Founders promise equity constantly — in a meeting, in an offer letter, sometimes on WhatsApp. Years later the employee asks for their shares, and there is nothing to give them but a disagreement.
Employee share schemes are entirely possible in Pakistan. They just have to be done properly, and "properly" starts with a document rather than a promise.
The framework
Employee share option schemes for companies are governed by the Companies Act 2017 and the SECP framework for such schemes, which addresses matters including approval of the scheme, eligibility, the price at which shares may be offered, limits, and disclosure. Listed companies operate under the additional requirements applicable to them.
In outline, implementing a scheme involves:
- Board approval of the scheme and, as required, shareholder approval
- A written scheme document setting out eligibility, the pool, grant, vesting, exercise and leaver terms
- Authorised capital sufficient to issue the shares
- Amendment of the articles where needed, and consistency with any shareholders' agreement
- Grant letters to individual participants
- Filings and record-keeping, including on issue of shares on exercise
Where a foreign holding company issues the options to Pakistani employees — common for startups with an offshore parent — additional considerations arise, including the foreign exchange and tax treatment of employees holding foreign shares. Take advice on that specifically; it is not the same exercise. See startup fundraising and the offshore question.
The mechanics that matter
The pool. A defined percentage of the fully diluted capital, reserved. Investors will expect one, and will usually want it created before their money goes in — which means it dilutes the founders, not them. See shareholders' agreements and deadlock.
Grant. An individual letter stating the number of options, the exercise price, the vesting schedule and the expiry.
Vesting and cliff. The standard shape internationally is four-year vesting with a one-year cliff — nothing vests until twelve months, then monthly or quarterly. The cliff is the point: it protects the company from an employee who leaves in month three keeping equity.
Exercise price. What the employee pays to convert options into shares. Set with care — a price so high that nobody can afford to exercise makes the scheme decorative.
Exercise window. When options can be exercised, and — importantly — how long a leaver has to exercise vested options. A short window means most leavers lose their equity; a long one means a share register full of ex-employees. Decide deliberately.
Leaver provisions. Distinguish good leavers from bad. Unvested options invariably lapse; what happens to vested ones is the negotiation.
Exit and liquidity. In a private Pakistani company there is no market for the shares. Options are only worth something if there is a realistic path — a sale, a buy-back, or a listing. Say so honestly to employees; equity presented as more certain than it is causes real resentment later.
Change of control, and whether vesting accelerates on a sale.
Restrictions on transfer, and drag-along so a minority of employee shareholders cannot block a sale.
Tax
The treatment of share-based compensation must be considered under the Income Tax Ordinance, and the questions are when the benefit is taxed — grant, vesting, exercise, or disposal — how it is valued, and the employer's withholding obligation.
Two practical points, because this is where schemes go wrong:
A tax charge on exercise, without a market to sell into, is a real problem. An employee who must pay tax on a paper gain in an unlisted company is worse off than before. Model this before granting.
The employer has obligations too. Benefits provided to employees engage withholding. See withholding tax obligations.
Get current advice on the tax position at the time you implement — this area moves, and the treatment differs between options over Pakistani shares and options over foreign parent shares.
Alternatives when real equity is impractical
For many Pakistani private companies — especially family businesses — issuing shares to staff is more complexity than it is worth. Workable alternatives:
Phantom shares / shadow equity. A contractual right to a cash payment measured by the value of a notional shareholding, paid on a defined event such as a sale. No shares issued, no dilution of control, no share register complications. Purely contractual, and taxed as employment income when paid.
Exit bonus. A contractual bonus payable on a sale of the business, as a percentage of proceeds. Simple, and often what people actually want.
Profit share. A defined share of profits, with the definition tightly drafted — "profit" is where these arrangements fail.
Long-term incentive plans tied to defined performance metrics.
For most owner-managed businesses, phantom equity or an exit bonus achieves the commercial purpose with a fraction of the difficulty.
What not to do
Do not promise equity verbally or in an offer letter without a scheme. It creates an expectation you cannot satisfy and a claim you have to answer. If you intend to grant equity, say "subject to a scheme to be adopted by the board", and then adopt one.
Do not issue shares to employees informally, without vesting or transfer restrictions. You will have created a minority shareholder with statutory rights, including the ability to bring oppression proceedings, and no way to buy them out. See directors' duties and personal liability.
Do not let "shares held for" an employee sit in someone else's name. That is a benami arrangement with its own consequences. See benami transactions.
Do not forget the employment side. Equity does not substitute for lawful terms — appointment letters, wages, gratuity, EOBI and SESSI all still apply. See employment contracts and gratuity and final settlement.
For IT companies and startups specifically
Employee equity has become an expectation in the Pakistani technology sector, particularly for senior engineers who have offers from abroad. If you are competing for that talent, a documented scheme with a credible exit story is a genuine retention tool — and a vague promise is worse than none, because it is discovered when the employee's next offer arrives.
See setting up a software house and protecting your business when an employee leaves.
How the firm can help
We design and implement employee share option schemes, prepare scheme documents, grant letters and the necessary corporate approvals and filings, structure phantom equity and exit bonus arrangements where shares are impractical, advise on options granted by foreign parents to Pakistani employees, and clean up informal equity promises before a fundraising or a sale exposes them.
See corporate and commercial, or contact the firm.