Unacademy ESOP move explained: Legal, ethical, or unfair to employees?
Published by India Today
Abhishek Kumar's role: Quoted
Abhishek Kumar said the law bars changes that harm option holders and that shortening the window could fall in that category. He explained the tax due on exercise and suggested employees read option agreements with scepticism.
What Abhishek Kumar said
Can a company legally shorten the ESOP exercise window for former employees?
Under the Companies Act 2013 and SEBI's rules, a company may modify an ESOP scheme by passing a special resolution, but the same rules expressly bar changes that harm the interests of people holding options. In my view, cutting the exercise window could be seen as harmful in that sense, because it takes away the practical chance to realise value from options that have already vested.
Why is cutting the exercise window to 30 days seen as unfair?
Employees accepted lower cash pay because they relied on a long exercise window, in this case ten years. Changing that to 30 days after they have left is a one-sided change. Employees lose their options while investors keep liquidation preferences that protect their capital, and a 30-day window forces people to decide at once, with no reasonable time to arrange money or judge how the company will do.
What tax do I pay when I exercise ESOPs in an unlisted startup?
Exercising the options triggers perquisite tax under the Income Tax Act straight away, on the gap between the shares' fair market value on the day you exercise and the price you pay for them. This is added to your salary, taxed at your slab rate and falls due within months. Because employee shares rank below preferred investors when money is paid out, you could pay the tax now and still be left holding illiquid shares that carry the downside.
What should startup employees check in their ESOP terms?
I suggest reading ESOP agreements with scepticism and judging them on more than the headline valuation. Treat a post-termination exercise window shorter than seven to ten years as a red flag. Protections for employees need to be written into the scheme itself; do not rely only on informal, good-faith promises from the founders, as the case of a large edtech company showed.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
The article examines an edtech startup's decision to cut the window for former employees to exercise stock options from ten years to 30 days. It covers whether such a change is legal, the fairness concerns, the tax due on exercise, and what startup staff should check in their option terms.
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Unacademy ESOP move explained: Legal, ethical, or unfair to employees?