5 ESOP mistakes you must avoid

We have seen this happening so many times. Whenever someone is joining their first startup, fresh from a college or after years of corporate heavy lifting, in the excitement of finally getting an offer from a startup they miss on asking few basic questions and regret later when it becomes big.

Here are 5 of the most common mistakes people make when it comes to ESOPs

1) Don't think it is same as salary

“ESOPs are not like cash that you get at the end of the month and will help you pay your Home Loan EMI. They are more like PF which are locked and can benefit in long term that too is not 100% sure”

If a company making an offer of 25 L fixed plus 10 L in ESOPs and other one is offering 20 L in fixed salary and 15 L in ESOPs then these are different offers and carry different risk. Don't consider them both as 35 L CTC

2) ESOPs are not annual pay but vest over years

“ESOPs generally vest over 4 or 5 years while CTC is an annual package. This means a 10 L ESOP is worth 2.5 L if vested over 4 years. Understand this difference”

Vesting period is an important parameter that people do not understand and end up confusing this as an annual pay which leads to poor satisfaction later on

3) ESOPs are given every year and it is not one time

“ESOPs allocation is one time activity which will vest over time. There may be a top up later on basis performance or appraisal which may be of different amount than joining ESOPs”

Don't get confused if a company offers 10 L worth of ESOPs on joining that every year they will allocate 10 L ESOPs to you. It is a one time activity. In future one may get less or more ESOPs basis company policy and individual's performance

4) ESOPs vest from day 1 and you get them pro-rata

“Sometimes people think they have ESOPs worth 4.8 lakh vesting over 48 months and that means if they leave in 6 months they will have 0.6 L ESOPs, that's a mistake”

ESOPs have a cliff period which can be 1 year to 2 year before which no ESOPs vest and if you are taking a quick stop at this company then better assume ESOPs are worth zero

5) ESOPs are free and one does not have to pay for it

“ESOPs are generally given at an exercise price that can face value, nominal value or even market value of share. This may not come free for employee both in terms of exercise cost as well as taxes one has to pay”

Be super clear on what happens when you exercise the option of converting the ESOP into a company share. Many people do not take this into account while joining a startup as different companies have different exercise price

Choose Wisely

As we see, ESOPs are a new tool and we all can make mistakes here. Add to it the problem of transparency as many startups do not share their ESOP policy openly and this leads to poor attrition as one figures out they have been cheated by showing wrong calculations. Leverage our community to know answers to all your questions before you join any startup . Good luck!