In India’s fast-evolving startup and corporate landscape, equity-based compensation has become a cornerstone for attracting, retaining, and rewarding high-performing talent. But with multiple options — ESOPs (Employee Stock Option Plans), RSUs (Restricted Stock Units), and SARs (Stock Appreciation Rights) — founders often face a critical question:
Which equity instrument best suits our company’s growth stage and regulatory comfort?
Let’s decode each one, along with insights on Indian legal frameworks, taxation, and adoption trends.
1. ESOPs: The Classic Choice for Early-Stage Companies
Employee Stock Option Plans (ESOPs) grant employees the right to purchase shares at a pre-decided “exercise price” after a vesting period.
Why ESOPs Work for Startups:
- Cash-efficient: Conserve cash while rewarding performance.
- Valuation-aligned: Employees share in the company’s upside.
- Customizable: Flexible vesting and grant rules.
Legal Lens:
ESOPs in India are governed under the Companies Act, 2013 and SEBI (SBEB & SE) Regulations, 2021 for listed entities. They are taxed under the Income-Tax Act, 1961, both at the time of exercise (as perquisite) and again on sale (as capital gains). Private firms must handle valuation and TDS compliance carefully.
Best for: Early- to mid-stage startups (Seed to Series B) nurturing long-term ownership culture.
2. RSUs: The Global Model That Operates Like ESOPs in India
Restricted Stock Units (RSUs) are share awards that vest over time, typically without any exercise price. Globally, RSUs automatically convert into shares once vested. However, in India, RSUs legally flow and operate like ESOPs, meaning they follow the same approval, valuation, and taxation process.
Why RSUs Fit Growth-Stage Companies:
- No upfront cost: Employees don’t pay to acquire shares except face Value.
- Global credibility: Favoured by multinational and pre-IPO firms.
- Simplified communication: Easy to explain and administer.
Legal Lens:
Since RSUs are treated akin to ESOPs in India, companies must comply with the Companies Act, Income-Tax Act, and FEMA (for cross-border grants).
Best for: Growth and pre-IPO companies that want transparent, globally aligned equity rewards.
3. SARs: Cash-Settled Rewards for Performance-Driven Companies
Stock Appreciation Rights (SARs) reward employees for the appreciation in company value without transferring actual shares. Here, we focus on Cash-Settled SARs, where employees receive the monetary difference between the grant price and the fair market value at payout.
Why Cash-Settled SARs Stand Out:
- No dilution: Preserves founder ownership.
- Performance-based: Best suited for leadership KPIs.
- Simplified exit: Payouts made in cash, not equity.
Legal Lens:
In India, Cash-Settled SARs are not governed by SEBI or the Companies Act, since they do not involve issuance or transfer of equity shares. They are contractual in nature, governed by employment agreements and internal policies. Hence, accurate valuation, accounting recognition, and documentation are key.
Best for: Mature or profit-driven companies rewarding senior executives through non-dilutive, performance-linked cash incentives.
Equity Adoption Trends in India
From an adoption standpoint, ESOPs dominate India’s equity-incentive landscape.
- Around 70% of Indian companies (as per EY and Grant Thornton reports) offer ESOPs as part of their long-term incentive strategy.
- SARs, on the other hand, are adopted by only 9–12% of companies, primarily among mature or listed entities.
- RSUs are gaining momentum in India, especially among growth-stage startups and multinational subsidiaries looking to align with global compensation frameworks.
Among unlisted firms, those covering more than 10% of employees through equity plans have increased from ~42% in 2020 to ~58% in 2022, reflecting India’s growing equity culture.
Final Takeaway for Founders
- ESOPs inspire early ownership.
- RSUs add simplicity and credibility.
- Cash-Settled SARs offer performance-based, non-dilutive rewards.
At ESOP Guardian, we help founders choose the right equity strategy — balancing compliance, valuation, and motivation at every growth stage.
Connect with our experts to design your ideal equity plan — from ESOPs to RSUs to Cash-Settled SARs — built for your company’s success at Info@esopguardian.com.
