How Do I Set Up an ESOP in Pakistan in 2026, SECP Rules, Companies Act 2017, Vesting & Tax

Last reviewed: 28 May 2026

If you are asking how do I set up an ESOP for a Pakistan-based startup, the short answer is that the legal framework now firmly supports it, but the execution demands careful navigation of the Securities and Exchange Commission of Pakistan (SECP) guidelines, the Companies Act 2017, shareholder approval mechanics, and income-tax timing. Pakistan’s tech ecosystem has matured rapidly, and an employee stock option plan in Pakistan has become the default equity-incentive tool for founders competing for scarce AI, fintech, and deep-tech talent.

This guide walks through every approval, document, vesting design choice, valuation step, and tax trigger you need to move from boardroom concept to fully implemented ESOP, with sample resolution language and a worked tax example you can adapt today.

Quick Answer, Can a Pakistan Startup Set Up an ESOP?

Yes. The SECP has published dedicated Guidelines for Structuring and Offering of the Employees Stock Option Schemes, and the Companies Act 2017 provides the statutory machinery for issuing shares to employees. A private company ESOP in Pakistan requires a board resolution, a shareholder special resolution authorising the share reserve, a formal plan document that complies with the SECP ESOP guidelines, and, where new shares are issued, compliance with the Companies (Further Issue of Shares) Regulations. Listed and public-unlisted companies face additional Pakistan Stock Exchange (PSX) disclosure requirements, but the underlying corporate-approval pathway is the same. In practical terms, a well-prepared startup can move from plan design to first grant letters in as little as four to eight weeks.

What Is an ESOP and How Does It Work in Pakistan?

An ESOP, also referred to as an Employees’ Stock Option Scheme (ESOS), is a contractual arrangement under which a company grants selected employees the right to purchase shares at a pre-agreed exercise price after specified vesting conditions are met. The scheme is governed primarily by the SECP ESOP guidelines and underpinned by the share-issuance provisions of the Companies Act 2017. Unlike a direct share allotment, an option grants no ownership until the employee exercises it; until that point, the employee holds a conditional right, not an equity stake.

ESOP vs ESOS vs Option Unit, Key Distinctions

In Pakistan’s regulatory vocabulary, ESOP and ESOS are used interchangeably to describe the overall scheme. An option unit is the individual right granted to an employee to acquire one underlying share. One option unit is not the same as one share: the option is a right to buy; the share is delivered only upon exercise and payment of the exercise price. Companies may structure the scheme as a direct-grant model (the company issues shares upon exercise) or a trust-based model (a trust holds shares that are transferred to employees on exercise). Most Pakistan startups use the direct-grant model because it avoids the cost and complexity of establishing and administering a separate trust.

Dilution occurs at the point of exercise, not at grant, and founders should model the fully diluted cap table from day one.

How Do I Set Up an ESOP, Primary Compliance Decision: Who Can Implement and Which Route to Pick?

Both private and public companies formed under the Companies Act 2017 may implement an ESOP, but the regulatory burden differs materially. A private limited company follows the SECP ESOP guidelines and the Companies (Further Issue of Shares) Regulations where new shares are to be issued, with no PSX involvement. A public unlisted company must additionally comply with SECP reporting obligations, and a listed company must satisfy PSX Listing Regulations, including caps on the ESOS pool (commonly expressed as a percentage of issued share capital) and prospectus-level disclosure to shareholders.

Founders at the pre-Series A to Series B stage, the core audience for this guide, will almost always be operating a private limited company and should focus on the SECP guideline pathway plus the Companies Act 2017 share-issuance mechanics described below.

Eligibility, Who Is Covered?

Under the SECP guidelines, eligible participants typically include permanent employees, whole-time directors (excluding independent directors in listed companies), and, at the company’s discretion, key managerial personnel. Consultants, advisors, and part-time contractors are generally not eligible unless the plan document and articles of association expressly provide otherwise. Founders should define eligibility criteria clearly in the plan document to avoid disputes at exercise.

Step-by-Step Setup Checklist, SECP Guidelines, Companies Act 2017 and Company-Level Actions

The following five-step checklist answers the core question of how do I set up an ESOP under Pakistan law. Each step references the governing rule and the deliverable document.

Step 1, Plan Design and Share-Reserve Mechanics

Begin by deciding the size of the option pool (typically 10 – 15 % of issued share capital for early-stage startups) and whether the pool will be sourced from newly issued shares, treasury shares, or a combination. Draft the ESOP Plan Document covering: pool size, eligibility criteria, vesting schedule, exercise price methodology, exercise window, lapse and forfeiture rules, and change-of-control provisions. The plan document is the master legal instrument and must conform to the structural requirements set out in the SECP’s Guidelines for Structuring and Offering of the Employees Stock Option Schemes.

If new shares are to be issued, confirm that the company’s authorised share capital is sufficient; if not, pass a resolution to increase it under Section 92 of the Companies Act 2017 before proceeding.

