ESOPs at Indian startups, explained: vesting, cliffs, exercise and tax

ESOPs are how Indian startups pay you with the future. Sometimes the future arrives. This is how to read a grant so you know what you're being offered.

The vocabulary

• Grant — the number of options you're promised. Meaningless on its own; you need the total shares outstanding to know your percentage.
• Vesting — the schedule on which you earn them. Four years with a one-year cliff is standard: nothing for 12 months, then 25%, then monthly or quarterly.
• Cliff — the point before which you get nothing. Leave at 11 months and you leave with zero.
• Exercise price — what you pay per share to convert options into shares. Often the fair market value at grant; sometimes ₹1 or ₹10 at early-stage companies.
• Exercise window — how long after leaving you can exercise. Some companies give 90 days; the friendlier ones give years. This single clause decides whether your options are worth anything if you leave.
• Liquidity — a secondary sale, buyback, acquisition or IPO. Until one happens, vested options are paper.

Questions to ask before you accept

1. How many shares are outstanding, fully diluted? (So you can compute your percentage.)
2. What was the price per share in the last funding round?
3. What's the exercise price and the exercise window after leaving?
4. Has the company ever run a buyback or secondary? How often?
5. What happens to unvested options if the company is acquired? (Acceleration.)

A company that answers these clearly is a company you can trust with your equity. One that gets vague is telling you something.

Tax, briefly

In India, ESOPs are taxed twice: as a perquisite (salary income) when you exercise, on the difference between fair market value and exercise price; and as capital gains when you sell, on the gain over FMV at exercise. Employees of DPIIT-recognised eligible startups can defer the perquisite tax under Section 192(1C). This changes with every budget — confirm with a CA before you exercise.

How to value a grant, roughly

Percentage × last-round valuation × (probability of a liquidity event) × (expected dilution factor). If that number, divided by four years, is not meaningfully larger than the fixed-pay gap between this offer and your alternative, take the alternative.