Employee Stock Ownership Plans

ESOPs don’t always work, but when they do its magical 5000 Swiggy employees made around 9000 crores in the IPO Some would have made 100 cr plus Many many more would have made 10 cr plus Life changing money for most people and will enable risk taking and another 100 plus startups from this set If you are evaluating offers from startups with significant ESOP component, this is how you should evaluate it For an employee to make meaningful money through ESOPs, 2 things must happen: - Growth in company value - Employee friendly ESOP policies that ensures employees make money when company grows a) Growth in Company Value This is where employees need to think like investors Just like investors are particularly wary of what valuation they are coming in, entry valuations should matter for employees too ESOPs are allotted basis the current valuation The likelihood of a 10x growth in your ESOPs if you are joining a startup valued at 100 million $ is much higher compared to joining a startup already valued at 5 billion $ A 75 lakh ESOP allotment in a 1000 cr valued org with chances of a 10x growth could be a better offer than 2 cr ESOP allotment at a 20000 cr valued org with lower chances of future growth The second thing to judge is the business model and the likelihood of the business to grow( very important for Seed/Series A/B startups) b) ESOP Policies The startup ecosystem is full of stories where employees didn’t make money despite the company growing and having multiple liquidity events. Swiggy, Zomato are examples of great ESOP policy. Many companies have extremely shitty ones Here are the things that should matter most while evaluating policies: 1. Vesting Schedule: The standard is 25% vesting after every year. Any schedule which has higher vesting towards the later years is a red flag Vesting should never be performance linked If performance is bad, it is management’s responsibility to fire 2. Vesting on Leaving/Startups Exit: If you exit, you should retain all options that has vested If a startup gets acquired before all your options vest, there should be accelerated vesting 3. ESOP Communication: There should always be written communication( preferably through ESOP portal) Verbal communication for ESOPs is a huge red flag 4. Strike Price: Strike Price should be as low as possible( Re 1 ideally). This maximizes the value creation for the employee 5. Holding/Exercise Period: Converting options to shares is a major tax liability exercise. With limited exercise period, it becomes impossible for employees to exercise as it means paying up to 40% real taxes on notional capital gains in an asset class that is not liquid Ideally, holding period should be infinite for vested options, even after exit This enables employees to wait for liquidity events without incurring upfront taxation to be paid out of own pocket

Startup equity is not cash. Obvious! But we see early-stage founders and HR get ahead of themselves on this all the time. The AI bubble has only made it worse. With valuations getting wild, employees can be dazzled by equity offers expressed as massive dollar figures...but ask a few startup folks who joined rocket ships in 2021 how often those numbers actually hit the bank account. Okay: you're a Series A founder (company valued at $60M) and you're trying to close an amazing engineer. In her offer, you list the base salary, any potential bonuses, and the equity options package (Incentive Stock Options or ISOs). 𝗜𝘁'𝘀 𝗲𝗮𝘀𝘆 𝘁𝗼 𝘄𝗿𝗶𝘁𝗲 𝘁𝗵𝗮𝘁 𝗼𝗳𝗳𝗲𝗿 𝗮𝘀: • Annual base salary: $153,000 • Potential bonus: Up to $8,000    • Equity: Annual value of $26,000 ❌ 𝗕𝘂𝘁 𝗶𝘁 𝘀𝗵𝗼𝘂𝗹𝗱 𝗮𝗰𝘁𝘂𝗮𝗹𝗹𝘆 𝗿𝗲𝗮𝗱: • Annual base salary: $153,000 • Potential bonus: Up to $8,000    • 4-Year Equity Grant: 15,000 options which represent 0.054% of fully-diluted shares + a link to a scenario model the employee can utilize to project the future Is that as easily understandable as the dollar amount? No! But it's far more honest. Expressing equity in dollar terms should be reserved for startups that are valued at hundreds of millions of dollars - because the modal outcome for Series A equity is $0. It's why the discussion of "what % of my compensation is equity vs cash" can be quite misleading at young companies. Besides share count and % ownership, candidates should also ask: • 𝗙𝘂𝗻𝗱𝗶𝗻𝗴: What is the post-money valuation of the company? When did that round take place? Has the company had to raise any convertible bridge financing since then? Are there plans to raise more capital?    • 𝗘𝗾𝘂𝗶𝘁𝘆 𝗱𝗲𝘁𝗮𝗶𝗹𝘀: What is the current strike price? What is the vesting period? What is the post-termination equity period for these options (typically they'll say 90 days after you leave, which is..not a lot! Could be a negotiation point for you to push on).    • 𝗢𝗻𝗲 𝗳𝗶𝗻𝗮𝗹 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻: When this company goes public or gets acquired, what's the minimum valuation it needs to achieve for common stock to make a profit?    Venture-backed dollars can come with strings attached. Those strings (liquidity preferences, participating preferred, etc) can make it harder for employees to get any real value out of their equity EVEN WHEN the company exits. This question may not be something a recruiter can answer. Remember: equity is not cash. It's upside only. The more you know. #startups #salary #equity #founders #compensation  

