IN BRIEF

Questions to ask before accepting ESOPs are the checks an employee runs on a startup's option grant before signing: the vesting schedule and cliff, the exercise price and its valuation, the post-exit exercise window, treatment on acquisition or IPO, tax at exercise and at sale, whether the grant is options or shares, and the pool size behind the promise.

The offer letter looks generous. A decent salary, a joining date, and a line that says you will also get stock options. It feels like a bonus. It is not. Not yet. An option is a promise about a future you cannot see, priced in a currency the company itself prints. I have watched bright people celebrate grants they never read, then feel cheated two years later when the terms bit them. The scheme was never hidden. Nobody asked. You do not need a law degree to protect yourself here. You need seven questions, asked before you sign, with the answers in writing — in the grant letter or the scheme document, not in a cheerful email from HR. Verbal comfort is worth nothing on exit day. Paper is.

The short answer: ask how your options vest and where the cliff sits, what you will pay to exercise and who values the shares, how long you get to exercise after leaving, what an acquisition or IPO does to your grant, what tax falls due at exercise and at sale, whether you hold options or actual shares, and how big the pool and the last valuation are. If a founder answers all seven clearly, that itself tells you plenty about the company you are joining.

1. How do my options vest, and where is the cliff?

Vesting is the clock that turns a promise into something you own. The usual pattern in Indian startups is four years with a one-year cliff: nothing vests for twelve months, then a quarter of your grant vests at once, and the rest trickles in monthly or quarterly over three years. Leave at month eleven and you walk away with zero. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 sets a minimum gap of one year between grant and vesting, so no Indian scheme can vest you sooner anyway. Ask for your schedule in dates. The clock runs from the grant date, not your joining date.

2. What is my exercise price, and who sets the fair value behind it?

Your exercise price is what you will one day pay, per share, to turn options into shares. Sometimes it is the face value, a token ₹10. Sometimes it tracks fair market value on your grant date. What matters is the gap, because tax at exercise is charged on the difference between the fair value then and your price — a low price today can mean a heavy tax bill later. Ask who values the shares. For an unlisted company, fair value for tax is certified by a Category I merchant banker. Get the last valuation, its date, and the valuer's name.

3. How long do I get to exercise after I leave?

This question decides whether your options survive your resignation. Vested options usually come with an exercise window once you exit — in practice it can be as short as thirty days or stretch to a few years, and the scheme, not the law, fixes it. A short window is brutal. You must find cash for the exercise price and the tax on top, within weeks, for shares you cannot sell. Miss it and vested options lapse. Our guide on ESOPs on resignation and vesting rules walks through what typically survives an exit. Ask before you join, not during your notice period, when your bargaining power is gone.

4. What happens to my options in an acquisition or an IPO?

Exits change everything, and schemes handle them very differently. Some accelerate vesting when the company is acquired, so unvested options vest early and you share in the sale. Some cancel unvested options outright. Some convert your grant into options of the buying company. An IPO raises its own questions: lock-ins, a fresh scheme under the listed-company rules, and a market price that finally makes your shares saleable. It is drafted, clause by clause, and it can be drafted against you. Ask for the change-of-control position in plain words. If the answer is "we have not thought about it," believe them — and price that silence in.

5. What tax do I pay at exercise, and what tax at sale?

Two tax bills, years apart. At exercise, the gap between fair value that day and your exercise price is taxed as a salary perquisite under section 17(2)(vi) of the Income-tax Act, and your employer deducts TDS. You pay cash tax on paper wealth before selling a single share. At sale, capital gains tax falls only on the rise above that fair value — section 49(2AA) makes it your cost, so the same gain is not taxed twice. Hold unlisted shares beyond twenty-four months and the gain is long-term, at 12.5% without indexation; sell sooner and your slab rate applies. A narrow TDS deferral exists for eligible recognised startups.

6. Am I getting options, or actual shares?

Read the noun. An option, under section 2(37) of the Companies Act, 2013, is only a right to buy shares later at a pre-set price. It carries no vote, no dividend and no seat on the cap table until you exercise and shares are allotted. Direct shares are different: you own them from day one, restrictions and all. Recruiters blur this line constantly. "We are giving you equity" can mean options, restricted units, or a phantom plan that pays cash and never issues a share. Ask which instrument your grant letter names, and ask to see the scheme beneath it. No scheme, no grant. Only a kind intention.

7. How big is the pool, and what was the last valuation?

A grant means little without the denominator. Ten thousand options sound grand until you learn the company has ten crore shares outstanding and your slice is a rounding error. Ask what percentage of the fully diluted capital your grant represents, how large the option pool is, and how much of it is granted. Then ask the last valuation, who did it, and when. Think of the pool as a wedding buffet: your plate matters less than how many guests are still in line behind you. Future fundraises will dilute you further. That is normal. A company refusing to share any of these numbers is not. Secrecy here is information too.

None of these questions marks you as difficult. Founders who run clean schemes answer them in minutes, often with pride. It is the vague answers — "trust us, everyone is treated fairly" — that should slow your pen down. Equity is the part of your pay that can change your life or quietly expire worthless. The difference usually sits in seven answers you were always entitled to ask for.

If you are weighing an offer right now, bring the grant letter and the scheme to someone who reads these documents daily. Our ESOP services at ComplyKart cover scheme design, tax and compliance for companies, and that same reading skill is what your offer needs — we will tell you plainly what your options are worth, what they will cost you, and which clause to push back on before you sign.