If you have been offered ESOPs, what all should you be aware of, how are these taxed, etc. (This post is employee-centered)

What are ESOPs? These are not the shares but a contract that gives you the right (but not the obligation) to purchase the stock at a specified price (called “exercise price” or “strike price”) at a future date.

Ensure that you sign the stock option agreement (just signing the offer letter is not sufficient). What to check for in this agreement -

  • Type of stock options
  • Number of shares
  • Exercise/Strike price
  • Vesting Schedule (duration, distribution and when does it start)
  • Expiration date - There is a period until which you can exercise this right once you leave the startup (Usually 30-90 days for US-based companies and 10 years for India-based)

Few other points in brief -

  • To calculate the percentage of the company’s equity you’re being offered = Shares offered in ESOPs/Total Outstanding shares. Note that your ownership would be diluted after fundraising rounds and hence your valuation might not change in exact proportion as companies. (refer to the sample image attached)


  • For some companies, you may only have 90 days to exercise after you leave (and hence you should have enough money to exercise and pay taxes)

How are ESOPs taxed - There are two types of taxes usually -

  • When you exercise, it is considered as income from the salary and you pay the tax as per the slabs (Taxable income = Fair Market Value on Exercise date - Exercise/Strike price)
  • When you sell the shares, you might have to pay short/long term capital gains tax (There is a recent amendment to point 1, please refer to the link)