The Indian government is considering rewriting the startup ESOP framework (article) — a step in the right direction & great news for early startup employees in India!
Will especially bring two key benefits to them:
- Employees can exercise options as soon as they’re vested without having to shell out (very high) fringe-benefit tax component upfront on ‘on-paper’ FMV of shares. When the exercise period is short, most employees today forego vested ESOPs as either they do not have the cash availability or do not wish to spend that cash on buying shares.
- A high chance that the employees pay long-term capitals gains tax on actual sale instead of short-term capital gains tax. While many startups now offer long exercise periods (solving the issue of ESOPs lapsing), employees still practically exercise the options just before the sale, ending up paying STCG. When this comes into force, there’s a real chance that they pay the lower LTCG (on par with founders).
Of course, FBT needs to go too, or at least be applied on FMV on grant date & not vesting date!
Btw, if you’re joining a startup at inception as a key member, try to get the same common stock as founders & not get bucketed in the ESOP pool. Will save a lot of shock & heartburn later!