For employees joining a startup, the salary on offer is often lower than what a large company would pay. The bridge across that gap is a set of four letters: ESOPs, or Employee Stock Options. An ESOP gives you the right to buy the company’s shares in the future at a price fixed today. If the company grows, the gap between that fixed price and the shares’ real value becomes your wealth – the mechanism behind many a startup millionaire. But options are not shares, and the journey from grant to money in the bank has traps at every stage. Here is how ESOPs work, from the day they are granted to the day you exit.

Grant: the promise on paper

It starts with a grant letter. The company allots you a number of options – say 1,000 – at a fixed exercise price, often the share’s fair market value on the grant date, sometimes as low as the face value of 10 rupees for very early employees. You own nothing yet; you hold a promise. The grant letter also specifies the vesting schedule, the exercise window and what happens if you leave. Read it carefully: two employees with the same number of options can have very different outcomes depending on these clauses. The total options granted to you are typically described as a percentage of salary or as a multiple of your CTC, and it is worth converting the grant into an actual rupee figure at the current valuation so you know what you have been promised.

Vesting: earning the options over time

Options vest – become exercisable – gradually, usually over four years with a one-year cliff. The cliff means if you leave before completing one year, you get nothing; after the cliff, vesting typically proceeds monthly or quarterly. This structure exists to retain you: the company buys your loyalty in instalments. Some companies offer accelerated vesting on acquisition – single or double trigger – where your unvested options vest immediately if the company is sold or if you are let go after a sale. Vesting schedules vary, and a shorter vesting period or a smaller cliff is genuinely valuable – it is worth negotiating, especially for senior hires.

Exercise: turning options into shares

Once options vest, you may exercise them: pay the exercise price and receive actual shares. If your exercise price is 100 rupees and the shares are worth 1,000, each option nets you 900 rupees of value – on paper. The catch is that exercising costs real money: 1,000 options at 100 rupees need a 1 lakh rupee cheque, plus taxes. Many employees exercise only at a liquidity event – an IPO, a buyback or an acquisition – when there is a market to sell into. But waiting carries its own risk: most ESOP schemes require you to exercise within a limited window after resigning, commonly 90 days to a few years, and unexercised options lapse. Leaving a job can thus force a painful decision: pay up now or forfeit years of vesting.

Exit: where the wealth actually materialises

Options become money only at a liquidity event. In an IPO, you can sell shares on the stock exchange after the lock-in period. In an acquisition, the buyer typically cashes out or converts your options. Increasingly, late-stage startups run buyback programmes, purchasing vested shares from employees to provide interim liquidity. Until one of these happens, your ESOP wealth is theoretical – startups fail, valuations fall, and down rounds can crush the value of your options. The sober way to think about ESOPs is as a lottery ticket with better odds than most: valuable, worth negotiating, but never a substitute for salary you need to live on.

Questions to ask before you sign

• What is the current per-share valuation, and how many shares are outstanding? (This tells you what your options are really worth.)
• What is the vesting schedule, cliff period and post-exit exercise window?
• Is there accelerated vesting on acquisition?
• Has the company done buybacks before, and is another planned?
• What are the tax implications of exercising now versus at liquidity?

ESOPs have created genuine wealth for thousands of Indian startup employees over the past decade. They work best when you treat them as what they are – a long-dated, high-risk bonus – and make your career decisions on the salary, the role and the learning, with the options as the upside.

FAQs

Are ESOPs the same as RSUs?

No. RSUs (Restricted Stock Units) are actual shares given after vesting, common in listed companies; ESOPs are options to buy shares at a fixed price, common in startups. RSUs always have some value; options can end up underwater.

What happens to my ESOPs if the startup shuts down?

They become worthless. Options in a dead company have no value, and this is the fundamental risk of startup equity compensation.

Can I sell my ESOPs to someone else?

Generally no. ESOPs are non-transferable; you can only exercise them yourself and sell the resulting shares when a liquidity event or buyback allows it.

Compiled by the Khabar 24h Editorial Desk from publicly available sources.