Step 2, Board and Shareholder Approvals

ESOP approval under SECP requirements involves two tiers of corporate authority. The board of directors must first approve the plan by resolution, and then the shareholders must authorise it, typically by special resolution at a general meeting, because the scheme involves the further issue of shares (or the reservation of shares for future issue). Below is sample resolution language that can be adapted for either tier.

Sample board resolution (extract):

“RESOLVED THAT, pursuant to the Companies Act 2017 and the SECP Guidelines for Structuring and Offering of the Employees Stock Option Schemes, the Board hereby approves the [Company Name] Employees’ Stock Option Scheme 2026 (the ‘Scheme’), substantially in the form tabled before this meeting, under which up to [number] option units, each entitling the holder to subscribe for one ordinary share at the exercise price determined in accordance with the Scheme, may be granted to eligible employees.”

Sample shareholder special resolution (extract):

“RESOLVED AS A SPECIAL RESOLUTION THAT the Company be and is hereby authorised to create a reserve of [number] ordinary shares of PKR [face value] each under the [Company Name] Employees’ Stock Option Scheme 2026, and to issue and allot such shares to option holders upon exercise in accordance with the Scheme and the Companies Act 2017.”

Step 3, Valuation and Exercise-Price Setting

The exercise price is the price an employee pays to convert an option into a share. For ESOP valuation in Pakistan, the SECP guidelines contemplate that companies may set the exercise price at fair market value, at a discount, or at nominal (par) value, provided the methodology is disclosed in the plan document. An independent valuation by a chartered accountant firm or SECP-registered valuer is strongly recommended, and, for listed companies, is effectively mandatory under PSX rules. Common approaches include the discounted-cash-flow method, the comparable-transactions method, and, for later-stage startups, the most recent priced funding round (often called the “409A-equivalent” in international venture practice). Valuations should be refreshed at least annually or at each new grant window.

Step 4, SECP Notifications and Guideline Compliance

Private companies must ensure the plan document conforms to the SECP ESOP guidelines and retain it in the company’s statutory records for inspection. Where the Companies (Further Issue of Shares) Regulations apply to the allotment, the company must file the return of allotment (Form 3) with the SECP within the prescribed period after shares are actually issued upon exercise. Listed companies face additional SECP and PSX notification obligations, including scheme-specific disclosures in the annual report. All filings are typically processed through the SECP’s eZfile or LEAP portal.

Step 5, Implementation: Grant Letters, Exercise Process and Share Transfer

Once approvals are in place, the company issues individual grant letters (also called option agreements) to each eligible employee. The grant letter specifies the number of options, the exercise price, the vesting schedule, the exercise window, and lapse conditions. When an employee’s options vest and the employee elects to exercise, the company collects the exercise price and issues or transfers shares. For companies using the Central Depository Company of Pakistan (CDC) for book-entry share records, the new shares are credited to the employee’s CDC sub-account. The company then files the return of allotment with the SECP and updates its register of members.

Approval and Filing Timelines by Entity Type

ESOP Vesting in Pakistan, Practical Patterns and Sample Clause Language

Vesting design is where legal structure meets talent-retention strategy. The vesting schedule determines when options become exercisable and is the primary mechanism founders use to align incentives over time.

Common Vesting Schedules

• Four-year time-based with one-year cliff. The industry standard for Pakistan tech startups mirrors Silicon Valley practice: 25 % of options vest on the first anniversary of the grant date (the “cliff”), with the remaining 75 % vesting monthly or quarterly over the next 36 months. This structure protects the company against early departures while giving employees a clear ramp.
• Milestone-based vesting. Options vest upon achievement of defined commercial or technical milestones (e.g., product launch, revenue target, regulatory approval). Useful for co-founders but harder to administer.
• Hybrid (cliff + milestone). A time cliff combined with performance gates, increasingly popular in AI startups where both retention and output matter.

Acceleration and Termination Triggers

Single-trigger acceleration accelerates vesting upon a single event, usually a change of control (acquisition or merger). Double-trigger acceleration requires both a change of control and the employee’s termination without cause within a defined window (commonly 12 months). Double-trigger is the investor-friendly default because it prevents a full acceleration windfall that might deter acquirers. On termination for cause, unvested and typically even vested-but-unexercised options should lapse immediately, spell this out in the plan document and grant letter to avoid litigation.

Sample Vesting Clause

The following clause can be adapted for a standard four-year schedule with a one-year cliff:

“Subject to the Participant’s continued employment with the Company, the Options shall vest as follows: (a) twenty-five percent (25 %) of the total Options granted shall vest on the first anniversary of the Grant Date (the ‘Cliff Date’); and (b) the remaining seventy-five percent (75 %) of the total Options granted shall vest in twelve (12) equal quarterly instalments commencing on the first day of the calendar quarter following the Cliff Date, such that all Options shall be fully vested on the fourth anniversary of the Grant Date. Upon a Termination for Cause, all unvested Options, and any vested but unexercised Options, shall lapse immediately and without compensation.”

