New Delhi, Aug. 29 -- Employee Stock Option Plans (ESOPs) can create life-changing wealth, but unlocking that value comes with significant upfront costs.

A startup employee granted stock options worth Rs.1 crore must pay several lakhs just to convert them into actual shares. On top of the exercise price, the employee may owe substantial perquisite taxes-all before selling a single share. Liquidity events such as buybacks, secondary sales, or initial public offerings (IPOs) are the only avenues to sell shares. The ultimate payoff depends on the valuation at exit, which must cover both the exercise price and the perquisite tax paid upfront.

The risk escalates if the employee borrows money to cover these costs. While ESOP financing covers ...