Working at new-age startups comes with many perks: flexible working hours, ability to don multiple hats and a chance to own a piece of the company’s success via stock options.
But there’s also the obvious downside: when external funding is hard to come by and the company isn’t generating enough free cash flow, people lose jobs.
We know, we know. Job cuts due to a recession are not limited to startups.
The likes of Meta and Google have cut thousands of jobs already with more likely on the way but one could argue that the nature of the beast is such that job security is lower when compared to more traditional MNCs.
Inc42’s layoff tracker states that 92 startups have laid off over 25,000 people in the past year alone, with funding drying up in the face of an economic recession.
And while layoffs are hard, what’s harder is seeing your hard-earned ESOPs go waste soon after. It may seem like stock options are of no use in a startup that’s apparently going to fail, but never say never!
History has enough examples to tell us that it’s not always the end until it is.
What’s your post-exit exercise window?
Companies that have the welfare of their employees in mind tend to keep a long exercise window post exit. In India, the longest permissible is 10 years but is further extendable at the discretion of the management.
But there’s no saying what the ESOP policy of your company states.
We know of startups where you lose your options (yes, even the vested ones!) as soon as you quit. It’s therefore important to keep a close eye on the post-exit exercise window when negotiating an offer.
What happens to unvested ESOPs?
In most cases, all unvested ESOPs are quashed as soon as someone exits the company.
For instance, your vesting schedule is 4-years-long with 25% of the options being vested every year. If you are let go after 3 years, only 75% of options are vested. The remaining unvested 25% are lost.
Why can’t I just exercise my options and keep them for later?
Factoring how there’s no real certainty for a potential liquidity event (IPO, acquisition or a buyback), you may essentially be paying for nothing.
Apart from the exercise cost, there’s also the tax implication to think of.
In India, you pay tax on the perquisite (difference between your exercise price and the current market value of the stock). So, for example, if you are exercising 5000 options at a strike price of ₹20 and the current market price of the stock is ₹1000, you will be paying a tax on ₹49,00,000!
The perquisite tax occurs at your usual income tax rates.