Friend: "I got an amazing offer! 50,000 shares!" Me: "What's the total outstanding shares?" Friend: "Um... I don't know" Me: "What type of shares are they?" Friend: "Not sure..." Me: "When can you sell them?" Friend: "I should probably ask..." I've had this conversation at least seven times in the last year, and here's the playbook I usually share with those friends. 1/ Understand the type of equity Not all equity is created equal: ↳ RSUs are actual shares that vest over time ↳ Stock options let you buy shares at a set price ↳ Preferred vs common stock have different rights 2/ Know your vesting schedule The classic is "4-year vest with a 1-year cliff" Translation: You get nothing if you leave before year 1 Then you get 25% after year 1 And ~2% each month after But don't assume this is standard. Always ask: ↳ What's my vesting schedule? ↳ Are there acceleration clauses? ↳ What happens in an acquisition? 3/ Get the full picture before discussing numbers Ask for: ↳ Total shares outstanding ↳ Latest 409A valuation ↳ Investor preferences ↳ Prior funding rounds ↳ Expected exit timeline 4/ Model different scenarios Don't just focus on the "we IPO at $10B" dream. Model out: ↳ Down round ↳ Flat round ↳ Modest growth ↳ Hyper growth ↳ Acquisition 5/ Understand the downsides If you're getting options, know that you might have to: ↳ Pay to exercise them (could be $$$$) ↳ Hold them for years before selling ↳ Pay taxes before seeing any gains ↳ Lose them all if you leave too soon 6/ Negotiate the details, not just the number Key terms to discuss: ↳ Early exercise options ↳ Extended exercise windows ↳ Acceleration triggers ↳ Refresher grants ↳ Tax implications 7/ Plan for the "what ifs" ↳ What if the company gets acquired? ↳ What if I need to leave early? ↳ What if the next round is a down round? Pro tip: Email these questions to the recruiter. Create a paper trail. Get the answers in writing. Remember: Equity can be life-changing. But it can also be worth zero. Your job isn't to be optimistic or pessimistic. It's to be realistic. What other equity negotiation tips would you add?

Wait what–24% of new hire equity grants at public companies in 2025-to-date utilize frontweighted (accelerated) vesting? A quick deep dive on equity practice trends. Let’s do a quick deep dive on equity practices and how they’ve changed over the past 5 years. Specifically, let’s look the following: 1: Equity Vesting Structure 2: Equity Vesting Duration 3: Cliff or No Cliff 4: Equity Burn Trends (which drive many of the behaviors in 1-3) _______________ 𝗠𝗲𝘁𝗵𝗼𝗱𝗼𝗹𝗼𝗴𝘆: All of today’s insights and trends are based on an analysis of over 2,000,000 equity grants across 8,000+ customers ranging from pre-IPO customers (like Databricks, OpenAI, Stripe, etc) to public customers (like Atlassian, Block, Okta, Snowflake, etc) in Pave’s dataset. _______________ 𝗩𝗲𝘀𝘁𝗶𝗻𝗴 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲 𝗥𝗲𝘀𝘂𝗹𝘁𝘀: –New Hire Grants: Public companies are generally experimenting a bit more with frontweighted grants (24% of 2025 new hire grants) while private companies are sticking with linear (92% of 2025 new hire grants). –Ongoing Grants: both public (85% of 2025 ongoing grants) and private (88% of 2025 ongoing grants) companies are still primarily using linear schedules for ongoing grants. _______________ 𝗩𝗲𝘀𝘁𝗶𝗻𝗴 𝗦𝗰𝗵𝗲𝗱𝘂𝗹𝗲 𝗗𝘂𝗿𝗮𝘁𝗶𝗼𝗻 𝗥𝗲𝘀𝘂𝗹𝘁𝘀: –New Hire Grants: Public companies are increasingly moving toward shorter-than-4-year new hire grants (53% of 2024 new hire grants were < 4 years). Private companies generally are sticking to the standard 4-year vest (11% of 2024 new hire grants were < 4 years). –Ongoing Grants: While shorter grant durations are more common in ongoing grants compared to new hire grants across both private and public companies, we see a similar trend here with shorter grants becoming more common at public companies (61% of 2025 ongoing grants < 4 years), and slightly less common at private companies (37% of 2025 ongoing grants < 4 years). _______________ 𝗖𝗹𝗶𝗳𝗳 𝘃𝘀 𝗡𝗼 𝗖𝗹𝗶𝗳𝗳 𝗥𝗲𝘀𝘂𝗹𝘁𝘀: –New Hire Grants: Public companies are moving toward removing cliffs on new hire grants; the % of public company new hire grants with cliffs decreased from 63% in 2020 to 20% in 2025 (so far). The cliff is staying strong for private company new hire grants (~85-88% of grants have a cliff, and this has stayed consistent over the years). –Ongoing Grants: Cliffs are less common for ongoing grants at both private and public companies, and we also see slightly decreasing prevalence for both private and public. So far in 2025, only 4% of public company ongoing grants and 21% of private company ongoing grants have had cliffs. _______________ 𝗕𝗼𝗻𝘂𝘀–𝗘𝗾𝘂𝗶𝘁𝘆 𝗕𝘂𝗿𝗻 𝗧𝗿𝗲𝗻𝗱 𝗥𝗲𝘀𝘂𝗹𝘁𝘀: –See the last chart for a look at net equity burn benchmarks by stage. Heightened equity burn rates–particularly at public companies following the interest rate hikes–contributed to the pressure cooker environment which inspired many of the equity practice innovations mentioned in this post.

