Key terms
| Term | Meaning |
|---|---|
| Grant | The number of options you are given |
| Exercise (strike) price | What you pay per share to convert an option into a share |
| Vesting | The schedule over which options become yours, often four years with a one-year cliff |
| Fair market value (FMV) | The value of one share. For unlisted shares, this is set by a valuation report |
| Exercise | Paying the strike price to convert vested options into shares |
A simple way to value options
Intrinsic value = (FMV per share − Exercise price) × Number of vested options
Intrinsic value is a starting point, not a cash value. Private-company shares can't usually be sold freely, so adjust for:
- Liquidity: when could you realistically sell? Look for buyback or secondary history.
- Risk: the chance the company's value falls or it fails.
- Dilution: future funding rounds reduce your percentage ownership.
- Leaving rules: how long you have to exercise after you leave.
Companies themselves value options for accounting under Ind AS 102, usually with option-pricing models such as Black-Scholes. That number is useful context but is not what you will receive.
How ESOPs are taxed in India
ESOPs are generally taxed at two points:
- At exercise: the difference between the FMV on the exercise date and the exercise price is taxed as a salary perquisite. For unlisted shares, FMV is set by a valuation from a Category I merchant banker.
- At sale: the difference between the sale price and the FMV at exercise is taxed as capital gains. The rate depends on how long you held the shares and whether they are listed.
Startup deferral. Employees of eligible startups (recognised by DPIIT and certified under Section 80-IAC) can defer the tax on exercise until the earliest of: 48 months from the end of the relevant assessment year, the sale of the shares, or leaving the company.
Tax rules and rates change through the annual Finance Act. Check current rules with a qualified tax advisor before exercising.
Comparing two offers with equity
- Compare fixed pay first. Equity should be a bonus on top of a fair salary, not a substitute for it. See compensation benchmarking.
- Annualise the equity: total intrinsic value at grant ÷ vesting years.
- Apply a discount for stage and liquidity. Earlier-stage equity deserves a bigger discount.
- Check the leaving terms and any buyback history.
For employers
Candidates increasingly compare equity carefully. Show the grant, the latest FMV, the vesting schedule and the exercise window clearly in the offer. Kynoa's salary benchmarking includes ESOP values by company stage, so you can see how your total offer compares.