पाठशाला Pathshala · दल Dal, The team · Lesson 20 · Build

ESOP communication: making equity feel real

Options an employee cannot value are not pay. How to explain a grant, its vesting, its strike and its exit scenarios in rupees, so the people you gave equity to value it.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

Neat rows of tea bushes under tall shade trees on a plantation in Valparai, Tamil Nadu. — Photograph: Soumith Soman · Pexels

Every option a startup grants costs its founders real dilution. Whether the employee counts it as pay depends almost entirely on whether anyone explained it. A grant described as “0.1 per cent” in an offer email, and never mentioned again, is worth close to nothing to the person holding it, and the company has paid full price for a retention tool that does not retain.

This lesson covers what to say at the offer, what goes in the grant letter, the annual equity statement in rupees, the exit scenarios told without promises, the tax, and the honest answer to the question every holder eventually asks: when can I sell?

Why equity nobody understands is worth nothing

Index Ventures’ handbook on employee equity puts it flatly: it is critical that your employees understand what stock options are. It records how Farfetch found at launch that its managers could not answer employees’ questions about the scheme, and wrote a five-page booklet to explain the essentials. Five pages is about right. A scheme document of forty pages is a legal instrument; it is not an explanation.

The failure is rarely dishonesty. It is that founders think in percentages of the company and employees think in rupees of salary, and nobody translates. The Holloway Guide to Equity Compensation makes the point that knowing how many options you have is meaningless unless you know how many shares are outstanding. The reverse is just as true: a percentage is meaningless unless the person knows what a share is worth today, what they pay to own it and what they pay in tax when they do. Until those numbers are on paper, the employee’s rational valuation is zero, and the best people discount the grant in every offer they compare against yours.

The four numbers on every grant letter

The grant letter is the employee’s record of what they own. It should state four things in plain figures. The number of options, and what one option converts into, usually one equity share. The fully diluted share count on the grant date, so the employee can compute their own percentage and see it change after each round. The strike price, the rupees per share they pay to exercise. The vesting and the window: the vesting start date, the schedule and the number of months a leaver has to exercise vested options.

Index describes four years with a one-year cliff as standard practice in the US and Europe, and notes that US leavers typically have ninety days to exercise, with some companies giving an extra year per year of service after the cliff. An Indian scheme sets its own window. Whatever yours is, put it in the letter in days, because the window decides whether vested options are worth anything to someone who leaves. The [ESOP design lesson](/library/esop-design-pool-grants-strike-price) covers how to choose it.

Rupees, not percentages: the annual statement

Once a year, and at every priced round, send each holder a one-page statement. It has five lines. Options granted and vested to date. The fair market value per share at the latest valuation, with the date. The paper value of the vested options: vested options times the gap between fair market value and strike. The cash it would take to exercise them today: the strike plus the tax on the perquisite. And the whole grant at three or four exit prices, from below today’s value to well above it.

A vintage wooden abacus with brown and black beads against a white wall. — Count it the way the employee counts. A grant becomes real when the statement says what it is worth today and what it costs to own. Photograph: Alexander Popadin · Pexels

Say which price you are using. For an unlisted company the fair market value used for tax is set by a valuation and is usually well below the price the last investors paid for their preference shares, because those shares carry rights the employee’s do not. Holloway notes the same gap in the US between the valuation used for employee equity and the preferred price. Quoting the investors’ price as the value of an employee’s share flatters the grant, and the employee discovers the difference at the worst moment.

At the defaults, four thousand options at a ₹10 strike, a fair market value of ₹800 and two years of service, half the grant has vested with a paper value of about ₹15.8 lakh. Exercising it today would cost about ₹4.9 lakh in strike and tax, for shares the employee cannot yet sell. That number is the one most employees have never seen, and it is the one that decides whether a leaver keeps their options. Move the fair market value up and the paper value rises, and so does the cash needed to exercise. At three times today’s value the whole grant leaves about ₹67 lakh in hand; at half today’s value, about ₹10.9 lakh. Showing all four bars is the honest version.

If an employee cannot say in rupees what their options are worth, what it costs to own them and when they might sell, the company has paid for equity that does no work.

Exit scenarios without promises

Show scenarios, never a forecast. Four exit prices relative to today, half, flat, three times and ten times, cover what can honestly be said. Include the down case every time: it is the one that earns trust, because the employee knows it is possible and notices when it is missing.

Then explain the two things that make the employee’s share of an exit smaller than the arithmetic suggests. Later rounds dilute every holder, so a percentage today is a smaller percentage at exit; the [dilution lesson](/library/dilution-a-cap-table-you-can-touch) shows by how much. And investors’ liquidation preferences are paid before equity shareholders in a sale, so in a modest exit the investors may take most of the proceeds; the [term sheet lesson](/library/term-sheet-clause-by-clause) explains how. A statement that ignores both should say so on its face, as the figure does.

The tax and the cash, said before it is discovered

Indian employees meet the tax at exercise, not at sale. The difference between the fair market value on the exercise date and the strike is a perquisite taxed as salary, a point the Finance Bill 2020 memorandum acknowledged when it noted that tax on a benefit received in kind can cause cash-flow problems. The same Bill let employees of an eligible start-up, one certified under section 80-IAC, defer that tax until fourteen days after the earliest of three events: forty-eight months from the end of the assessment year, the sale of the shares, or leaving the company. Tell every holder whether your company is eligible, because it changes the cash line on their statement.

Two further points belong in the five-page explanation. On a later sale, the gain above the fair market value at exercise is a capital gain, taxed separately. And the Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 without, the department says, altering the underlying tax policy; section numbers have changed, so refer employees to an adviser for the current references. The [ESOP tax lesson](/library/esop-taxation-in-india-two-taxing-events) walks through both taxing events with numbers. Checked 10 October 2026.

Liquidity: the honest timeline

Options in a private company turn into money in three ways: a sale of the company, a listing, or a buyback or secondary sale the company arranges. Employees should hear which of these the founders expect, roughly when, and what has to be true first. “We intend to offer a buyback for vested options once we are profitable or after the Series B, and we will tell you a year before” is a sentence an employee can plan around. “There will be liquidity” is not.

Do not promise a date or a price. Do promise the process: how a buyback would be offered, who would be eligible and at what valuation basis. And when one happens, explain the arithmetic of each holder’s offer in the same rupee format as the statement, so the first liquidity event confirms that the statements were honest.

The equity communication calendar

At the offer: the grant in options and in rupees at today’s fair market value, the four exit scenarios and the cash to exercise, in writing next to the salary. Within a month of joining: the grant letter with the four numbers, and the five-page explanation of how options work in your scheme. At the one-year cliff: a short note saying what has vested and what it is worth. Every year, on a fixed date: the one-page statement to every holder. At every priced round: an updated statement and a sentence on how the round changed the fully diluted count. At every departure: the vested count, the exercise window in days and the cash needed, given in the exit meeting rather than discovered afterwards. Once a year the founders read the statements as if they held one, and fix whatever they would not understand.

Nothing here is legal, tax or investment advice. Have the scheme, the grant letters and the statements reviewed by a lawyer and a tax adviser who work with Indian ESOP schemes.