ESOPs Aren't Yours Yet: A Guide to Vesting, Cliffs & Exercise

When a company grants you ESOPs, you do not own shares yet. You own options, and they become yours in stages, a process called vesting. Nothing can vest in the first year, because Indian law requires at least a year between the grant and the first vesting: that is the cliff. Even vested options are only a right to buy. You own shares once you exercise, which means paying the exercise price and the tax. If you leave early, unvested options lapse, and vested ones lapse too if you miss the exercise window.

This guide explains each step in plain terms, with worked examples in rupees.

The four stages of an ESOP

Caption: The life of an ESOP in India, from grant to sale.

What is vesting in ESOPs?

Vesting is the process by which your options become yours to exercise. The company's ESOP scheme and your grant letter set the conditions. Most often the condition is time: you stay with the company, and a set number of options vests on each date. Some schemes add performance targets.

Until options vest, you cannot exercise them. Even after they vest, Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 limits what you can do with them:

• you cannot sell, transfer or pledge an option
• you get no dividend and no vote until shares are issued to you
• only you can exercise your options, except on death, when they pass to your legal heirs or nominees

What is a cliff in ESOPs?

A cliff is the period at the start of a vesting schedule in which nothing vests. When it ends, a first block of options vests at once.

In India, a cliff of at least a year is not a choice. Rule 12 requires at least one year between the grant of an option and its vesting, and SEBI's rules set the same minimum for listed companies. On a four-year schedule with a one-year cliff, the first 25% usually vests on the first anniversary of the grant.

Two details catch people out:

• The year runs from the grant date, not your joining date. If you join in April and the board grants your options in July, your first options vest the following July, after about 15 months of work.
• The cliff is all or nothing. Leave one day before it, and none of your options have vested.

Is the one-year cliff ever waived?

Only in two cases. If an employee dies, all options granted till then vest in their legal heirs or nominees. If an employee suffers a permanent incapacity while in service, all options granted till then vest on that day.

Common ESOP vesting schedules

Treelife describes four years with a 12-month cliff, then monthly or quarterly vesting, as the market default in India. Schemes vary around that pattern.

Caption: Illustrative: a grant of 6,000 options, 20 months after the grant date. The numbers are made up to show the method.

The monthly schedule works like this: 1,500 options vest at 12 months, then 125 a month for the next 36 months. Eight months later, 2,500 have vested. On the quarterly schedule, 375 vest every three months after the cliff, so two quarters have passed by month 20.

Time, performance and milestone vesting

Time-based vesting is the most common. Treelife notes that performance vesting is allowed under Rule 12 as long as the scheme discloses the conditions. A milestone still cannot vest earlier than 12 months from the grant, and the scheme should say what happens to options tied to a milestone that is missed.

Refresh grants have their own clock

Each new grant, such as a refresh grant after a promotion, has its own vesting schedule and its own one-year minimum from its grant date. A grant made today cannot vest until a year from today, however long you have been with the company.

What happens when you leave

When you resign or your job ends:

• Unvested options lapse. Rule 12 says so directly.
• Vested options can be exercised within the period the scheme sets. If you miss it, they lapse too.
• If you are dismissed for cause, many schemes cancel vested options as well. Swiggy's 2021 plan, for example, cancels vested options on termination for cause.

How long you get to exercise after leaving varies a great deal. Treelife describes 30 to 90 days as common. Meesho's scheme gives up to 10 years from the last working day, and Swiggy's 2021 plan gives former employees 36 months once the company is listed.

Windows can also change. In December 2025, Unacademy told former employees they would have 30 days to exercise, instead of up to 10 years. After public criticism, it put the change on hold in January 2026. Rule 12 allows a scheme to be varied only by special resolution, and only if the change does not hurt existing option holders.

Good leaver and bad leaver

Many schemes sort people who leave into good leavers and bad leavers. A good leaver, such as someone who resigns on good terms, usually keeps vested options. A bad leaver, such as someone dismissed for misconduct, may lose them. Read your scheme's definitions: some treat any voluntary resignation as a bad leaver event.

Long leave is another grey area. Rule 12 does not say whether vesting continues during unpaid leave, so the scheme has to decide.

