ESOP vesting schedule explained: cliff, monthly vesting and examples (India)

When a startup grants you 12,000 options, you do not get the right to exercise all 12,000 on day one. The grant letter and the company's ESOP scheme set a vesting schedule: a timetable that says how many options become vested, and on which dates.

Vested options are the ones you can exercise, that is, pay the exercise price and convert into shares. Unvested options are still conditional. They depend on you staying with the company, and sometimes on performance targets as well.

This is why two people with the same grant can be in very different positions. Someone who joined four years ago may own the full grant. Someone who joined eleven months ago may own nothing yet.

A cliff is a waiting period before anything vests. With a one-year cliff, nothing vests for the first twelve months. On the first anniversary of your vesting start date, a whole year's worth vests at once, usually 25% of a four-year grant.

After the cliff, the rest usually vests in equal monthly or quarterly instalments. On a four-year grant with monthly vesting after the cliff, that is the remaining 75% spread over 36 months, about 2.08% of the grant each month.

The cliff protects the company from giving equity to people who leave within weeks. For you, it means the first year carries the most risk: leave at month eleven and you usually walk away with no vested options at all.

For unlisted companies, the Companies (Share Capital and Debentures) Rules, 2014 require a minimum gap of one year between the grant of options and their vesting, with limited exceptions such as death or permanent incapacity. Listed companies follow SEBI's share-based employee benefits regulations, which also set a one-year minimum.

In practice this means an Indian ESOP cannot vest in the first year after the grant date, whatever the offer letter implies. If a company promises immediate vesting, ask its CS how that fits the rules. The answer is usually that it is the grant date, not the joining date, that matters.

Note the difference between the grant date and the vesting start date. Some companies set the vesting start date to your joining date, and only formally grant the options later, once the board or committee approves them. Check both dates on your grant letter.

Say you are granted 12,000 options with a vesting start date of 1 April 2026, four-year vesting, a one-year cliff and monthly vesting after that.

On 31 March 2027 you have 0 vested options. On 1 April 2027, 3,000 options vest (25%). From then, 250 more vest on the first of every month (9,000 options over 36 months). By 1 April 2028 you have 6,000 vested, by 1 April 2029 you have 9,000, and on 1 April 2030 the full 12,000 have vested.

If you resigned on 15 October 2028, you would have 7,500 vested options (3,000 at the cliff plus 18 monthly instalments of 250), and the other 4,500 would normally lapse.

Schedules vary. Read your own documents rather than assuming the common pattern.

Unvested options usually lapse on your last working day and go back to the company's ESOP pool.

Vested options normally remain yours, but only for an exercise window set by the scheme. That window can be anything from 30 days to several years, and some Indian schemes let you exercise only on a liquidity event. If you do not exercise in time, vested options can lapse too.

Before you resign, find out three numbers: how many options are vested on your last day, how long you have to exercise them, and how much cash exercising would need, including any tax. Leaving a week after a vesting date rather than a week before it can be worth a whole tranche.