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Alok's Posts / Essentials

ESOPs for Startups by Rodinhood

Esops can change your life. They are probably the most valuable contribution that Startups make to the lives of employees who suffer low salaries and long hours while working in new Companies. However, ESOPs as a concept is confusing and complicated and needs to be understood well. 

This is a humble attempt to demystify ESOPs.

Hope this was helpful! Please provide feedback!


Please download the presentation via the image link:
added by asha
there was a q in quora on this topic:
‘How do I split equity between my new co-founder and I on a side-project I have been working on for over two years, put money in, and brought initial users for?’
Alok’s answer: 

“Let me dive directly into the sweet problem:

– Lets assume that you have invested 400 hours into the project

– Lets assume that your market value is US$ 25 per hour

– You state that you have invested 5000 US$ into the project

Therefore the ‘capital’ invested into the venture by you is = (400*25) + 5000 = US$ 15,000

– Now let’s assume that your friend puts in 500 hours in the next few months

– His value in the market is US$ 30 per hour

After he has put in his hours, the ‘capital’ invested by him will be US$ 15,000

Total Capital of the Company now will = US$ 30,000

Both of you will therefore own 50% each.

– Lets assume that you also continue to contribute while he is involved

– Lets assume that you add another 200 hours

Your capital invested in round 2 will be = US$ 5000

Total Capital created will be 15K + 15K + 5K = 35K

Your share will be 20/35 = 57.15%
Your friends share will be 15/35 = 42.85

This formula can be used to add capital to the pool and reward the contributors (be it via cash, effort, employees (the amount they DO NOT take home in cash) etc.”

First Published on: Oct 4, 2012


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  1. Thanks.. This Answers a lot of questions I always had.. !! 

  2. Alok – Again a masterpiece and a very useful repository of valuable information. Thank you and please keep sharing! Question though – Can you elaborate a bit on the contractor/consultant situation? I am currently working with multiple senior folks who are helping me in a part time capacity. Given that their contributions are important, I want to include them in the ESOP pool. Your response will help me out quite a lot. 

  3. Hi Alok, 

    Terrific guideline document . Only yesterday I was talking to our corporate attorney for ESOP and he said he wont do ESOP for a startup because its too complicated. Your compilation answers most of the questions comprehensively and will be a great guidelines for all the employees in our company. 

    I still have doubt over how you keep a face value of 10 to the VC and Re 1 for the employees.. Can we have shares of different face values at any given instant ?

    Thanks for the compilation. I would nominate this for Oscars of Indian startups


  4. the ‘face’ value of the shares are the same = Rs 1

    The ‘premium’ we sell them to the VCs is Rs 4999 = Total Rs 5000

  5. Ur Gyan is like bible of  startup 🙂 Awesome piece crisp n clear 

  6. Yeah !!! I finally understood the ESOP funda. Thanks.
    But, How do we decide on number of shares ??

  7. +1

  8. Hi Alok

    I liked the presentation -crisp and precise. Just wanted to add one point – there is something called a cashless transaction as well. In such a scenario, you do not have to pay money at the time when the shares get vested. Instead, when you sell (say at the time of IPO), the company sells the ESOPs on your behalf and pay you the amount after deducting the issued price and taxes. That way employee doesn’t have to shell directly from his pocket for buying these shares.



  9. Yes – its just that you pay short term capital gains rather than lower long term cap gains and IF you leave the Company in between, then securing shares can be risky…

  10. I dont think u paid attention to slide 9

  11. No … what I meant was – How do we decide on number of shares in the company. 
    That is – Out of 100% of the company – how many shares(number of shares) do we make 10000….100000 or a million.

  12. Very valuable inputs !  This kind of information is not easily available.  Thanks Alok !

  13. ???? thats a question of paid up capital

    if u want a 1 lac paid up capital, you issue 1 lac shares of Rs 1 while starting the company.

    Paid up capital attracts stamp duties in slabs!

  14. Hi Alok, suppose if i leave my company before it’s merger with some big group, and I buy my piece of vested shares, in that case, can I sell it back (if they have a clause of non transfer) in future to them. how will I know about the evaluation. do I have to make the buy n sell both at the same time during the exit (benefiting with the differential between market & base value)

  15. Also a number of companies have a clause that in case there is a liquidation event (IPO/M&A etc) before your shares are completely vested, there would be accelerated vesting and all your shares would get vested before their normal vesting cycle.

  16. It’s good how you’ve covered both, an entrepreneur’s and an accountant’s perspective.

  17. Thank you so much… Extremely helpful!

  18. XYZ management will recommend to the Board of Directors that you be
    granted an option to purchase 30000 shares of Common Stock of XYZ Inc.
    through our stock option plan. The price per share for each grant will be the fair
    market value of the Common Stock as determined by the Board of Directors at the
    date of the grant. The shares are subject to vesting over a four-year period at a
    rate of 1/48 per month. However, no shares shall be vested for a period of 12
    months from your start date.

    1) The shares are subject to vesting over a four-year period at a rate of 1/48 per month: Does this mean i shall be allotted (30000/48) shares every month for 48 months???

    2) no shares shall be vested for a period of 12 months from your start date: Does it mean i shall not be able to sell the shares for 12 months from the date of allotment???

  19. This is awesome… Can someone also shed some light on how ESOP pool is managed by the company? If say founders have divided 100% of the company among themselves, what do we need to do to expand the pool and what is the “exact” way to offer shares to employees? I need legal process.

  20. What happens in case a company issues additional capital and sells it? This generally dilutes the value of the ESOP. 

  21. nice piece of information. 

    Thanks @Alok

  22. Thank you Alok…I must say what a Timing…Today we as board discussed about management share and ESOP options and now this one will be really handy for us.

    Can you through some light of management stock options?

    Wish you great week ahead.


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