The Three Types of Indian Startup Equity
1. ESOPs (Employee Stock Option Plans)
The most common form of Indian startup equity. An ESOP gives the employee the right to buy company shares at a predetermined exercise price (set at FMV at grant date) after a vesting period.
Tax treatment: Perquisite tax at vesting on the spread between FMV and exercise price, then capital gains tax on subsequent appreciation at sale.
Best for: Employees who believe strongly in the company's exit potential and can handle the perquisite tax cash flow at vesting.
2. SARs (Stock Appreciation Rights)
A SAR grants the employee the right to receive cash equal to the appreciation in share value over a specified period. No actual shares are issued — the employee receives a cash payment at the liquidity event (IPO, acquisition, or buyback).
Tax treatment: The cash payment is taxed as salary income (perquisite) when received. No perquisite tax at vesting because no value is delivered at vesting.
Best for: Startups wanting to offer equity-like upside without the complexity of share issuance; employees who prefer cash settlements; companies where actual share issuance is complex.
3. Phantom Stock
Phantom stock grants a hypothetical number of "phantom shares." At a liquidity event, the employee receives cash equal to the value of those phantom shares at the time. Like SARs, no actual shares change hands.
Tax treatment: Cash received is taxed as salary/bonus income in the year received.
Best for: Compensating senior hires who join late-stage companies where the option pool is depleted; retaining employees through a bridge to liquidity.
Comparison Table
| ESOP | SAR | Phantom Stock | |
|---|---|---|---|
| Actual shares issued | Yes, at exercise | No | No |
| Tax at vesting | Perquisite tax | No | No |
| Tax at payout | Capital gains | Salary tax | Salary tax |
| Shareholder rights | Yes, after exercise | No | No |
| 409A required (US entity) | Yes | May apply | No |
| SEBI SBEB applies | Yes | Yes | Depends |