Startups can’t match big-company salaries early. They compete with ownership, mission, learning and culture. ESOPs make ownership real.
How ESOPs work
- The company creates an ESOP pool (a percentage of shares reserved for employees). Investors often ask for this before a round, which dilutes the founders.
- Employees receive grants of options with an exercise price.
- Options vest over time, typically 4 years with a 1-year cliff.
- After vesting, employees can exercise (buy shares at the exercise price), usually when there’s a liquidity event such as a buyback, acquisition or IPO.
- Many Indian startups have run ESOP buybacks, letting employees sell vested shares back for cash. CRED is one company that has announced them.
Tax (simplified): in India, the gain at exercise (fair value minus exercise price) is generally taxed as a salary perquisite, and later gains on sale as capital gains. Eligible DPIIT-recognised startups can let employees defer the perquisite tax for a period. Get professional advice; the rules are detailed.
Building culture deliberately
- Write 4–5 values as behaviours. “Customer first” means little. “We reply to every customer within 2 hours” means something.
- Hire and fire by values. One brilliant jerk can damage a whole team.
- Rituals: weekly all-hands, demo days, written updates.
- Founders model it. People copy what you do, not what you say.
HR compliance basics in India
- Written offer letters and appointment terms, plus confidentiality and IP assignment for every employee.
- Payroll with correct TDS on salaries.
- EPF and ESIC once you cross the employee thresholds; professional tax in applicable states.
- Shops & Establishments registration as per state law.
- POSH (Prevention of Sexual Harassment) Act compliance: a policy, plus an Internal Committee once you have 10 or more employees.
- Leave, working hours and gratuity rules under applicable law and India’s labour codes.
Use a payroll provider and an HR adviser early. Mistakes here are costly and damage trust.
Your takeaway
Create an ESOP pool, write values as behaviours, and get HR compliance right before you scale. You’ve finished Level 7. Next: raise money.