For startups that receive institutional funding ESOPs are a very handy instrument to attract and retain employees. Earlier the rules of ESOPs (employee stock options) were attractive, but somewhere down the road the rules became draconian.
According to today’s Economic Times the govt is considering to rewrite the rules. Currently when an employee exercises his vested stock options the capital gains is payable immediately.
Most companies allow you to hold the vested options without having to exercise them provided you continue to work for them. This policy, however, is an internal matter and has nothing to do with the government.
The painful issue is when an employee exercises the options at the strike price but has no buyer for the shares. You pay a hefty capital gains because the strike price is very low, rather negligible when compared to the fair market value.
So you pay capital gains before actually being able to sell shares for real money. And at a later date when you actually do sell the shares you can claim credit for the capital gains which was paid at the time of exercising the shares.
This rule ‘may’ go says the article. You can convert your options at the strike price, hold it until you find a buyer. Pay capital gains only when you actually sell your shares for money.
This would be a very welcome change. A much needed change. This will energize startups in a big way.