Did you know that there is a mandatory 1 year cliff on ESOPs?

CLiff (3)

A cliff or a moratorium is the time period between grant of ESOPs to an employee and vesting of the ESOPs. Under the Indian Companies Act, 2013, there has to be a mandatory one year gap between granting and vesting of ESOPs by companies in India. Why does it matter?

It matters because in most start-ups, the promoters tend to offer ESOPs to employee as part of the compensation in the offer letter. It is one of the primary benefits to employees used by start-ups. However, a promise to give ESOPs in an offer letter is not “granting” of ESOP. The 1 year cliff does not start from the date of the offer letter. An ESOP is said to have been “granted” only once the company has taken steps to put in place an ESOP Policy, such ESOP Policy is approved by the Board and Shareholders of the Company and then the company issues a Grant Letter summarizing terms of the ESOP Policy and specifying the details of the ESOP grant to the employee.

Take a scenario where you worked really hard to get Swati Pandey, a super sharp programmer who has the makings of a future leader onboard your startup, wrestling her away for competitive offers from other companies and startups. Swati joined your company in March 2015 with a promise of ESOPs with 1 year vesting. Swati would, therefore, have been entitled to buy shares against the ESOPs upon them being vested in March 2016. However, like most start ups, you delayed putting in place the ESOP Policy and finally issued a grant letter to Swati only in November 2015. As a result, the vesting of Swati’s ESOP would now get delayed to November 2016. You would ask, why can’t the vesting be accelerated, after all the delay in vesting was because of you, so you should have the discretion to accelerate the vesting. Unfortunately, due to the one year mandatory cliff period under the law, the vesting of ESOP cannot be accelerated to less than a year from the grant of the ESOPs.

It is, therefore, important that if as an employer you are bringing employees on board with a promise to grant ESOPs, do not delay granting of the ESOPs. By doing so, you would effectively be delaying the vesting timeline for your employee, who is anyway working hard for you from Day 1.

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