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Tarun Suthar
•
The Institute of Chartered Accountants of India • 2m
I have got many DMs regarding ESOPs So Let me Clear up here. 1. Are ESOPs free for employees? ESOPs are granted for free, meaning the employee doesn't pay to receive the options. However, to own the shares, the employee must pay the exercise price and applicable taxes. So, they are not free overall. This is biggest myth in the ecosystem. 2. If ESOPs are granted for free, why does the employee need to pay later? Because the grant is just a right to buy shares later, not actual ownership. To convert that right into real shares, the employee has to exercise the options, which involves paying the exercise price. 3. So ESOPs aren’t really free? Correct. They are free to receive but not free to exercise or sell. There are three costs: 1. Exercise price 2. Tax on exercise (perquisite tax) 3. Capital gains tax on selling 4. Why do people in the startup ecosystem say “ESOPs are free”? They mean the grant is free, not the whole process. This is half the truth. It’s often marketing or simplification - sounds attractive, but doesn't reflect the real financial commitment involved during exercise and exit. 5. Is it compulsory for employees to exercise their ESOPs? No. Exercising ESOPs is optional (that's why it is called options) If an employee doesn’t want to pay the exercise cost or sees no value, they can choose not to exercise. However, if they leave the company and don’t exercise within a certain period (usually 90 days), they lose the options. 6. So why are ESOPs still valuable? Even though you pay to exercise and pay taxes, the potential upside is huge if the company grows and its market price increases more than the contract price. Example: Pay ₹10L to buy shares, sell them for ₹1.2Cr later = Make over ₹1Cr profit (even after taxes).
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