Faster vesting if the company is sold

If the company is acquired, the scheme and the board decide what happens to unvested options. Faster vesting on a sale is called acceleration, and it comes in two forms:

• Single trigger: unvested options vest when the company changes hands.
• Double trigger: they vest only if a second event follows, usually losing your job after the sale.

Acceleration is a term of the scheme, not a legal right. If it matters to you, ask for it in writing when you join.

What exercising means

Exercising means using your right to buy shares at the exercise price, also called the strike price. Once you pay it, the company allots shares to you, and only then do you become a shareholder.

The scheme sets the exercise price. It cannot be lower than the share's face value, because Section 53 of the Companies Act bars issuing shares at a discount. Many startups set it at face value, often ₹1 or ₹10.

How to exercise ESOPs in India, step by step

1. Check what has vested and the last date you can exercise.
2. Open a demat account if you do not have one. Private companies that are not small companies must issue shares only in dematerialised form under Rule 9B.
3. Send an exercise notice to the company, in the form the scheme sets.
4. Pay the exercise price.
5. Pay for the tax. Your employer deducts TDS on the gain, so you may need to fund it alongside the exercise price.
6. The company allots the shares and files Form PAS-3 with the MCA within 30 days of the allotment.
7. The shares are credited to your demat account.

What it costs to exercise

Exercising costs the exercise price plus the tax on your gain. That tax is often the larger amount.

At exercise, the fair market value of the shares minus the exercise price is a perquisite, taxed as salary at your slab rate. For an unlisted company, the fair market value comes from a valuation by a SEBI-registered Category I merchant banker.

Worked example: exercising 2,500 options

Say 2,500 options have vested. The exercise price is ₹10, and the latest merchant banker valuation is ₹800 a share. The numbers are made up to show the method.

• Exercise price: 2,500 × ₹10 = ₹25,000
• Taxable gain: 2,500 × (₹800 − ₹10) = ₹19,75,000
• Tax at the 30% slab plus 4% cess: about ₹6.16 lakh, more if a surcharge applies
• Cash needed to exercise: about ₹6.4 lakh

So you would pay about ₹6.4 lakh for shares you may not be able to sell for years. Under the new tax regime, at the 30% slab with cess and any surcharge, tax takes roughly 31% to 39% of the gain.

The startup tax deferral

Employees of eligible startups can put off this tax. The employer then deducts it within 14 days of the earliest of three dates:

• 60 months from the end of the tax year in which the shares were allotted
• the date you sell the shares
• the date you leave the company

Only some startups qualify. They need DPIIT recognition and a tax-exemption certificate from the Inter-Ministerial Board. About 3,700 startups had the certificate by May 2025, against more than 1.6 lakh recognised startups. Ask your employer whether it has one.

Tax when you sell

When you sell, you pay capital gains tax only on the rise in value after exercise. ESOPs are not taxed twice on the same gain.

• Cost: the fair market value used for the tax at exercise, not the exercise price.
• Holding period: counted from the date the shares were allotted to you.
• Unlisted shares: held for more than 24 months, the gain is long-term and taxed at 12.5%. Sold sooner, it is taxed at your slab rate.
• Listed shares: held for more than 12 months, gains above ₹1.25 lakh a year are taxed at 12.5%. Sold sooner, they are taxed at 20%.

Continuing the example: if you sell the 2,500 shares for ₹1,500 each, 30 months after allotment, the gain is 2,500 × (₹1,500 − ₹800) = ₹17,50,000. As a long-term gain on unlisted shares, the tax is 12.5%, or ₹2,18,750, plus 4% cess.

The Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026, keeps this two-stage approach.

Questions to ask about your ESOPs

Ask for the answers in writing, and keep your grant letter and the scheme together.

1. What is my grant date, and when does my first block of options vest?
2. Does vesting continue monthly, quarterly or yearly after the cliff?
3. Are any of my options tied to performance targets?
4. What is the exercise price, as a rupee amount?
5. What was the latest merchant banker valuation, and when was it done?
6. How long can I exercise after I leave, and how does the scheme define a bad leaver?
7. What happens to unvested options if the company is sold?
8. Does the company have the Inter-Ministerial Board certificate for the tax deferral?
9. Has the company run a buyback or secondary sale before?

This article is general information, not legal, tax or financial advice. Check your ESOP scheme and grant letter, and speak to a tax adviser before you exercise or sell.