Cliff: The minimum period to be employed with the company to earn any ESOPs at all (eg 1 year)
Vesting Period: The period over which the ESOPs are being earned by the employee (eg 4 years)
Thus, if a person has 100 ESOPs over 4 year vesting and a 1 year cliff with quarterly vesting, the employee may earn ESOPs as follows:
At the end of Year 1: 25
Quarterly in Year 2: 6, 6, 6, 7
Similarly in Year 3 and 4
Such vesting can also be monthly or half yearly instead of quarterly.
Exercise Price: The price an employee has to pay to buy the vested shares (eg Rs 10)
Value of Share: Fair Market Value of the share on Exercise Date (eg Rs. 1000)
Taxable Income of the Employee: Rs. 990 (TDS may be deducted by employer and may result in lower in hand salary at the time of exercise.
This taxability may be deferred to the earliest of the following 3 if the employer is a recognized startup under DIPP and IMB:
a) 5 years from exercise
b) Leaving the company
c) Sale of exercised shares
At the time of sale, the capital gain shall be taxed on sale value (Rs. 2000) less fair value on exercise date (Rs 1000) after indexation on long term or as short term depending on duration of holding.
Startups generally create ESOP pools before a fundraising event like a Seed round or Series A (between 8 to 15% of the fully diluted cap table) through creating unissued authorized capital.
Issue Unissued Authorized Capital as per Term Sheet / SHA > Create a policy > Pass a BR > Pass an SR at EGM > Issue Grant Letters
