation explains the models in more detail.

Vesting tied to an IPO or an exit is generally treated as a non-market performance condition under Ind AS 102. It changes the number of options expected to vest each period, not the fair value per option.

Inputs that move the number

Volatility is usually the most judgemental input. A small change in the peer set or look-back period can shift the option value noticeably, so we record which peers were chosen and why.

A worked example

The figures below are round numbers chosen only to show how the inputs interact.

A company grants 1,00,000 options with an exercise price of ₹100 when the share is also worth ₹100. The expected term is four years, the risk-free rate is 7% and no dividend is expected.

• With expected volatility of 45%, Black-Scholes gives a fair value of about ₹44 per option. The total grant-date fair value is about ₹44 lakh, before adjusting for forfeitures. It is recognised as an expense over the vesting period.
• At 35% volatility the same option is worth about ₹38. At 55% it is worth about ₹50.

A ten-point swing in volatility moves the total expense by roughly ₹6 lakh on this grant. This is why the peer set and look-back period are documented in the report.

Which valuation serves which purpose

The tax valuation is a separate exercise from the accounting valuation, and the two figures are not interchangeable. For the current rule references, check the position under the Income-tax Act, 2025, which has applied since 1 April 2026.

Modifications, repricing and cancellations

Schemes change. A company may lower the exercise price after a fall in share value, shorten the vesting period or cancel grants. Ind AS 102 treats each differently:

• If a modification raises the fair value of the option, the extra value is measured on the modification date and recognised over the remaining vesting period.
• If a modification lowers the value, the original grant-date expense continues to be recognised.
• A cancellation is treated as an acceleration, so the unrecognised expense is charged immediately.

Each of these needs a fresh valuation on the date of the change, not an adjustment to the original report.

ESOP valuation for startups and private companies

Startups face two practical problems: limited financial history and a cap table with several share classes. We rely on the last funding round and forward projections, and we show the effect of liquidation preferences on common share value. Companies that expect an IPO within a few years should keep earlier valuations consistent with the pricing narrative they will later present to the merchant banker and SEBI. For the wider picture, see our startup valuation services.

Pre-IPO companies and exit-linked schemes

Many pre-IPO schemes vest only on a listing or a sale. For these we model the probability and timing of the event, because it drives how many options are expected to vest in each reporting period. Offer documents disclose past share issuances and ESOP grants, and merchant bankers and auditors compare them with the IPO price. Valuations that have been kept consistent over the years avoid awkward explanations at that stage. After listing, the scheme may need to be aligned with the SEBI regulations and ratified by shareholders.

Subsidiaries of foreign groups

Employees of Indian subsidiaries often receive options or RSUs of a foreign parent. A valuation is usually needed for the tax position of the employee in India and for any cost recharge from the parent to the subsidiary. Where the parent is listed, the share price is available. Where it is unlisted, we value the shares as described above, and add 409A work when the parent is in the US.

What the ESOP valuation report contains

• Scope, valuation date and the standard followed
• Description of the scheme: grant details, vesting schedule, exercise period, leaver terms
• Equity value workings with assumptions and sources
• Option pricing model, inputs and a sensitivity table
• Fair value per option and total expense by year of vesting
• Reconciliation notes for modifications, repricing or cancellations
• Reliance and limitation statements

The report is written so that a statutory auditor can trace each input to its source without a call to us.

Common issues auditors and tax officers raise

These are the points we see questioned most often:

• The last fundraising price used as the ESOP share value. Preference shares carry rights that common shares do not, so common is usually worth less.
• A valuation that is too old when the grant or exercise happens after a major event.
• Volatility taken from one peer, or from a period unrelated to the option's life.
• A discount for lack of marketability applied with no stated reasoning.
• Exit-linked vesting treated as if it changed the fair value per option.
• Scheme terms in the model that differ from the signed scheme document.
• Attrition assumed at zero in a business with high staff turnover.
• Modifications that were never separately valued.

