ESOP in Pakistan: What Startups Can Actually Offer After the 2021 SECP Rule Change

A Pakistani startup has been able to legally grant employee stock options only since April 2021, when the SECP clarified that private companies — not just listed ones — can run a stock option scheme under the Companies Act, 2017. The mechanics still take a board resolution, a shareholder special resolution reserving the share pool, and a plan document consistent with the SECP's ESOP guidelines. Tax lands in two separate stages: salary income when restrictions on the shares lift, and capital gains again when the shares are eventually sold — with private-company shares valued at balance-sheet break-up value, not whatever the last round implied.

That's a narrower, newer legal basis than founders assume when copying an ESOP template built for Delaware or India. Search "ESOP Pakistan" and most results are either generic global ESOP explainers or 2021 news coverage of the SECP announcement itself — nothing that walks a founder from "we're now allowed to do this" to "here's what happens when an employee actually exercises."

Why this couldn't happen before 2021

Pakistan has had rules for employee stock option schemes since 2001, but the Public Companies (Employees Stock Option Scheme) Rules, 2001 did exactly what the name says: they governed public, listed companies. A private limited company — the entity type almost every Pakistani startup incorporates as — had no equivalent framework. Founders wanting to compensate early employees with equity were working without a clear statutory basis for the scheme itself, even though nothing stopped a private company from issuing shares to an individual employee as a one-off transaction.

In April 2021, the SECP opened the door, confirming that private companies and startups can structure and offer stock option plans, and publishing Guidelines for Structuring and Offering of Employees Stock Option Schemes to go with it. That's the current legal basis, alongside the general share-issuance provisions of the Companies Act, 2017. It's recent enough that a lot of "how ESOPs work" content online predates it, and recent enough that there's no deep bench of settled market practice to point to — a five-year-old permission, not a fifty-year-old one.

The approval chain, not just the grant

Getting from "we want to do an ESOP" to a valid option grant in a Pakistani private company runs through a specific sequence, not a single board vote:

1. Board resolution approving the intent to adopt a stock option scheme.
2. Shareholder special resolution authorizing the share reserve the scheme will draw from — this is a capital matter, not something the board can approve alone.
3. A formal plan document that sets out eligibility, vesting, exercise mechanics, and valuation methodology, consistent with the SECP's guidelines.

Listed companies additionally have to submit their scheme to the SECP under the 2001 Rules for regulatory approval before offering it. For a private company, the 2021 clarification removes that scheme-level SECP sign-off as a precondition — the company runs the approval chain internally, through its own board and shareholders, rather than waiting on the regulator to approve the plan itself. A founder who assumes "SECP approval" is a step they personally need to clear is solving a listed company's problem, not theirs.

Direct grant vs. trust: the structural choice nobody explains clearly

Once the plan exists, a Pakistani startup still has to decide how options actually get fulfilled, and the two live options work very differently on a cap table.

Direct grant means the company itself issues shares straight to the employee on exercise, and buys them back directly if the employee leaves before vesting out. It's conceptually simple, but every departure before full vesting becomes a share repurchase and reissuance the company has to execute and document itself — fine with three employees holding options, slower and more error-prone once a startup has issued options to twenty or thirty people over several years.

Trust-based structuring is what most practitioner guidance in Pakistan defaults to: the company funds or lends money to an employee welfare trust, the trust holds the shares, and handles transfers to employees on exercise and repurchases on departure. This keeps the churn of departures and exercises off the company's own share register, at the cost of setting up and administering a second legal entity.

Neither choice is unique to Pakistan — India faces the same decision, for similar reasons. What's different in Pakistan is that there's no decade of settled market practice to lean on; a founder choosing between the two routes today is working from guidance documents and law firm commentary, not years of comparable companies' precedent.

Break-up value: why the ESOP number won't match the fundraising number

For a listed company, the share value used for ESOP purposes is simply the quoted exchange price. For a private company — every startup reading this — the relevant number is break-up value: total shareholders' equity on the balance sheet, divided by the number of outstanding shares.

That's a backward-looking accounting number, not a forward-looking one. A startup that raised its last round at a valuation reflecting growth expectations and investor appetite will almost always show a much lower break-up value, because break-up value only counts what's already on the balance sheet — paid-in capital plus retained earnings or losses — with no credit for the growth story that got the round priced where it did.

The practical consequence: an employee's taxable spread at vesting is calculated against break-up value, which can make the tax hit look smaller than the "paper value" a founder quoted when recruiting — or, for a company burning cash with negative retained earnings, can push break-up value close to zero even though the company has real enterprise value nobody's booked yet. Either way, explaining ESOP value to a candidate in terms of the last round's valuation quotes a number tax law doesn't use.

