10 questions to ask before you accept an ESOP offer

Offer letters in India increasingly come with a line like "5,000 ESOPs, vesting over four years." On its own, that sentence tells you very little. Here are the questions that fill in the gaps. None of them is rude to ask; a company that is serious about equity will have the answers.

About the grant itself

1. What is the exercise price? This is what you pay per share to convert an option into a share. Your potential gain is the difference between the share's future value and this price, so an option with a high exercise price is worth less than the same count at a low one.

2. What was the fair market value (FMV) at the last valuation, and when was it done? Unlisted companies get an FMV from a registered valuer. It is the closest thing to a current price, and it is also the number used to tax you when you exercise. Ask for the date: a valuation from two years ago says little about today.

3. How many fully diluted shares does the company have? Without this, you cannot convert "5,000 options" into a percentage of the company. (We wrote a whole post on why share of the pool and share of the company are different numbers.)

4. What is the vesting schedule, and is there a cliff? Four years with a one-year cliff is common, but not universal. Some companies vest monthly after the cliff, others quarterly or yearly. Some front-load or back-load.

About leaving

5. How long do I have to exercise after I leave? This is the single most important clause most people never read. Windows range from 30 or 90 days to several years. A short window can force you to find cash (and pay tax) quickly, or lose vested options.

6. What happens to unvested options if the company is acquired? Look for "acceleration" language. Single-trigger acceleration vests options on a sale; double-trigger needs a sale and your role ending. Many Indian schemes are silent on this, which usually means no acceleration.

About getting money out

7. Has the company ever run a buyback or secondary sale for employees? In India, most employees see cash from ESOPs through a buyback or an IPO. A track record of buybacks is a strong signal that the company treats equity as real compensation.

8. Is there an IPO or exit plan, even a rough one? No one can promise a date, but you can ask whether listing is part of the plan and whether the scheme has been drafted with SEBI's listed-company rules in mind.

About tax

9. Is the company a DPIIT-recognised startup with an inter-ministerial board (IMB) certificate? If yes, you may be able to defer the tax that arises when you exercise. Only a few thousand startups hold that certificate, so do not assume it applies.

10. Will the company help with tax at exercise? Some companies allow "cashless" exercise, sell-to-cover, or loans. Others leave you to fund the exercise price and the tax yourself. Know which before you need it.

Putting it together

Once you have these answers, you can describe your grant in three sentences: what it costs to exercise, what it might be worth at the last valuation, and what has to happen for you to actually receive money. If you cannot write those three sentences, you do not yet know what you are being offered.

When your employer shares these details in ESOP Record, each grant shows the exercise price, the latest valuation and its date, your vesting timeline and your exercise window in one place.

This article is general information, not tax, legal or investment advice.