ESOPs in Pakistan

An employee stock option plan is the standard second currency of a startup: pay below market now, a share of the outcome later. In Pakistan the idea works, but the plumbing is local, and most plans in circulation are foreign templates whose promises Pakistani law does not keep on those terms. This briefing describes the legal position as of July 2026 and flags the points on which current SECP and FBR practice should be confirmed before a scheme is adopted.

The test of an ESOP is not the day it is announced. It is the day an employee exercises, the day a bad leaver disputes a forfeiture, the day the FBR asks how the exercise gain was valued, and the day an acquirer's counsel reads every grant letter. Design for those four days.

What an option actually is here

An option is a contract: the company's binding promise to issue a fixed number of shares at a fixed price if conditions are met. The option holder is not a shareholder. Until exercise there is no vote, no dividend, and no entry in the register of members — only a contractual right whose value depends entirely on whether the company can lawfully perform when the time comes.

That last point is the heart of Pakistani ESOP design. Issuing shares to an employee is a further issue of capital, and section 83 of the Companies Act, 2017 gives existing members the first right to any new shares in proportion to their holdings. A company that grants options without first putting the shareholder authority in place to issue outside pre-emption has promised something it may not be able to deliver — and courts measure the employee's rights by the documents, not by the all-hands announcement.

The corporate layer: authorising the pool

A real pool has three properties. It is a defined number of shares, not a percentage that silently moves with each round. It is authorised by the members — the approval that departs from section 83, obtained by the prescribed route, which for further issues by private companies runs through the framework the SECP has made under the Act [MECHANISM UNDER THE COMPANIES (FURTHER ISSUE OF SHARES) REGULATIONS, 2020 FOR EMPLOYEE ISSUES BY PRIVATE COMPANIES — TO BE VERIFIED BY REVIEWING LAWYER]. And it is visible: the resolutions exist, the articles permit the scheme, and each eventual allotment is filed with the SECP like any other.

Founders resist the formality because it feels premature. It is the opposite. Investor term sheets are priced on a fully diluted basis that includes the pool; an unauthorised pool means the dilution has been promised to employees but not yet suffered by shareholders, and the round becomes the moment that gap is forced closed, on the investor's terms.

The 2001 Rules, and what private companies do instead

Pakistan does have a dedicated instrument: the Public Companies (Employees Stock Option Scheme) Rules, 2001, made by the SECP. As the name states, they are addressed to public companies, and they impose a supervised structure — a scheme approved through the prescribed corporate and regulatory process, limits and conditions on grants, and restrictions such as the non-transferability of options [SPECIFIC CONDITIONS, APPROVAL PROCESS, AND CURRENT STATUS OF THE 2001 RULES — TO BE VERIFIED BY REVIEWING LAWYER]. A startup heading toward listing, or already public, plans within them.

Private companies — which is to say, nearly every startup — sit outside that framework, and no equivalent private-company rules exist as of mid-2026 [TO BE VERIFIED BY REVIEWING LAWYER]. Their schemes are built from general company law: the shareholder authority described above, articles drafted to accommodate employee shares, and scheme rules that operate as contract. That is workable, but it means nothing is standard by default. Every mechanic the scheme needs — vesting, forfeiture, leaver purchases, drag-along of employee shares on an exit — exists only if it was drafted, approved, and reflected in the articles.

Tax: section 14 of the Income Tax Ordinance, 2001

Employee share schemes have their own section of the tax code, and it drives design more than founders expect. Under section 14 of the Income Tax Ordinance, 2001, grant is a non-event. Exercise is the taxable moment: the spread between fair market value and the price paid is salary income, except that where the shares are subject to a restriction on transfer, the charge is deferred until the restriction lifts or the shares are sold, with the value measured then [PRECISE SECTION 14 MECHANICS — TO BE VERIFIED BY REVIEWING LAWYER]. Growth after that point is a capital gains question on eventual disposal.

Two practical consequences. First, exercise is a cash tax on a paper gain — the employee owes real rupees on shares that cannot yet be sold. Schemes should either time exercise against liquidity events or use the transfer-restriction deferral deliberately, as a designed feature rather than an accident of drafting. Second, the employer is the withholding agent on salary income, which means payroll must be able to value unlisted shares defensibly at exercise. Decide the valuation methodology when you write the scheme, not when the first employee exercises.

Foreign-parent plans

Where the startup has flipped and options sit over the Delaware, Singapore, or ADGM parent, the corporate mechanics move offshore but each Pakistani-resident employee acquires a personal exchange-control problem. Paying an exercise price abroad, holding foreign securities, and bringing sale proceeds home each engage the Foreign Exchange Regulation Act, 1947 and the State Bank's FE Manual. The usual workable design is cashless: exercise and same-day sale, or net share settlement, so no rupee ever needs permission to leave, with proceeds repatriated through the authorised dealer [CURRENT FE MANUAL PROVISIONS ON RESIDENT EMPLOYEES IN FOREIGN SHARE PLANS — TO BE VERIFIED BY REVIEWING LAWYER]. Set the route up with the bank before granting, because a plan employees cannot lawfully exercise is worse than no plan.

The mechanics that decide disputes

Almost every ESOP dispute we see turns on one of four drafting points. Leavers: define good and bad leaver, forfeit unvested options on departure, give vested options a stated exercise window, and route any recovery of exercised shares through purchase by founders or a trust rather than a company buy-back the Act restricts. Death: say expressly that options pass to legal heirs or are settled at a stated value — silence produces a succession dispute inside your cap table. Exit: give the board authority to require employee shares to be sold in an approved sale on the same terms as everyone else, or an acquirer will find fifty accidental holdout shareholders. Amendment: reserve the power to amend the scheme prospectively, because tax law and SECP practice will change over the plan's life.

Some companies interpose an employee trust: a vehicle that holds pool shares and settles exercises, purchases, and forfeitures without touching the register of members for every event. It adds setup cost and its own governance, but it solves the buy-back problem cleanly and keeps the cap table to one line of employee ownership — worth considering once the holder count moves past a handful [TRUST STRUCTURE AND TAX TREATMENT — TO BE VERIFIED BY REVIEWING LAWYER].

Then grant properly. Each holder gets an individual letter — shares, price, schedule, expiry, the scheme attached — and the company keeps an option register reconciled against the authorised pool. An ESOP administered by spreadsheet and memory is the single most common diligence finding in funded Pakistani startups, and the cheapest to avoid. The plan's promise is simple: work here, share the outcome. The law's demand is equally simple: every step of that promise, authorised and in writing.