ESOP Valuation and Accounting Considerations

Getting the valuation right protects founders from tax disputes, investor pushback, and employee dissatisfaction. For ESOP valuation in Pakistan, the key decisions are: (1) who performs the valuation (an independent chartered accountant firm or SECP-registered valuer is best practice), (2) the valuation date (typically the grant date for setting the exercise price, and the exercise date for tax purposes), and (3) the method (DCF, comparable transactions, or last-round pricing). From an accounting perspective, share-based payments must be recognised in the financial statements in accordance with IFRS 2 (applicable in Pakistan under SECP’s adoption of IFRS). The expense is recognised over the vesting period, with the fair value measured at the grant date.

Founders should model the fully diluted cap table, including the entire ESOP pool, not just granted options, to give investors an accurate ownership picture during due diligence.

ESOP Tax Treatment in Pakistan, Timing, Perquisite Treatment and Capital Gains

Important: Tax rules are subject to change. The following summarises prevailing practice as of 28 May 2026. Founders and employees should confirm current positions with the Federal Board of Revenue (FBR) and a qualified chartered tax adviser before relying on this guidance.

Under prevailing practice, ESOP tax in Pakistan crystallises at two points in time:

1. At exercise, perquisite / benefit-in-kind. When the employee exercises the option, the difference between the fair market value of the share on the exercise date and the exercise price paid is treated as a perquisite (benefit from employment) and is taxable as salary income under the Income Tax Ordinance, 2001. The employer is generally required to withhold tax on this perquisite amount under the applicable salary slab rates.
2. At sale, capital gains. When the employee subsequently sells the share, any gain above the fair market value on the exercise date is treated as a capital gain. The applicable rate depends on the holding period and the nature of the share (listed vs unlisted). For unlisted private-company shares, capital gains are taxed at the rates prescribed in the relevant Finance Act schedule.

Worked Tax Example

The total economic gain of PKR 300,000 is thus split across two tax events. Founders should budget for the withholding obligation at exercise, as failure to withhold exposes the company to penalties under the Income Tax Ordinance.

Practical Templates and Annexes

Below are abridged template extracts that founders can use as starting points. Each should be customised to the company’s specific articles of association, share structure, and investor agreements.

• Board resolution. See the sample wording under Step 2 above. The resolution should reference the Companies Act 2017 and the SECP ESOP guidelines, identify the plan document by name and date, and specify the maximum pool size.
• Shareholder special resolution. See the sample wording under Step 2. File the special resolution with the SECP within the statutory period after the general meeting.
• Option grant letter. Must state: grant date, number of options, exercise price, vesting schedule (reference the plan document), exercise window, lapse and forfeiture conditions, and a confidentiality clause. The employee should countersign to acknowledge the terms.
• Vesting clause. See the sample clause under the vesting section above. Adapt the cliff period, instalment frequency, and acceleration triggers to match the company’s commercial objectives and any investor side-letter commitments.

For full, execution-ready templates, including the complete plan document, trust deed (if applicable), and CDC transfer instructions, founders are advised to engage experienced Pakistan corporate counsel.

Common Pitfalls and Negotiation Tips for Founders

• Over-generous vesting. Granting large pools with short vesting periods dilutes founders and irritates later-stage investors. Use a four-year schedule with a one-year cliff as the default.
• Ignoring investor consent. Most shareholders’ agreements and investment documents contain anti-dilution protections or ESOP-pool caps. Issue options beyond the agreed pool without consent and you risk a breach-of-contract claim.
• Unclear exit mechanics. If the company is acquired, what happens to unvested options? Spell out single-trigger and double-trigger acceleration upfront, ambiguity here becomes a deal-blocker in M&A negotiations.
• Tax surprises. Employees who do not understand the perquisite tax at exercise may face unexpected withholding. Provide a simple tax fact-sheet alongside every grant letter.
• Failing to model dilution. Always present the cap table on a fully diluted basis, including the entire authorised ESOP pool, not just granted options, to maintain credibility with investors.

Next Steps, Your ESOP Setup Checklist

1. Confirm authorised share capital is sufficient; if not, pass an increase resolution.
2. Draft the ESOP plan document in line with SECP guidelines.
3. Obtain board approval by resolution.
4. Pass a shareholder special resolution at a general meeting.
5. Commission an independent valuation and set the exercise price.
6. Issue grant letters and begin administering vesting, then contact experienced Pakistan corporate counsel for ongoing compliance and SECP filings.

Sources

1. SECP, Guidelines for Structuring & Offering of the Employees Stock Option Schemes
2. Companies Act, 2017 (official consolidated PDF)
3. Majeed & Partners, ESOP Pakistan (2022)
4. Lexology, Employees’ Stock Option for Private Companies
5. Pakistan Stock Exchange, DPS Filing / ESOS Disclosure Example
6. Central Depository Company of Pakistan (CDC), Share Book-Entry Guidance
7. National Center for Employee Ownership (NCEO), ESOP Technical Overview
8. Federal Board of Revenue Pakistan (FBR), Tax Guidance & Circulars