Are Esops A Trap Instead Of A Perk? Expert Breaks Down How Rewards Can Turn Into Risks

The upcoming IPO of EV two-wheeler awesome Ather Energy is group to unlock astir Rs 530 crore successful worth for astir 1,300 labor holding banal options nether nan company’s Employee Stock Option Plan (ESOP). Ather had launched its ESOP strategy successful 2024 pinch a excavation of astir 16.5 cardinal shares, arsenic per its reddish herring prospectus. However, labor will look a one-year lock-in aft listing, pinch nan company's shares group to debut connected nan exchanges connected May 6, 2025.

ESOPs (Employee Stock Ownership Plans) connection labor a chance to ain a portion of nan institution they activity for. These plans tin beryllium issued arsenic nonstop stock, bonuses, aliases profit-sharing models. However, they are options, not guaranteed rewards.

Similarly, Swiggy precocious announced nan allotment of 1.28 crore equity shares nether its ESOP 2024 plan, granting eligible labor shares astatine a look worth of conscionable ₹1 each, according to its April 22 speech filing.

ESOPs let labor to acquisition shares astatine a predetermined value earlier a group expiry. Strict regulatory frameworks govern really and erstwhile these options tin beryllium exercised.

All financial experts do not spot ESOPs arsenic a awesome option. CA Nitin Kaushik, successful a caller post, warned that ESOPs—once seen arsenic a "jackpot"—can quickly move into a financial trap. He highlighted really labor extremity up paying taxation connected insubstantial profits erstwhile shares vest astatine precocious valuations, only to look losses if banal prices autumn post-listing, turning expected wealthiness into existent taxation burdens.

He further explained labor are granted ESOPs (Employee Stock Option Plans) astatine a nominal value —say Rs 10. When these shares vest and are allotted, nan marketplace value whitethorn beryllium overmuch higher — opportunity Rs 50. As per income taxation rules, that Rs 40 quality is treated arsenic perquisite income and taxed immediately, moreover if nan worker doesn't waste nan shares.

During nan tech boom, this worked brilliantly. Employees astatine world giants for illustration Apple and Adobe — and crossed India’s startup ecosystem — exercised and sold their shares during highest valuations. The profits were real, fast, and funded everything from homes to retirements.

But erstwhile markets turn?

Kaushik further explained that nan aforesaid Rs 50 banal mightiness now waste and acquisition astatine Rs 20. The worker still owes taxation connected nan Rs 40 summation — income that ne'er materialized. Selling nan shares now intends not only locking successful a superior nonaccomplishment but besides paying for phantom profits.

This is nan ESOP trap — a classical lawsuit of insubstantial wealthiness turning into existent taxation pain.

ESOPs aren’t conscionable rewards. They’re financial instruments tied to marketplace risk. And unless timed right, they tin wounded much than they help.

ESOPs: Trap aliases investment

Long-term investing is often hailed arsenic nan aureate norm for building wealthiness — staying invested, compounding returns, and riding retired marketplace volatility. But erstwhile it comes to Employee Stock Option Plans (ESOPs), semipermanent investing tin sometimes beryllium a double-edged sword.

At first glance, ESOPs look for illustration a cleanable wealth-creation vehicle: you get shares astatine a preferential price, nan institution grows, nan banal worth multiplies, and you reap nan rewards. Many labor astatine startups and tech giants person seen this dream play out. IPOs person made insubstantial millionaires overnight. Companies for illustration Infosys, Google, and Amazon turned ESOP holders into early occurrence stories.

Risks and timing

But nan way isn’t ever smooth.

One large consequence is timing mismatch. Employees salary taxes connected nan adjacent marketplace worth of shares erstwhile they vest, moreover if they don’t waste them immediately. If banal prices clang aft vesting — arsenic seen successful immoderate startup IPOs — labor are stuck pinch taxation bills connected inflated valuations, moreover though their existent profits person evaporated.

Another situation is nan deficiency of liquidity. Many ESOPs travel pinch lock-in periods, and trading is sometimes only allowed during circumstantial windows aliases aft listing. This locks labor into volatile stocks, exposing them to marketplace cycles they can't control.