Swiggy announced $65m ESOP liquidity plan at $9bn valuation. ESOPs are one of the best ways to wealth creation. These days ESOPs are a part of package for most startup and hence you should know this information. An Employee Stock Ownership Plan buyback involves the company buying back shares issued to employees . Here’s a detailed look at how it works and the associated tax implications: 1. Issuance:   - Companies grant stock options to employees as part of their compensation.   - These options can be exercised by employees after a certain vesting period. 2. Exercise of Options:   - Employees exercise their stock options, converting them into shares by paying the exercise price. 3. Buyback Offer:   - The company may offer to buy back these shares from the employees. This can be done to provide liquidity to employees, manage equity dilution, or to adjust capital structure. 4. Buyback Procedure:   - The company announces the buyback, specifying the price and other terms.   - Employees willing to sell accepts the offer.   - The company purchases the shares and pays the employees the agreed buyback price. Tax Implications of Buyback 1. While exercising the option:   - Perquisite Tax: The difference between the Fair Market Value (FMV) of the shares on the date of exercise and the exercise price is considered a perquisite. This amount is taxed under the head 'Income from Salaries.' 2. During buyback:   - Capital Gains Tax:When the company buys back the shares, the difference between the buyback price and the FMV on the date of exercise is taxed as capital gains.    - Short-Term (STCG): If the shares are sold within 24 months of exercise, the gain is considered short-term and taxed at applicable rates (usually 15%).    - Long-Term (LTCG): If the shares are sold after 24 months, the gain is considered long-term. LTCG exceeding ₹1 lakh is taxed at 10%. 3. Buyback Tax:   - Companies not You are required to pay an additional tax on distributed income at 20% on the distributed income. It is the difference between the buyback price and the issue price of the shares. Example Suppose an employee is granted 1000 ESOPs at an exercise price of ₹100 per share. The FMV at the time of exercise is ₹300 per share. Later, the company offers to buy back the shares at ₹500 per share. 1. At Exercise:   - Perquisite Tax = (FMV - Exercise Price) * No. of Shares   = (₹300 - ₹100) * 1000   = ₹200,000 (This amount is taxed as per the applicable slab rate) 2. At Buyback:   - Capital Gains = (Buyback Price - FMV at Exercise) * No. of Shares   = (₹500 - ₹300) * 1000   = ₹200,000 (STCG or LTCG as applicable) 3. Buyback Tax for company:   - Buyback Tax = 20% of (Buyback Price - Issue Price) * No. of Shares   = 20% of (₹500 - ₹100) * 1000   = ₹80,000 (plus applicable surcharge and cess) Navigating ESOP buybacks and taxes in India can be complex. Please should consult your tax professionals to understand & ensure compliance with tax laws.

