Growth shares vs ESOPs in India: what should startups consider?

For an Indian startup thinking about employee equity, the conversation often starts with ESOPs.

But ESOPs aren't the only way a company can think about sharing future value with employees. Some founders and advisors also explore structures referred to as growth shares, particularly when they want employees to participate primarily in value created above a defined starting point.

The two approaches can look similar from a distance: both can align employees with the company's future growth.

Structurally, however, they are different.

So what should an Indian startup consider when comparing growth shares and ESOPs?

First, what is the difference?

An ESOP generally gives an eligible employee a right to acquire shares in the future, subject to the terms of the scheme and the grant.

The employee doesn't become a shareholder merely because an option has been granted. The option normally needs to vest and then be exercised before the underlying shares are acquired.

Growth shares, by contrast, are shares designed so that their economic value is primarily linked to growth above a specified threshold or hurdle.

For example, a company could structure shares so that existing shareholders retain the value attributable to the company's current valuation, while the growth-share holder participates in value created above an agreed threshold.

That means the two structures answer slightly different questions:

ESOP:
“How can we give employees the right to acquire equity in the future?”

Growth shares:
“How can we give employees an economic interest in future value creation while protecting existing value?”

The precise legal and tax treatment depends on how the instrument is structured, which is why Indian startups should not treat “growth shares” as a standard off-the-shelf equivalent to an ESOP.

1. When does the employee get the economic interest?

This is one of the first distinctions founders need to understand.

With an ESOP, the employee receives an option. The grant can vest over time, and the employee generally acquires the underlying shares only after exercising the option according to the scheme terms.

With growth shares, the employee may receive shares themselves, but those shares can be designed with specific economic rights or restrictions.

That creates an important practical difference.

An ESOP can separate the grant of the option from the future acquisition of shares.

A growth-share structure can involve the employee holding an actual share from the outset, subject to the rights and restrictions attached to that class of shares.

The company's lawyers and tax advisers therefore need to examine the proposed structure rather than assuming that the two instruments are legally equivalent.

2. What happens to value that already exists?

This is where the “growth” part becomes important.

Imagine a startup is currently valued at ₹100 crore.

The founders want employees to participate primarily in value created above that level.

A growth-share structure could, depending on its terms, establish a hurdle so that the economic participation relates to value created above the relevant threshold.

An ESOP works differently.

An option grant normally gives the employee the right to acquire shares at a specified exercise price, subject to the scheme's terms.

The economic outcome for the employee therefore depends on factors including the exercise price, future share value, vesting and eventual liquidity.

The key question is not simply how much equity employees receive. It is which part of the company's future value that equity actually gives them an interest in.

3. How does the structure affect your cap table?

This is particularly important in India because employee equity needs to be considered alongside the company's broader capital structure.

Suppose a startup has:

• 10 million existing shares
• founders and investors holding the existing equity
• an ESOP pool
• a proposed employee growth-share arrangement

The company needs to understand how the proposed structure affects both current and future ownership.

With ESOPs, the company can separately track options granted, vested options, exercised options and the remaining pool.

With growth shares, the company needs to understand the number and class of shares being issued, their rights, restrictions and how they interact with existing shareholders.

This means the comparison shouldn't stop at employee compensation.

Founders need to model the effect on the cap table under different future outcomes.

4. What happens when the company raises another round?

A funding round can expose differences between equity structures.

Suppose a startup introduces employee equity before its Series A.

The founders and investors may need to understand:

• current issued share capital
• outstanding ESOPs
• the ESOP pool
• growth shares, if any
• different classes of shares
• fully diluted ownership
• the effect of the new investment
• potential dilution under different scenarios

For an ESOP, the outstanding options can be incorporated into the company's fully diluted ownership analysis.

For growth shares, the terms of the shares themselves may need to be considered when modelling ownership and economic rights.

This is why founders should model the structure before implementing it, rather than discovering its impact during the next funding round.

5. How does employee vesting work?

ESOPs are commonly built around vesting schedules.

An employee might receive a grant that vests over a defined period, potentially with a cliff and periodic vesting thereafter.

The company can therefore use vesting to align the equity with continued employment.

Growth shares can also be subject to contractual conditions, restrictions or vesting arrangements, depending on how the structure is designed.

But because the employee may hold shares rather than simply an option, the consequences of those conditions need to be carefully documented.

For founders, the practical question is:

What happens to the employee's equity if they leave after six months, two years or four years?

That answer needs to be clear before either structure is implemented.

6. What are the tax and accounting implications?

This is an area where startups should avoid relying on generic comparisons.

The tax treatment of employee equity depends on the specific instrument, transaction and circumstances.

For ESOPs, Indian tax rules contain specific provisions dealing with securities or sweat equity shares allotted or transferred to employees, and eligible startups can have specific rules around the timing of certain ESOP tax obligations. The Income Tax Department continues to identify deferred ESOP taxation for eligible startups in its current return guidance.

Growth shares can create different tax questions because the employee may receive shares rather than an option.

There can also be accounting considerations around share-based payments, valuation and the terms attached to the instrument.

This is not an area where the company should choose an instrument based on a headline tax comparison alone.

The proposed structure should be reviewed with the company's legal, tax and accounting advisers.

7. What happens when employees actually realise the value?

Employee equity is only meaningful if employees understand how value could eventually be realised.

For ESOPs, the journey can involve:

Grant → vesting → exercise → shares → liquidity

The company may eventually provide a liquidity event through a transaction, buyback, secondary sale or another permitted route, depending on its circumstances.

Growth shares can provide a different economic structure, but employees still need to understand what creates liquidity and how their particular share rights operate.

A grant that looks attractive on paper can be difficult for employees to evaluate if they don't understand:

• the current company value
• the relevant hurdle or exercise price
• vesting conditions
• dilution
• transfer restrictions
• potential liquidity events

The employee communication strategy matters almost as much as the instrument itself.

ESOPs vs growth shares: the questions to compare

A side-by-side view of how ESOPs and growth shares differ across the employee equity lifecycle.

This table is a starting point, not a substitute for legal or tax advice.

So which should an Indian startup use?

There isn't one structure that works for every company.

An ESOP may fit a startup that wants a familiar option-based employee equity framework with grants that vest over time and can later be exercised.

A growth-share structure may be considered where the company wants to structure employee participation specifically around future value creation above an agreed threshold.

The right analysis depends on the company's stage, capital structure, employee population, existing shareholders, funding plans, tax position and the precise legal terms being proposed.

The important thing is to compare the economic and operational consequences, rather than choosing based on the label.

How Vestd India fits in

Whatever structure a company uses, the underlying ownership data needs to remain accurate.

Vestd India provides connected cap table, ESOP and shareholder management, allowing companies to track ownership alongside employee equity and broader equity events.

Teams can manage grants and vesting, maintain equity documentation, model funding and exit scenarios, track shareholder records and generate custom reports.

For companies considering more complex employee equity structures, having a clear view of current and fully diluted ownership becomes particularly important.

The platform doesn't replace the legal, tax or accounting work required to design an appropriate structure. It provides the equity-management infrastructure needed to keep the resulting ownership data organised and accessible.

The takeaway

Growth shares and ESOPs can both be used to align employees with a startup's future value, but they do so through different structures.

The important questions are not simply:

“Which gives employees more equity?”

or

“Which is better?”

Instead, founders should ask:

What economic interest are we trying to create?

When should employees participate in that value?

How will the structure affect our cap table and future dilution?

What happens when employees leave, the company raises funding or shareholders seek liquidity?

What are the legal, tax and accounting consequences of the specific structure?