Decoding ESOPs: What You Need to Know Before Signing

Employee Stock Ownership Plans (ESOPs) are increasingly common in the Indian startup ecosystem. They are pitched as a way to share in the wealth you help create. However, the reality of realizing that wealth depends entirely on the fine print.

Here is a breakdown of what you need to look out for.

Key Terms to Understand

• Grant Date: The date the options are officially given to you.
• Vesting Schedule: The timeline over which you earn the right to exercise your options (usually a 4-year period with a 1-year cliff).
• Exercise Price (Strike Price): The price at which you can buy the shares, fixed on the grant date.
• Exercise Period: The timeframe during which you can actually buy the shares after they vest.

The Pitfalls

1. The ‘Post-Exit’ Exercise Window: What happens if you leave the company? Many startups give you only 30 to 90 days to exercise your vested options. If you don’t have the cash to buy them (and pay the associated taxes), you lose them.
2. Taxation: In India, ESOPs are taxed twice: first as a perquisite when you exercise (based on the Fair Market Value), and second as capital gains when you sell.
3. Liquidity: Having shares in a private company is only valuable if there’s a way to sell them (an IPO, acquisition, or secondary buyback).

Before you accept an offer heavily weighted with ESOPs, have an expert review the policy. At Ethos, we help professionals decode their compensation structures so they know exactly what they are signing up for.