Stock options are more like handcuffs than an incentive. Because you don’t own equity with a “stock option”, you just under certain conditions have the option to buy the stock at a predetermined price. But if you want to leave the company to pursue a new passion or opportunity, you can’t. You’re handcuffed. Because if you leave, you need to actually buy the vested stock options to convert them to equity. Pay up or you forfeit the options. But you probably won’t be able to afford buying it. And you probably won’t want to and/or can’t afford to pay the taxes to buy it. Especially when the investment won’t produce cashflow. And the timeline to exit is totally unknown. And your potential return is totally unknown. So really, you’re just handcuffed to being an employee until a liquidity event. Which may not even make you any real money. Because your options sit low (or the lowest - common shares) in the capital stack. And even if company exits, you’ll be stuck paying ordinary income tax instead of capital gains which will cost you an extra ~20% of your net gain due to unfavorable tax treatment. ___ Real equity is how you get wealthy, not stock options. Real equity (usually) provides cash flow and (usually) provides tax benefits and (always) counts toward your net worth. Stock options do none of these. Let’s break down the differences - people need to know this stuff!! STOCK OPTIONS -You are granted options. You don’t need to buy the equity upfront. This *seems* like a good thing to inexperienced people, but it’s the worst because it classifies you as ordinary income (worker), not capital gains (investor). -Stock options don’t count toward your net worth. You don’t own them.  -Stock options have the least favorable tax treatment - ordinary income. Costs you an extra 20%  -Stock options don’t entitle you to dividends or cashflow -If you cease employment, you likely forfeit your options since you’d need to put up the 6-figure or 7-figures in cash to buy the equity (which is objectively often a terrible investment). EQUITY -You are an investor. You purchase equity with cash, note, or another form of payment -Equity counts toward your net worth at fair market value -Equity (usually, if held for more than 1 year) has favorable tax treatment - capital gains -Equity (usually) provides cash flow, at least for most companies outside of B2B tech who don’t burn excessively -Your *employment* is not tied to your *ownership*. You can leave the company whenever you want. Retain the equity. Be entitled to the distributions. And be able to sell the equity at FMV back to the company or another buyer ___ Want to get wealthy? Be an investor. In companies that produce cash flow to investors. Then be an employee there, too. And create net new enterprise value that builds your net worth. #b2b #equity #stockoptions #personalfinance *NOT FINANCIAL ADVICE. There are lots of situations with equity - do your own research & consult a Legal/Financial advisor

Here’s the one thing no one tells you about stock options… In the early days of my career, I was fortunate to be part of a few high-growth companies that went on to massive exits. And while the ride was exciting, there’s one thing I really wish someone — a mentor, a manager, anyone, had sat me down and explained: Stock options are way more complicated than they look. Yes, they’re part of the upside. Yes, they can be life-changing. But what people rarely talk about is what it actually means to exercise them and the very real financial risk that comes with it. Let me break it down: Let’s say you join a company super early and rack up a large equity grant. Y ou crush it, the company takes off, and suddenly it’s worth billions. 🎉 Congrats! you’re sitting on paper millions. All you need to do is buy your options. Easy, right? Well… here’s the catch. Your strike price might be low, but the Fair Market Value (FMV) of the stock has skyrocketed. The IRS sees that as a taxable gain even if you haven’t sold a single share. So now you’re faced with: A massive tax bill due immediately No liquidity event in sight And the real possibility you could lose all that money if things change Sound insane? It is. Especially for people who don’t come from wealth and can’t just borrow millions from a generous uncle or wire it from a trust fund. It’s a broken system. And worse, it’s one that’s rarely explained to employees, even as equity is pitched as a “meaningful” part of the comp package. If you’re offering options, educate your team. If you’re receiving options, ask hard questions. Equity isn’t just upside. It’s responsibility and sometimes, a serious liability. It’s time we talked about that more.

