Are ESOPs a trap instead of a perk? Expert breaks down how rewards can turn into risks

The upcoming IPO of EV two-wheeler major Ather Energy is set to unlock nearly Rs 530 crore in value for around 1,300 employees holding stock options under the company’s Employee Stock Option Plan (ESOP). Ather had launched its ESOP scheme in 2024 with a pool of approximately 16.5 million shares, as per its red herring prospectus. However, employees will face a one-year lock-in after listing, with the company's shares set to debut on the exchanges on May 6, 2025.

ESOPs (Employee Stock Ownership Plans) offer employees a chance to own a piece of the company they work for. These plans can be issued as direct stock, bonuses, or profit-sharing models. However, they are options, not guaranteed rewards.

Similarly, Swiggy recently announced the allotment of 1.28 crore equity shares under its ESOP 2024 plan, granting eligible employees shares at a face value of just ₹1 each, according to its April 22 exchange filing.

ESOPs allow employees to purchase shares at a predetermined price before a set expiry. Strict regulatory frameworks govern how and when these options can be exercised.

All financial experts do not see ESOPs as a great option. CA Nitin Kaushik, in a recent post, warned that ESOPs—once seen as a "jackpot"—can quickly turn into a financial trap. He highlighted how employees end up paying tax on paper profits when shares vest at high valuations, only to face losses if stock prices fall post-listing, turning supposed wealth into real tax burdens.

He further explained employees are granted ESOPs (Employee Stock Option Plans) at a nominal price —say Rs 10. When these shares vest and are allotted, the market price may be much higher — say Rs 50. As per income tax rules, that Rs 40 difference is treated as perquisite income and taxed immediately, even if the employee doesn't sell the shares.

During the tech boom, this worked brilliantly. Employees at global giants like Apple and Adobe — and across India’s startup ecosystem — exercised and sold their shares during peak valuations. The profits were real, fast, and funded everything from homes to retirements.

But when markets turn?

Kaushik further explained that the same Rs 50 stock might now trade at Rs 20. The employee still owes tax on the Rs 40 gain — income that never materialized. Selling the shares now means not only locking in a capital loss but also paying for phantom profits.

This is the ESOP trap — a classic case of paper wealth turning into real tax pain.

ESOPs aren’t just rewards. They’re financial instruments tied to market risk. And unless timed right, they can hurt more than they help.

ESOPs: Trap or investment

Long-term investing is often hailed as the golden rule for building wealth — staying invested, compounding returns, and riding out market volatility. But when it comes to Employee Stock Option Plans (ESOPs), long-term investing can sometimes be a double-edged sword.

At first glance, ESOPs look like a perfect wealth-creation vehicle: you get shares at a preferential price, the company grows, the stock value multiplies, and you reap the rewards. Many employees at startups and tech giants have seen this dream play out. IPOs have made paper millionaires overnight. Companies like Infosys, Google, and Amazon turned ESOP holders into early success stories.

Risks and timing

But the path isn’t always smooth.

One big risk is timing mismatch. Employees pay taxes on the fair market value of shares when they vest, even if they don’t sell them immediately. If stock prices crash after vesting — as seen in some startup IPOs — employees are stuck with tax bills on inflated valuations, even though their real profits have evaporated.

Another challenge is the lack of liquidity. Many ESOPs come with lock-in periods, and selling is sometimes only allowed during specific windows or after listing. This locks employees into volatile stocks, exposing them to market cycles they can't control.