1. ESOP Grant

Modified on Wed, 6 Aug at 9:14 AM

1. Receiving an ESOP Grant

When your company gives you equity, they will issue you a grant letter. Now, this grant letter will comprise of various information detailing:

How any share or options you’ve been granted
The vesting schedule (how and when you’ll earn those shares)
Where you need to buy them later (If you are issued stock options)

At this stage, you don’t actually own the shares yet, but rather you’ve just been promised the right to earn them over time.

2. Vesting: Earning Your Shares Over Time

ESOPs typically follow a vesting schedule, which means you don’t receive all your shares at once. Instead, you earn them gradually over time, often across several years.

There are two common types of vesting schedules:

Cliff Vesting
With cliff vesting, you don’t receive any shares until a specific milestone is reached — usually after a set number of years. For example, if your vesting schedule includes a 2-year cliff, you won’t receive any shares until the end of Year 2. At that point, a large portion (often 100%) may vest all at once.
Graded Vesting
In a graded vesting schedule, your shares vest gradually over time — such as monthly, quarterly, or yearly. For instance, if you’re on a 4-year schedule with monthly vesting, you’ll receive a small portion of your total shares each month until fully vested.

The purpose of vesting is simple: the longer you stay with the company, the more ownership you earn. It’s designed to reward long-term commitment and help align employees with the company’s future growth.

3. Exercising Your Shares (Applicable to stock options only)

Recall that you may either be granted shares or options? If your ESOP involves stock options, you may need to pay to “exercise” them — that is, buy the shares at a fixed price (called the exercise price or strike price).

Not all ESOPs are like this. Some types of ESOPs like RSUs (We will go through the type of Equity Compensations in a later article) would simply deliver shares to you at no cost once vested.

Generally, exercising an option is when you officially become a shareholder as you would be the rightful owner of the share. Depending on your company’s plan, you may need to make a decision about exercising before you leave the company or within a certain timeframe.

Other Factors of Consideration: Taxes (Just the basic)

ESOPs may trigger taxes at different points:

When your shares vest

When you exercise them (if applicable)
When you eventually sell your shares

These tax events apply in many countries — including the US and much of Asia — but the exact timing, rates, and obligations vary depending on your local laws and the type of equity you receive.