ESOPs for Leadership Hires in Unlisted Indian Companies: A Design Guide

For unlisted Indian companies, ESOPs are usually the only instrument that lets them compete with larger employers for senior talent. Yet a striking number of leadership ESOP conversations fail — not because the equity is too small, but because the candidate does not believe in it. Believability is a design outcome, and this guide covers how to engineer it.

Start with the pool, not the grant

Before negotiating any individual grant, the board should settle the architecture:

• Pool size. Growth-stage Indian companies commonly reserve a high single-digit to low double-digit percentage of fully diluted equity for the ESOP pool, with leadership grants drawing on a defined share of it. The exact number matters less than having one — ad hoc top-ups erode investor confidence and internal parity.
• Allocation philosophy. Decide what fraction is reserved for the CXO layer versus the broader team, and what a "full" grant looks like at each level. Without this, every negotiation starts from zero and ends wherever persistence takes it.
• Refresh strategy. A leader who fully vests with no refresh grant in sight has, structurally, been told to start interviewing. Plan refresh grants from year three.

The design levers that matter

• Vesting schedule. The Indian standard is four years with a one-year cliff. For senior hires, consider milestone-linked vesting for a portion — tied to funding, profitability or audit-grade governance milestones — so equity rewards value creation, not tenure alone.
• Exercise price. Granting at a discount to the latest round's price, or at face value, makes the grant materially more valuable. Granting at the last preferred-round price can leave common-equivalent options underwater from day one — a fact sophisticated candidates will model.
• Exercise window after exit. Short post-termination exercise windows force departing leaders to fund the exercise cost and perquisite tax before any liquidity exists. Extending the window, or permitting cashless exercise at a liquidity event, is one of the cheapest credibility upgrades available.
• Taxation honesty. In India, options are taxed as a perquisite at exercise and again as capital gains at sale. Eligible startups can defer the perquisite tax in defined circumstances, but most companies cannot. Walk candidates through the actual cash flows; surprises discovered later poison trust.

The credibility test

A senior candidate evaluating your ESOP offer is implicitly asking five questions. Strong offers answer them unprompted:

• What is the company worth today, and on what basis?
• What is the realistic liquidity path — and when?
• What happens to my vested options if I leave, or if the company is acquired?
• Who else holds equity, and have employees ever actually realised value?
• Can I see the scheme document before I sign?

If your answer to the last question is no, expect discounting. Leaders who have seen one bad ESOP experience — and most have — treat opacity as a signal.

Buybacks and liquidity: the trust flywheel

Companies that have conducted even one employee buyback — however small — find subsequent equity negotiations dramatically easier. The first realised rupee converts the ESOP from a story into an asset class. If a funding round permits secondary sales, allocating a portion to employee liquidity is among the highest-ROI rewards decisions a board can make.

Where this fits in your hiring process

Equity design should be settled before the search begins, not negotiated live with a candidate. When we run executive search mandates, offers move significantly faster when the ESOP framework is documented and the talking points are rehearsed. It also pays to model the full cost of the hire — cash, equity and onboarding — using a tool like our executive hiring cost calculator before anchoring a negotiation.

And remember: ESOPs are one instrument, not the whole answer. For leaders nearing retirement, or in family businesses with no intention of diluting, long-term cash plans and phantom equity may serve better — a topic we cover separately.

For help designing or repairing a leadership ESOP framework, talk to us.