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Investors argue that a company needs the right to cancel vested options if an employee joins a competitor or leaves on a sour note. Their other fear is the prospect of former employees as shareholders who have a right to the company’s information and need to sign off on key documents. Such employees could hold the company hostage over matters that require shareholders’ approval.

The other tactic Banglani has noticed is that companies keep the exercise price very high. Not because they need the money as equity, but often as a way to discourage employees from exercising the options when they quit. If an employee earns Rs 20 lakh annually (US$26,460), she could end up paying as much as Rs 10 lakh (US$13,230) to buy company stock. Not many employees have that kind of cash lying around.

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One of the reasons this happens is because founders may value personal loyalty more than an employee’s contribution, said Banglani. “As long as you work for me, you’ll get what is promised. If you leave, all bets are off.”

What companies are not gauging here is the long-term loss of reputation such policies lead to. “Such clauses should not exist in the first place,” added Banglani. “The founder and the board should have no discretion over an employee’s vested ESOP. When there is discretion, there is an incentive [to deny vested ESOPs].”

According to Banglani, there are three cardinal rules that can make ESOPs attractive for employees: a guaranteed exercise of vested options, reasonable exercise price, and no time limit for exercise. The employee should be free to exercise her stock any time until a liquidation event happens.

Flipkart, Bounce, and ad-tech firm InMobi are among the companies that give employees seven to 10 years to hold on to their vested options before they need to exercise it, said Sharat Khurana, chief executive of ZenEquity, a platform that helps companies manage their ESOP programme.

Companies like Bigbasket have a selective approach. If employees quit before four years, they’ll have to exercise the vested options within 90 days of resignation. If they leave after four years, they can hold onto the vested options (which would have vested in full by then) without exercising them till there is a liquidation event or the expiry date of the options (10 years from grant date)—whichever is earlier, said Bigbasket’s Hari.

Listing for help

Listing for help

The only ray of hope for employees with exercised shares are companies like wealth management firms and investment banks that aggregate buyers and sellers for shares of unlisted companies.

In the first few months of 2020, queries from startup employees who want to sell their shares have increased over 25% compared to the whole of last year, said Abhishek Ginodia, investment advisor at Abhishek Securities, a popular wealth management firm that helps sell unlisted shares.

But because the unlisted market takes cues from the IPO market, investor interest in these shares has dried up, according to brokers we spoke to. Investors can range from high-net-worth individuals to family offices, to Chinese or American mutual funds.