Tushit Pandey
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Editor's Note:- In order to help both employers and employees negotiate equity pay with clarity, this article describes employee stock option grants in India in basic, understandable terms. Before acting on your grant, always check the relevant plan documentation or speak with a tax or legal advisor because ESOP models differ greatly.
If you've ever discussed remuneration with an early-stage employee in India, you'll quickly discover that while they are enthusiastic about ESOPs, they are also rather perplexed. What is a stock option exactly? What distinguishes a stock grant? When shares vest, what happens? And why do some people act as though restricted stock grants are a completely separate world?
In actuality, employee equality is effective in India, but only when individuals are aware of the benefits they are receiving. Understanding how stock option grants operate can transform your perspective on your career, whether you're a founder setting up an ESOP, an HR director creating compensation, or an employee attempting to assess your offer.
Let's begin with something easy.
A stock option is the right to purchase a share at a later date, typically at a set price known as the exercise price; it is not a share.
On day one, you are not granted ownership. Rather, you have the opportunity to become the company's owner in the future, and this right progressively becomes available through a process known as vesting.
It is not an accidental structure. Companies utilize options because they provide long-term motivation for employees to remain longer as ownership increases over time, according to a study on employee ownership patterns.
Real businesses are built on patience, loyalty, and performance, all of which are rewarded by options.
Stock grants, also called stock awards, provide shares directly to employees, either upfront or on a vesting schedule, whereas options allow employees the right to purchase shares at a later time. These are less prevalent in India, but they are more frequently utilized by wealthy or late-stage businesses.
Timing is what distinguishes stock grants from one another. Even if economic rights are limited, ownership with a grant is established as soon as the shares are distributed. Employee perceptions of risk and reward are altered as a result. There is no need to decide whether to exercise or whether it is worthwhile to pay the strike price. Both the upside and the downside begin earlier. The value automatically increases as the business expands. In the event that it doesn't, the worker maintained equity throughout. Grants are frequently used for senior leadership, important hires, or late-stage businesses where the likelihood of long-term survival is already more certain because of this immediacy.
However, there are trade-offs associated with stock grants that are simple to overlook. Even though liquidity may still be years away, taxation may occur earlier than with options, particularly when shares vest or are allotted. This results in a cash flow mismatch that is typically avoided by options. Grants are also more dilutive up front and more difficult for a company to emotionally recover, even if it is legally feasible. For this reason, despite their psychological allure, the majority of Indian startups reserve stock grants or RSUs for particular circumstances rather than utilizing them widely. To put it briefly, grants provide ownership clarity and certainty, but they also require more careful financial planning on the part of both the employer and the employee.
Because stock grants provide employees with actual ownership rather than just the possibility of ownership, they may feel more tangible. However, many Indian entrepreneurs choose to continue with options because they also come with taxation at the time of vesting or allocation.
ESOPs were offered by over 71% of businesses in FY23. Meanwhile, only roughly 9% of businesses adopted SAR, which was at 12% in FY19.
Employees who receive a restricted stock grant are given actual shares, but with the following limitations:
Although restricted stock is commonly used in US markets, companies in India frequently use restricted stock units (RSUs) under the more general ESOP framework to structure similar models.
The most important human aspect of restricted stock is that employees feel ownership right away, which can have significant cultural effects. Employee stock options offer substantial retention benefits, according to studies; one analysis found that they outperform granting costs by 95–275%, primarily because of lower turnover before vesting.
This emotional impact is something Indian companies are slowly waking up to.
The typical lifecycle of a stock option grant is as follows:
The business first establishes an ESOP program and distributes a pool of shares to prospective workers. Employees are then given grants that include information about the number of options, exercise price, vesting period, and cliff. The options vest over time as workers fulfill performance or tenure requirements. After they are vested, the employee can exercise them by paying the exercise price, at which point shares are distributed. Lastly, shares may be sold through an IPO, buyback, or secondary sale, depending on the company's stage.
SEBI's SBEB & Sweat Equity Regulations , which specify how stock option grants must be issued, vested, disclosed, and exercised, serve as the legal foundation for this entire procedure.
For private companies, the Companies Act, 2013 governs ESOP structures, approvals, shareholder resolutions, and disclosures.
When you ask an employee what they find exciting about ESOPs, you are unlikely to hear them discuss fair market value or exercise prices. They discuss possibilities.
Employees who own equity feel like co-drivers rather than just passengers on the journey. In India's startup scene, where ESOP buybacks have produced significant wealth for thousands of workers, this has become even more evident. Indian startups have collectively completed several hundred million dollars in ESOP buybacks over the last few years, providing concrete evidence that equity compensation is more than just a theoretical concept.
However, there is also a negative aspect. Vesting, taxation, exercise costs, and liquidity timelines are frequently misinterpreted by employees. From 26% in 2013 to 42% in 2019, the proportion of employees who highly value their equity awards has steadily increased; however, one in three (36%) still saw little value in them.
That stat may not be India-specific, but the sentiment absolutely is.
This is why education matters. A well-designed ESOP is only as good as the understanding employees have of it.
Because cash compensation is costly, Indian businesses, particularly startups, heavily rely on ESOPs.
Options help companies attract strong talent without burning too much cash.
Only when the business succeeds do employees benefit. This promotes sustainable growth, lessens short-termism, and improves alignment.
An employee hesitates to switch when they are aware that their vesting cliff is approaching.
Equity holders think like problem-solvers rather than time-trackers, which is why they behave differently.
A robust ESOP pool demonstrates the company's commitment to its employees.
In growing, venture-backed companies, this structure becomes the core of the compensation narrative.
In India, employee stock option grants are more than just a line item on an offer letter; they serve as a link between personal aspirations and business expansion. Equity compensation, whether in the form of restricted stock grants, stock options, or stock grants, fosters loyalty, rewards dedication, and gives workers a real stake in the future they are contributing to.
ESOPs are a strategic tool for businesses because they help create a culture of ownership, manage cash effectively, attract talent, and align incentives. They provide upside, a sense of community, and the opportunity to accumulate long-term wealth for workers.
The first step to making better career decisions and confidently contributing to the expansion of the business you choose to establish is to fully comprehend your grant.
Options give you the right to buy shares later. Grants give you the shares directly, usually with conditions.
Four years with a one-year cliff is common, but vesting varies by company.
Shares are allotted upfront but with restrictions on transfer, performance, or holding period.
Only listed companies follow SEBI. Private companies follow the Companies Act, 2013.
Not at the grant. Taxation typically happens at exercise and again at sale.
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