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Designing a Phantom Option Plan for an NBFC
India’s startup ecosystem has entered a defining phase, one where innovation is not just about products or technology but also about how companies engage and reward their people. Over the past few years, Employee Stock Option Plans (ESOPs) have emerged as a cornerstone of this transformation, shaping how founders attract, retain, and motivate talent.
At Qapita, we’ve had the opportunity to work closely with several startups and scale-ups across India and Asia, and one thing is clear: ESOPs have become more than just a compensation tool; they are a culture-building mechanism. When employees become shareholders, they don’t just work for the company; they build with it. That shared sense of ownership is now driving some of the most inspiring success stories in India’s startup landscape.
At their core, ESOPs enable employees to acquire shares of the company over time, usually through a vesting schedule that rewards long-term commitment and contribution.
For founders, ESOPs serve two key purposes. First, they align employee interests with the company’s growth journey, ensuring that every team member has a stake in collective success. Second, they create a tangible sense of belonging, which is invaluable in a startup environment where agility and loyalty go hand in hand.
A well-structured ESOP pool, typically ranging between 5% and 15% of total equity in startups, signals that the company values its people as true partners. It’s not just about wealth creation; it’s about creating a mindset of accountability, ownership, and shared ambition.
From an advisory standpoint, I’ve seen firsthand how well-designed ESOPs can transform organizations.
Startups that embrace ESOPs early benefit from higher retention rates, as employees who own equity feel emotionally and financially invested in long-term success. ESOPs also help attract top-tier talent, particularly when startups are competing against well-capitalized corporates for skilled professionals.
Beyond attraction and retention, ESOPs cultivate a culture of alignment, where every milestone, funding round, and valuation uplift feels personal. Employees begin to connect their daily efforts to the company’s overall progress. This ownership mindset often fuels innovation and collaborative problem-solving far more effectively than traditional bonus structures.
Some of India’s most admired startups have built their growth stories on the foundation of employee ownership.
Zomato, for instance, recognized early on the power of ESOPs in driving retention and performance. Today, its ESOP pool stands at over 84 crore options valued at ₹16,970 crore (Data Source: FY 2024–25 – Annual Report), illustrating the scale of its commitment to shared wealth creation.
Similarly, Razorpay set a benchmark in employee engagement by unlocking ₹30 crore worth of ESOPs on its anniversary—rewarding over 3,000 team members with an average of ₹1 lakh each. These moments go beyond financial reward; they symbolize trust, partnership, and long-term collaboration.
(Data Source:https://www.business-standard.com/companies/news/razorpay-rewards-over-3k-employees-with-rs-1-lakh-esops-on-10th-anniversary-124122300827_1.html)
Such examples demonstrate that ESOPs, when thoughtfully structured, can help companies retain their best minds and inspire ownership-driven innovation, two ingredients that define enduring success.
Regulatory frameworks are also evolving to support India’s startup ecosystem. In June 2025, the Securities and Exchange Board of India (SEBI) approved a key reform allowing startup founders holding ESOPs granted at least one year before filing the Draft Red Herring Prospectus (DRHP) to retain or exercise them post-IPO.
Previously, such ESOPs had to be liquidated before the IPO process. This progressive move aligns India with global norms, ensuring that founders remain invested post-listing. It also provides much-needed flexibility in cap table planning and IPO structuring, paving the way for a more founder- and employee-friendly equity environment.
While ESOPs offer immense value, implementing them effectively requires thoughtful planning and regulatory awareness.
The valuation process can be complex, especially for early-stage startups where funding milestones fluctuate. Determining a fair market value that’s both compliant and motivational is critical. Similarly, navigating the regulatory and tax framework requires specialist knowledge, an area where advisory support can make a significant difference.
Another key challenge is balancing equity allocation; founders must strike the right proportion between rewarding early contributors and keeping enough flexibility for future hires. In my experience, the most successful ESOP structures are those that evolve with the company’s growth, reviewed and refined at each funding stage.
From my work advising founders and leadership teams, I’d highlight a few practices that consistently make ESOP programs effective:
1. Start with clear intent – Know whether your ESOP is primarily for retention, attraction, or both.
2. Communicate transparently – Educate employees on how ESOPs work, including vesting, taxation, and liquidity events. Transparency builds trust.
3. Customize for your stage – A Series A company’s ESOP design will differ significantly from that of a pre-IPO company. Align vesting schedules and exercise prices to your business goals.
4. Review regularly – As you scale, re-evaluate your pool size and grant philosophy. Periodic adjustments maintain relevance and motivation.
5. Seek expert guidance – Engage legal, valuation, and tax professionals early. A well-advised structure prevents future complications and ensures compliance.
A successful ESOP is not a static document; it’s a living framework that evolves alongside your company.
While cash incentives offer short-term satisfaction, ESOPs build enduring value and alignment.
For employees they open doors to wealth creation and personal investment in the company’s success. There’s a powerful sense of pride in seeing one’s contribution reflected in the company’s growth and valuation.
For companies, ESOPs help conserve cash, especially crucial during growth phases, while fostering a culture where everyone thinks like an owner. The result is stronger collaboration, higher engagement, and a workforce that’s intrinsically motivated to drive results.
In essence, ESOPs create a shared destiny where success is celebrated collectively, not individually.
As India continues its journey as a global innovation hub, ESOPs will play a defining role in shaping the next generation of entrepreneurs and leaders.
They encourage founders to share value, employees to think beyond salaries, and organizations to grow sustainably. The most successful startups I’ve seen are those that treat ESOPs not merely as a financial instrument, but as a strategic philosophy, one that builds trust, loyalty, and purpose. In the long run, ESOPs don’t just distribute wealth; they build ownership cultures that turn ideas into innovations and employees into partners in success. And that, in my view, is what truly fuels India’s startup revolution.