Two tax events, not one

Employee stock option taxation in Pakistan follows the same two-stage shape common across South Asia, with its own specific trigger and its own valuation method:

Stage one — at vesting or exercise, whichever lifts restrictions on the shares. The spread between fair market value (break-up value, for a private company) and what the employee paid is taxed as salary income, at the employee's normal slab rate, with the employer deducting tax at source the way it would on a cash bonus. This is owed whether or not the employee has any way to sell shares to cover the bill — a real problem for anyone holding illiquid private-company stock.

Stage two — at disposal. Once the shares are eventually sold, any further gain above the fair market value already taxed at stage one is a separate capital gain. For unlisted private-company shares, that gain is taxed at Pakistan's normal income-tax slab rates rather than any preferential rate — there's a materially better declining-rate schedule for companies that list on the stock exchange, but it only applies once the company actually lists, which for a Seed-to-Series-B startup is a hypothetical future event, not the tax reality of the grant today.

There's no Pakistani equivalent of the ISO/NSO split that lets some US option holders defer tax until sale and pay only capital gains. Every option grant in Pakistan is taxed, by default, closer to how a US non-qualified option is taxed — ordinary income at the point restrictions lift, full stop.

What this means for a cap table

A Pakistani startup's equity register ends up holding pieces that don't line up in one column: a trust's shareholding if that's the structure chosen, a break-up-value calculation that has to run fresh at every exercise event rather than once at grant, and a salary-tax withholding obligation triggered by a vesting date, not a sale. None of that is visible on a cap table built around a single "value per share" field that assumes one valuation serves every purpose.

We cover the broader version of this — comparing cap table software built for different markets, and the gap between what a free template tracks and what a growing company actually needs — in our coverage of cap table software for Pakistani startups.

Where Govy fits — and where it honestly doesn't yet

Govy's equity module tracks stock options, RSUs, SARs, and phantom shares as distinct instrument types on one append-only ledger, with configurable vesting and a treasury workflow for buying back, reissuing, and retiring shares — which matters directly for a company running either the direct-grant or trust route, since both involve exactly that cycle of departures, repurchases, and reissuance that a spreadsheet tends to lose track of after a few cycles.

To be direct about the boundary: Govy's jurisdiction-aware legal template pack currently covers Saudi Arabia, the UAE, US-Delaware, and the UK. It doesn't generate a Pakistani ESOP plan document, trust deed, or the board and shareholder resolutions the SECP's guidelines expect — that drafting still needs Pakistani counsel. What it replaces is the tracking underneath: the share ledger, the vesting schedule, and the buyback-and-reissue lifecycle, whichever structure a founder's lawyer settles on.

See how Govy tracks multi-instrument equity on one ledger at govy.tech.

FAQ

Can a private company in Pakistan legally offer employee stock options?

Yes, since April 2021. Before that, the SECP's rules on employee stock option schemes applied only to listed public companies, so a private limited company — what almost every Pakistani startup is — had no clean legal basis to grant options at all. The SECP's 2021 clarification, paired with its Guidelines for Structuring and Offering of Employees Stock Option Schemes, lets private companies run an ESOP under the Companies Act, 2017, through a board resolution and a shareholder special resolution reserving the share pool.

How are employee stock options taxed in Pakistan?

In two separate stages. When restrictions on the shares lift — typically at vesting or exercise — the spread between fair market value and whatever the employee paid is taxed as salary income at the employee's normal slab rate, with tax deducted at source the same as a cash bonus. When the employee eventually sells the shares, any further gain above that same fair market value is taxed again as a capital gain, calculated separately from the salary-tax stage.

How is the value of private company shares determined for ESOP tax in Pakistan?

Listed companies use the quoted stock exchange price. Private companies — every startup — use break-up value instead: total shareholders' equity on the balance sheet divided by the number of outstanding shares. That number is almost always lower than what a recent SAFE or priced round implies the company is worth, because it ignores growth expectations entirely and only reflects accounting equity, which creates a real gap between the value a founder quotes a candidate and the value tax law actually uses.

Should a Pakistani startup use a trust or grant options directly to employees?

Most practitioner guidance defaults to a trust structure — the company lends or contributes funds to an employee welfare trust, which holds the shares and transfers them to employees on exercise — because it keeps share buybacks and reissues off the company's own register. A direct grant is simpler to set up but means the company itself has to manage repurchasing and reissuing shares every time someone leaves before vesting out, which gets messy fast on a cap table with any real headcount.

Is there a tax-advantaged option category in Pakistan like a US ISO?

Not based on current guidance. US law splits options into incentive stock options with preferential capital-gains treatment and non-qualified options taxed as ordinary income — Pakistani tax treatment doesn't carry an equivalent split. Every option grant is taxed as salary income when restrictions lift, regardless of how the company structures or labels the plan, so founders shouldn't promise employees a tax outcome that assumes a US-style distinction that doesn't exist here.