How to Assess If Your ESOP Plan Is Good

The First Mistake: Options × Share Price Is Not Your Wealth

Ask any Indian startup employee what their ESOPs are worth. Almost every one of them will say: "I have X options and the share price is Y, so my ESOPs are worth X × Y."

This is the most common ESOP misconception in India. And it's wrong.

That calculation gives you a gross number – before taxes, before your exercise cost, before reality.

Here's what actually matters:

Your real gain per option = Sale price − Strike price

That's it. The share price when you were granted options is irrelevant. What matters is the difference between what you pay to buy your shares (your strike price) and what you eventually sell them for.

How ESOP Taxes Actually Work in India

The biggest fear employees have is being taxed twice – "I'll pay tax when I exercise and pay tax again when I sell. That's double taxation."

This is a misunderstanding. It is not double taxation. It is two different taxes on two different events, on two different types of income. Once you understand this, you can make much smarter decisions about when to exercise and when to sell.

Tax Event 1: When You Exercise (Convert Options Into Shares)

This is the real reason most Indian startup employees never exercise their ESOPs even when they can. The tax bill arrives before the money does.

Tax Event 2: When You Sell Your Shares

When you eventually sell, the gain from your exercise price to your sale price is taxed as capital gains – a separate, usually lower tax.

The timing insight most employees miss: Waiting 24 months after exercising before selling can meaningfully reduce your total tax burden. But for illiquid startup shares, waiting that long is often not possible – which is where ESOP secondary funds come in.

Example continued:

Let's assume you exercised your options earlier at $6(as in Tax Event 1)

Scenario 1: Sold within 24 months (Short-term)

Scenario 2: Sold after 24 months (Long-term)

What this means:

• Short-term tax: $1.1K
• Long-term tax: $257

Tax saved by waiting: $801

What Makes a Strike Price Good or Bad

Your strike price is the single most important number in your ESOP grant letter.

Simple rule: the lower your strike price compared to the current share price, the better your ESOP plan.

Because your gain and your eventual wealth is entirely the gap between what you pay to exercise and what you eventually sell for.

The trap nobody warns employees about:

Some employees are given a very large number of options at a very high strike price. On paper it sounds exciting – 50,000 options. But if the strike price is $2 and the current share price is $3 exercising all your options costs $117.6K – before tax – with no way to sell the shares immediately.

The exercise cost alone runs into crores. Add the tax on top. With no liquidity in sight, most employees simply cannot afford to exercise. Their options expire worthless.

A large number of options at a high strike price is not a good ESOP plan. It's a number designed to impress at the offer stage.

How to Read Your Grant Letter: 3 Things That Tell You Everything

Most employees sign their grant letter without reading it carefully. These three things tell you immediately whether the plan is designed with employees in mind.

1. Is the Strike Price a Fixed Number?

Some grant letters are vague – they say the strike price will be "fair market value at the time of exercise" instead of stating a specific amount today.

If your strike price is not a fixed rupee amount in your grant letter, that is a red flag. A clear, fixed number protects you. Vague language protects the company.

What to look for: "The exercise price per option shall be $0." A specific number. Not a formula.

2. How Long Is Your Exercise Window?

The exercise window is how long you have to buy your shares after they vest – or after you leave the company.

Most Indian startup ESOP plans give you 30 to 90 days to exercise after you resign. If you cannot afford the exercise cost plus taxes within that window, you lose your vested options entirely.

Why this matters: If you leave a startup before any liquidity event, a 90-day window means you must immediately pay lakhs in exercise costs and taxes – with no certainty of ever being able to sell the shares. Most employees walk away from their ESOPs entirely because of this.

What to look for: An exercise window of at least one year after leaving the company. Some progressive Indian startups now offer five to ten years, following global best practices.

3. What Do Good Leaver and Bad Leaver Mean in Your Plan?

Most ESOP plans distinguish between employees who leave normally (good leavers) and those terminated for serious misconduct (bad leavers). Bad leavers typically forfeit unvested options- which is reasonable.

What is not reasonable is when a plan treats voluntary resignation as a bad leaver event, stripping you of unvested options with no compensation for the time you worked toward them.

What to look for: Clear, specific definitions. A good plan treats normal resignation as a good leaver event.

We have written an entire article on understanding ESOP grant letter, more of your questions will have answers there.

The 5-Question Test: Is Your ESOP Plan Actually Good?

Run your ESOP through these five questions:

1. What is my strike price compared to the current share price?

The bigger the gap in your favour, the better. A strike price far below current value means real potential wealth. A strike price close to current value means you need significant company growth before you benefit.

2. What will I actually pay in tax if I exercise today?

Calculate: (Current share price − Strike price) × Number of vested options × Your tax rate.

Can you pay this in cash right now? If not, you need a liquidity event – or a secondary sale – before exercising makes financial sense.

3. What is the company's most likely path to liquidity – and when? IPO in two years? Secondary buyback? No clear path?

Your ESOP is only as valuable as the company's ability to give you an exit. A great plan at a company with no liquidity path has limited real value.

4. What happens to my options if I leave before a liquidity event? How long is your exercise window? Can you actually afford to exercise within that window?

If the answer is no, understand that you may walk away with nothing from your vested options if you leave early.

5. Is there a secondary liquidity option available? Has the company done ESOP buybacks before? Do they work with a secondary fund?

ESOP secondary funds – like Hissa's dedicated ESOP fund – let you sell shares before an IPO, giving you real cash without waiting years for a public listing.

What a Genuinely Good ESOP Plan Looks Like

After reviewing hundreds of ESOP plans across Indian startups, here is what the best ones have in common:

• A low, fixed strike price – well below current share value, stated clearly in the grant letter
• A long exercise window – at least one year after leaving the company
• Fair leaver provisions – normal resignation treated as a good leaver event
• A clear liquidity path – IPO timeline, history of buybacks, or access to a secondary fund
• Proactive communication – the company helps employees understand their equity's worth

The absence of any of these – especially a clear liquidity path – should make you think carefully before treating your ESOPs as a core part of your compensation plan.

What to Do If You Are Unsure

1. Pull out your grant letter and find three numbers: strike price, exercise window, and leaver definitions
2. Calculate your real gain – not options × share price, but (sale price − strike price) × vested options, after tax
3. Ask HR directly: what is the company's liquidity plan? A company with nothing to hide will answer this
4. Understand your tax liability before you exercise – not after
5. If you want a second opinion on your specific ESOP situation, speak to someone who works with employee equity every day

At Hissa, we work with employees across Indian startups to help them understand, value, and where possible, liquidate their ESOPs. If you want a conversation about your situation, feel free to talk to us.

Talk to us

The Bottom Line

Your ESOPs are not worth options × share price.

They are worth the after-tax cash you actually receive – which depends on your strike price, your tax situation, the company's liquidity path, and the terms in your grant letter.

The employees who actually get wealthy from ESOPs are not the ones with the most options. They are the ones who understood their plan early, asked the right questions, and made informed decisions at every step.

That is what this guide is for.

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