ESOP Pools: How Pakistani Startups Actually Set Them Up

At some point in every funded startup's life, a lawyer on the other side of a transaction asks to see the ESOP. What usually arrives is a slide: "10% ESOP pool" in the corner of a cap table. What the lawyer wanted was a members' resolution, a scheme document, an articles provision, and a stack of signed grant letters. The distance between the slide and the stack is the subject of this briefing — the actual setup sequence, in order, as the law stands in July 2026. The diligence scene above is a composite of many, but it is the single most common gap we find in Pakistani startup records.

First, know which regime you are in

Pakistan regulates employee share options through one dedicated instrument: the Public Companies (Employees Stock Option Scheme) Rules, 2001, made by the SECP. Their scope is in their name. A public company that wants an option scheme must take it through the Rules' prescribed approval process and live within their conditions — including restrictions on transferability of options and limits on the scheme's terms [APPROVAL PROCESS AND CURRENT CONDITIONS UNDER THE 2001 RULES — TO BE VERIFIED BY REVIEWING LAWYER]. If you are, or are about to become, a public company, the Rules are your track and this briefing's private-company sequence does not apply to you.

Nearly every startup, though, is a private company, and for private companies there is no equivalent instrument as of July 2026 [ABSENCE OF PRIVATE-COMPANY ESOP RULES — TO BE VERIFIED BY REVIEWING LAWYER]. That absence is both the freedom and the trap. Freedom, because the scheme can be whatever the company's general corporate law machinery and contract law will carry. Trap, because nothing exists by default: a private-company ESOP is assembled entirely from the Companies Act, 2017 and the Contract Act, 1872, and any component nobody drafted simply is not there.

Step one: decide the size in shares, not vibes

The pool's size gets set commercially — often by an investor's term sheet requiring a pool of a given percentage "pre-money." Convert that percentage into a defined number of shares in the corporate paperwork, because a percentage is a moving target and the members are about to authorise something specific. Model the dilution honestly with the existing shareholders: a pool created pre-money dilutes founders, not the incoming investor, and founders should understand they are paying for it before they sign the term sheet, not after. This is also the moment to check the authorised capital in the memorandum; if issuing the full pool would exceed it, increasing authorised capital under the Companies Act, 2017 belongs on the same members' agenda.

Step two: put the shareholder authority in place

Options are promises to issue shares, and further issues by a Pakistani company run into section 83 of the Companies Act, 2017, which gives existing members a pre-emptive right to new shares in proportion to their holdings. A pool therefore needs members' authority for the company to issue outside pre-emption when employees exercise, obtained through the route the law prescribes — for private companies, this runs through the framework under the Companies (Further Issue of Shares) Regulations, 2020 [EMPLOYEE-ISSUE MECHANISM FOR PRIVATE COMPANIES UNDER THE 2020 REGULATIONS — TO BE VERIFIED BY REVIEWING LAWYER]. Pass the resolutions properly, minute them, and file what must be filed. At the same sitting, amend the articles by special resolution so they accommodate the scheme: permission for employee shareholders, any special class terms, and — critically — drag-along language obliging employee shares to be sold in an approved exit, because an acquirer will not close against dozens of holdout minority holders.

Founders sometimes ask whether they can skip this layer and "just sign option letters." They can, in the sense that the letters will exist. But an option letter is the company's contractual promise, and a promise the company lacks authority to perform is a breach in waiting — with the employee's remedy arriving under the Contract Act, 1872 at the worst commercial moment, usually mid-transaction.

Step three: write the scheme rules as one document

The scheme document is the constitution of the pool, and everything else — grant letters, board approvals, the option register — hangs off it. At minimum it must decide: eligibility and who approves grants; vesting (the market pattern is four years with a one-year cliff, but the document controls, not the market); the exercise price and who sets it; exercise windows for leavers, with good and bad leaver defined; what happens on death, which otherwise becomes a succession dispute inside the cap table; treatment on an exit or new round, including the board's power to require participation in a sale; and a prospective amendment power, because the scheme will outlive several changes in tax and regulatory practice. Route any recovery of exercised shares through purchase by founders, other shareholders, or a trust — not through a company buy-back, which the Companies Act, 2017 confines to narrow routes a scheme should not lean on [BUY-BACK CONSTRAINTS — TO BE VERIFIED BY REVIEWING LAWYER].

Step four: build the tax mechanics into the documents

Employee share schemes are taxed under section 14 of the Income Tax Ordinance, 2001, and two of its features must be reflected in the setup paperwork rather than discovered later. First, the taxable event is exercise, not grant: the spread between fair market value and the exercise price is chargeable as salary income, with the charge deferred where the shares carry a restriction on transfer until the restriction lifts or the shares are sold [PRECISE OPERATION OF SECTION 14 — TO BE VERIFIED BY REVIEWING LAWYER]. That deferral is a design lever — a deliberately drafted transfer restriction can move the tax moment toward liquidity — so decide in the scheme whether exercised shares are restricted, and say so. Second, salary income means employer withholding under the Income Tax Ordinance, 2001, which means payroll needs a defensible valuation of unlisted shares at exercise. Name the valuation methodology in the scheme document now; a methodology adopted after the first exercise looks like a number chosen to suit.

Step five: grant, record, repeat

Grants are individual contracts. Each employee gets a letter stating the number of shares, exercise price, vesting schedule, expiry, and leaver terms, with the scheme attached, signed by both sides. The company keeps an option register reconciled against the authorised pool, updated at every grant, forfeiture, and exercise, and each exercise is completed like any other allotment — board approval, filing with the registrar, entry in the register of members under the Companies Act, 2017. The spreadsheet-and-memory ESOP fails here, quietly, over years: two letters promising the same shares, a forfeiture never recorded, a pool oversubscribed by three per cent. None of it is visible until diligence, and all of it is repriced against the company when found.

The setup checklist

• Pool sized as a fixed number of shares; dilution modelled and acknowledged by existing shareholders; authorised capital confirmed sufficient.
• Members' authority for employee issues outside section 83 pre-emption obtained by the prescribed route, minuted, and filed.
• Articles amended by special resolution: employee shareholding permitted, exit drag-along included; amendment filed with the SECP.
• Scheme rules adopted as a single board- and member-approved document covering eligibility, vesting, pricing, leavers, death, exit, and amendment.
• Section 14 of the Income Tax Ordinance, 2001 reflected: transfer-restriction decision made deliberately; valuation methodology for exercise named; withholding process agreed with payroll.
• Individual grant letters signed both sides, scheme attached; option register opened and reconciled to the pool.
• Exercises completed with allotment filings and register entries; leaver forfeitures documented at the time, not reconstructed later.
• Foreign-parent structures checked separately for exchange-control compliance under the Foreign Exchange Regulation Act, 1947 before any grant to Pakistan-resident employees [FE MANUAL REQUIREMENTS — TO BE VERIFIED BY REVIEWING LAWYER].

What this means for you

If your pool exists only in the deck, run the five steps in order — authority before scheme, scheme before letters — and expect the corporate layer to take a few weeks, which is why the right time is before the round that requires it. If you have letters but no authority, treat it as a live liability and regularise it now, while it is a paperwork exercise rather than a negotiation with an investor holding the finding. If you inherited an old scheme, audit the option register against the authorised pool this quarter. Our reference page on ESOPs under Pakistani law covers the design questions in more depth, and our fundraising and investment practice handles pool setup as standard pre-round work. An ESOP is a promise made to the people building the company; the setup work is what makes the promise true.