Standards and laws we work with

• Ind AS 102 and IFRS 2 on share-based payment
• ICAI Guidance Note on Accounting for Employee Share-based Payments, for companies that do not follow Ind AS
• Companies Act, 2013 (Section 62(1)(b)) and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014
• SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 for listed companies
• Income-tax provisions on perquisites arising from ESOPs
• FEMA, where non-resident employees or overseas entities are involved
• Section 409A and ASC 718 for US-linked companies

ESOP Advisory Services

Valuation tells you what an option is worth. Advisory covers how the scheme itself is built and kept compliant.

Scheme design

• Vesting schedule, cliff period and acceleration on exit
• Exercise price and any discount to fair market value
• Good leaver and bad leaver treatment, and the window to exercise after leaving
• Linking performance conditions to company or individual targets
• Eligibility of employees, including those of group companies

Pool size and dilution

The pool is usually set as a percentage of fully diluted capital and negotiated with investors. In many term sheets the unallocated pool is counted in the pre-money, so it dilutes founders before the round, not after. We model the pool under different hiring and fundraising scenarios so the founders can see their own dilution before agreeing to a number, and plan when the pool should be topped up.

Direct issue or ESOP trust

Under the direct route, the company allots new shares when an employee exercises. Under the trust route, a trust holds shares for employees, which can help manage the pool and give employees a path to sell. Each has different compliance, accounting and tax consequences, and listed companies are bound by the limits in the SEBI regulations. We compare both on your facts before the scheme is drafted.

Companies Act and SEBI compliance

For unlisted companies, Section 62(1)(b) and Rule 12 set the framework. In practice this means:

• A special resolution of shareholders, filed through Form MGT-14
• An explanatory statement with the disclosures Rule 12 requires, including the method the company will use to value its options (fair value or intrinsic value)
• A minimum gap of one year between grant and vesting
• Eligibility limits: independent directors are excluded, and promoters or holders of more than 10% are excluded unless the company is a DPIIT-recognised startup within the permitted period
• A register of employee stock options in Form SH-6, and Form PAS-3 for allotment on exercise

Listed companies follow the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which add rules on trusts, secondary acquisition limits and disclosures.

Tax planning for employees and the company

We map the tax at grant, vesting and exercise, and again at sale of shares. This covers perquisite tax at exercise, TDS obligations on the employer, capital gains on sale, and the deferral available to eligible startups. The company can then set the exercise price and exercise window with the employee's tax cost in view. Our blog on ESOP taxation / perquisite valuation covers this in more detail.

Exit, IPO and M&A scenarios

Before a deal, the scheme should say what happens to vested and unvested options on an IPO, a sale of the company or a buyback. Options can be accelerated, cashed out, rolled over into the acquirer's plan or allowed to lapse. We review the scheme and the term sheet together so there are no surprises for employees or the buyer during due diligence.

Employee communication

An option grant only motivates people who understand it. We help prepare grant letters, a plain-language summary of vesting and exercise, and worked tax illustrations that HR can share with employees.

Ongoing support

We prepare the grant-wise computation for the annual accounts, support the auditor's queries and update the valuation when a scheme is modified.

When to Get the Valuation Done

• Before the first grant, and before each new grant date
• Before the exercise window opens, so tax is computed on a current value
• Before the year-end audit, when the Ind AS 102 expense is finalised
• Ahead of a funding round, IPO filing or acquisition
• On any modification, repricing or cancellation of grants

How the Engagement Works

Information we need

• The ESOP scheme and board and shareholder resolutions
• Grant letters and the grant register
• The current cap table with share classes and rights
• Audited financials and management projections
• Details of past funding rounds and secondary transactions

Our process

1. You share the documents above.
2. We confirm the purpose of the valuation and the dates it must be struck on.
3. We value the equity, price the options and prepare the draft report.
4. We walk you or your auditor through the assumptions and revise where needed.
5. The final signed report is issued for accounting, tax or board use.

Frequently Asked Questions