Every founder wants crème de la crème tech leaders. And every tech leader wants meaningful equity. But here’s the catch — most ESOPs are structured to look lucrative, not actually be lucrative. A rigid four-year vesting plan? It might work for mid-level hires, but a seasoned CTO knows better. Equity with no clear liquidity path? That’s not wealth—it’s a waiting game with no exit in sight. Misaligned performance metrics? They might reward revenue growth but ignore the actual impact.

The reality is, tech executives evaluate ESOPs differently than other employees. They know the tax traps, the dilution risks, and the red flags in vesting schedules. So, if your ESOP isn’t structured right, it won’t attract the kind of leader who can take your company to the next level. In this article, we break down the biggest ESOP mistakes companies make—and what actually works to turn stock options into a real wealth-building incentive for top-tier tech executives.

Avoiding ESOP Pitfalls: 5 Proven Strategies to Attract & Retain Tech Executives  

    1.  Strategic Vesting Plans

Standard vesting models don’t always align with the company’s growth trajectory. A steep vesting schedule might discourage long-term commitment, while a long cliff period could deter sought-after executives.

📌 Best Practice: Use flexible vesting approaches that align with business goals:

• Milestone-based vesting: Tied to measurable goals like achieving an ARR milestone or launching a new product.
• Front-loaded vesting: A higher percentage of equity vesting in the early years to reward high-impact executives.
• Rolling vesting plans: Unlike a "cliff vesting" plan where all shares vest at once after a specific period, this plan distributes ownership incrementally over time, often resulting in a higher retention rate.
  

     2. Clear Liquidity Mechanisms

Many startups offer ESOPs without a clear exit strategy. If there’s no near-term IPO plans or acquisition in sight, and no secondary buyback program, these stock options may not attract senior tech leaders.

📌 Best Practice: Provide multiple liquidity options:

• Secondary sales: Allow executives to sell a portion of their vested shares pre-IPO.
• Structured buyback programs: Companies like Flipkart and Swiggy implemented buyback rounds in 2023 and 2024 respectively to maintain ESOP attractiveness.
• Exit clarity: Define scenarios like mergers, acquisitions, or IPOs where ESOPs can be monetized.
  

     3. Optimized Tax Planning

Poor ESOP structuring can create significant tax liabilities for executives, diminishing their attractiveness. For instance, in India, ESOPs are taxed twice – at the time of exercise and again while selling shares. In the US, executives often prefer Incentive Stock Options (ISOs) over Non-Qualified Stock Options (NSOs) due to favourable tax treatment. ISOs allow employees to potentially pay lower capital gains tax rates when selling the stock, provided certain conditions are met. In contrast, NSOs are taxed at ordinary income tax rates upon exercise, which can result in higher immediate tax liabilities. Global leaders working across jurisdictions may face cross-border tax complications. 

📌 Best Practice: Implement diverse variable pay methods: 

• Offer RSUs (Restricted Stock Units) with time-based, milestone-based, or composite restrictions to increase retention rate. 
• Utilize trust-based ESOP structures that provide senior leaders with ownership in the company through a trust structure, which manages the shares on their behalf, allowing for easier administration and tax advantages. 
• Implement Share Appreciation Rights [SAR] which is usually offered at a base price and when exercised, the executives receive the difference between the grant price and market price, often in the form of cash or shares. Phantom Stocks, a SAR-equivalent especially used by private or pre-IPO firms, where executives receive cash equivalent to the appreciation in share value without actually owning shares, paid usually at a liquidity event.
  

     4. Long-Term Vision Alignment

ESOPs should incentivize leadership to drive sustained business impact, not just reward tenure. If the vesting schedule doesn’t align with key milestones—such as a planned IPO, acquisition, expansion, or profitability targets—tech leaders may lack motivation to stay the course. 

📌 Best Practice: Align ESOP structures with business growth plans:

• For IPO-bound companies: Ensure vesting schedules coincide with public listing timelines.
• For M&A-focused firms: Implement accelerated vesting upon acquisition to incentivize leadership retention.
• For founder-driven startups: Structure ESOPs to minimize dilution while still attracting elite talent.
• Fractional tech leaders or interim CXOs: Offer shorter vesting schedules or milestone-based equity.
• Early-stage vs. late-stage companies: Early-stage firms may grant higher equity, whereas late-stage companies balance ESOPs with cash incentives.
  

     5. Create Industry-Standard ESOP Pool 

An ESOP pool is a portion of a company’s equity set aside specifically for issuing stock options to employees. It represents the number of shares allocated for the ESOP, typically making up a small percentage of the company's total equity. 

📌 Best Practice: Set up an ESOP pool and ensure that equity is allocated effectively across various roles. Here is a benchmark suggested by Antler – an early-stage VC firm: 

While these guidelines provide a direction, the specific needs of your company, the industry, and the seniority of the hires may warrant adjustments. Tailoring equity packages to reflect the unique contributions of each tech leader will ensure both fairness and long-term retention. As companies scale, ESOP pools typically expand, making it essential to monitor the ESOP policy regularly.

Analysing ESOP from A Tech Leader's Perspective 

For tech leaders, it's crucial to navigate the fine print of ESOPs carefully. Common loopholes include board approvals for exercising options, lack of liquidity events, investor-first clauses, and complex tax implications. If ESOPs form a significant part of the compensation package, tech executives should treat them with the same scrutiny as their base salary. Key considerations include a clear path to liquidity—whether through secondary sales, buybacks, or an IPO timeline—along with post-resignation exercise windows and robust anti-dilution protection. Here's. detailed guide to decode ESOP as a salary component. 

Closing Thoughts 

Ultimately, while tech leaders must approach ESOPs with due diligence, it's equally on companies to design plans that inspire confidence, not caution. Kiran Satya, Regional CEO, India & MEA, Purple Quarter puts it:

“ESOPs should be a growth engine, not a waiting game. The best equity plans offer clear liquidity, milestone-based vesting, and real value—anchored in execution, not just ideas. If your ESOP doesn’t excite a tech leader, it’s not built right.”

ESOPs were once a simple promise—but the traditional playbook no longer works. Liquidity is no longer a ‘someday’ event, tax inefficiencies can’t be ignored, and a one-size-fits-all vesting model is a deal-breaker.

Tomorrow’s tech leaders won’t just look at ESOPs as an add-on to their salary; they’ll demand structures that match their risk, impact, and long-term vision. Could we see more dynamic equity models—customized vesting based on individual contributions? More secondary market liquidity options to give executives real financial upside? More AI-driven benchmarking to ensure fairness in equity distribution? Time will tell. 

For more insights on structuring ESOPs and understanding compensation benchmarks for your tech leadership team, speak to our experts at interact@purplequarter.com.

 

Authored by Soumi Bhattacharya