ESOPs Explained: What Employees Must Know Before Counting on Them
With 100+ unicorns created in the last decade,
India’s ESOP enthusiasm is natural.
Here's what you must know before hopping on the bandwagon
In most startups ESOP pools range between 8-15% of total shareholding.
But distribution is never even, nor are the outcomes
In practice, liquidity tends to concentrate among
• Founders
• Senior leadership
• Early team members
Its high-risk high reward fundamental at play
✅ Why ESOPs make sense for companies
-Capital efficiency
Attract talent without increasing fixed salary costs.
-Long-term alignment
Vesting schedules (often 4 years) encourage continuity.
-Shared upside narrative
Ownership culture strengthens commitment.
From a business lens, ESOPs are rational and strategic.
✅ Where employees need clarity
- Vesting is not liquidity.
Liquidity usually requires:
• IPO
• Acquisition
• Buyback window
Until then, value remains notional.
IPO outcomes can be volatile
Take Paytm.
It listed at around ₹2100 in 2021 and corrected sharply in the following year.
Hasn’t crossed listing price till date
IPO is an opportunity - not a guarantee.
-Taxes are often misunderstood
In India
• Tax is payable when you exercise options - difference between FMV and strike price taxed as perquisite
• Tax is again payable when you sell shares - capital gains
This can create cash flow pressure if the stock price falls after exercise.
Many employees get this math wrong.
-Liquidity ecosystem is still maturing
Compared to the US
• Secondary markets are smaller
• IPO frequency is lower
• M&A exits are fewer
Common mistakes
• Base lifestyle decisions on latest funding valuations
• Underestimate dilution from future rounds
• Assume IPO probability is high
• Treat ESOP value as fixed
Because ESOP value depends on
Company performance
Liquidity windows
Future fundraising
Capital markets
Tax treatment
It is probabilistic, not guaranteed.
Before accepting ESOP-heavy compensation, consider asking
• What are the liquidity events has company planned for employee ?
• Probable taxation implicationat vesting and exit?
• What is the exercise price versus last valuation?
• What is the exercise window if I leave?
Clarity reduces regret.
ESOPs can be powerful wealth creators.
But they are also long-term, high-risk instruments tied to company outcomes.
Originally published on LinkedIn
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