Employee stock options let startups pay partly in future ownership — powerful for hiring when cash is short, and badly misunderstood on all sides of the table.
The machinery
- Pool: shareholders authorise a percentage of equity for the scheme
- Scheme: a written policy sets eligibility, vesting, exercise price and exit handling
- Grants: individual employees receive option letters
- Vesting: options mature over time — with the statutory minimum cliff for companies
- Exercise: employees buy shares at the exercise price, becoming shareholders
Tax reality employees deserve to hear
Tax hits at exercise (on the gap between fair value and exercise price, as a salary perquisite) and again on sale (capital gains on further appreciation). Eligible recognised startups enjoy a deferral facility for the first stage as per current provisions. Honest communication prevents resentment later.
Founder discipline
- Keep the pool proportionate to genuine hiring plans
- Document everything — verbal equity promises are litigation seeds
- Model dilution across future rounds before granting generously
We design compliant ESOP schemes with the tax story attached — startup advisory · get it structured.