Understand ESOPs before you fall for it. 🤔 What no one ever told me 10 years ago until I learnt myself 👇 If you're a young professional joining a startup and are being promised less salary in lieu of a high ESOP, potentially promising a huge upside. i.e., if a founder suggests you to take a small salary for now and that you're getting a lot of stocks, which will make you win big money in the long run..... -- here's what you need to know. 👇 Salary and ESOP have ZERO connection. 🎯 ESOPs are not given (for free). ❌ You buy it. By paying for it at a lower cost. It's like buying something at a early bird discount. Here's how it works: First the upside --> Let's say you hold 10k stocks. Now, if the company goes public or raises more capital by diluting the shares. You get to sell your stocks at the price at that moment. You make decent money. 💰💰 But here's what no one tells you or educates you on. 🤦🏻♂️ ESOP doesn't mean the company is giving you equity or stocks that you can cash in later. If you expect stocks to be given to you, you're looking for RSUs -- Restricted Stock Units. RSUs are restricted stocks that employees receive as compensation and can be sold after a vesting period or upon achieving specific milestones. Now back to ESOPs. ESOPs mean the company is giving you the option to buy at a lower price (based on stock value when you buy) in the early stages. It's still a blind bet you are taking by investing in the company. It's like if you're investing in the company in some way to get some skin in the game. And as long as you hold the stocks, you pay tax for it annually. Realistically, there's a good chance that it can be a sunk cost forever. ESOP is NOT an alternative to salary. ❌ If someone includes your ESOP as part of your CTC -- it's not right. It means you're being taken for a ride. 🤯 ➡️ It's not a cost to company. ➡️ It's a cost that goes out of your pocket. ➡️ It's taxable for you. It's like you buying a property in hope of selling it some day and you paying property tax as long as you hold it. I hope this post helps a lot of young professionals understand the basics before they buy into things.

Writing this to hopefully save someone from the suffering down the line: Cofounders should be on a vesting schedule for their equity. Ideally a 5-year vesting schedule with a 1-year cliff. I get it, when starting a company, splitting equity right away seems natural and fair. But company building is a marathon, not a sprint, and the hard truth is that cofounders don't always stick around. It's gut-wrenching when I see a cofounder quit, keep their equity out of spite, and the other cofounder has to suffer because of this tiny oversight in the beginning. Vesting ensures that everyone stays aligned for the long haul. It incentivizes cofounders to stick through the challenges and rewards those who contribute to the company’s success *over time.* Committing to a vesting schedule is a clear way of saying, “I’m in this for the long term.” Typical employees have 4, but I think the responsibilities and potential pay-off of a cofounder warrants 5 years. And the probability of a founder break up is highest in the first year, which is why you need a 1 year cliff. Let me know if you've seen folks handle vesting differently and have any advice.

A few more hard earned lessons about early exercise of options and QSBS (Qualified Small Business Stock) for early stage startup employees, as follow up to my last post ➤ Early exercise is a huge benefit for early startup employees as it helps a lot with taxes and unlocks the QSBS benefit. You purchase both vested and unvested shares upfront. If you leave before all your shares vest, the unvested portion is repurchased by the company at your original strike price. ➤ Long-term capital gains rates: with early exercise you start the long term capital gains clock. ➤ Eliminates the spread problem: the delta between strike price and FMV (Fair Market Value) at the time of exercise. If your strike price is $1 but the FMV is $10 at the time of exercise, you still only pay $1 per share but the $9 of spread is added as an adjustment in the calculation of the Alternative Minimum Tax (AMT). ➤ The problem of spread can be exacerbated by a 90-day exercise window (you have 90 days to exercise your options after leaving the company) as you might be in a situation where are subject to AMT for illiquid stock. Early exercises eliminates this problem 💡 The main reason to not exercise early is the risk of losing the money but if you don’t believe in the company to use the early exercise benefit maybe you should not be there ➤ From options to QSBS: founders and investors purchase their shares directly from the company so their stock is QSBS. Employees, need to exercise their options while the the corporation is QSB. The company must allow early exercise or they vest and exercise some options before the $50M asset line has been crossed ➤ Your shares qualify as QSBS is you buy them directly from a domestic C-corporation with gross assets of $50M or less at the time of stock issuance (practically means to have raised less than $50M) ➤ $10M exclusion: The main benefit of QSBS is the exclusion of up to $10M in gains (or 10x your basis if it's more) from federal taxes. ➤ 5-Year holding requirement: to unlock the tax benefits ($10M tax exclusion), you must hold the stock for at least five years 💡 Gifted shares maintain the QSBS eligibility. That combined with the fact that the exclusion is per tax entity it means that if you gift QSBS shares to your parents or kids trust funds, etc. they get their own exclusion 💡 In an acquisition, if stock gets involved, that is usually organized as a tax-free stock exchanged. The acquirer stock you get in exchange for your QSBS inherits the benefits. This is important if at the time of the acquisition the 5 year requirement was not yet satisfied at the time of the transaction ➤ Rollover of QSBS: in certain situations, you can roll over your QSBS gains into another QSBS-eligible investment, deferring taxes. For example, when investing at a startup after selling your QSBS All this only matters upon success but it's an important benefit to early employees