(The Weekend Insight) - The “Early Employee Betrayal” Phenomenon in India

In today’s deep-dive, we will examine a quiet fracture in India’s startup story - the growing gap between the promise of ownership sold to early employees and the economic reality many eventually experience. This is not about startup failure. It is about something more uncomfortable: companies that succeed, raise multiple rounds, make headlines - and yet leave their earliest believers with diluted stakes, no liquidity, and diminished influence.

“You own 0.3%.” That line has convinced thousands of young engineers to take lower salaries, move cities, and work 14-hour days.

But what does it actually mean?

In most Indian startups, employees are told the number of options they have. They are rarely told their fully diluted percentage ownership. Internal dashboards often multiply vested options by the last funding round’s share price and display a “value.”

A junior engineer at Series B might see:

“Current ESOP value: ₹2 crore.”

But no one is buying those shares.

No IPO. No buyback. No secondary window.

Just a number on a portal.

And in India, where startups stay private for 10–12 years on average, that number can remain theoretical for nearly a decade .

The betrayal narrative begins when employees anchor life decisions - housing, lifestyle, career trade-offs - on paper wealth that never converts.

Defining the Phenomenon: It’s Not About Failure

It’s important to clarify what this is not. And this is not about startups failing.

Failure is normal risk.

The “betrayal” sentiment typically arises in companies that raise multiple rounds and look successful externally - but where early employees discover that:

1. Their ownership percentage has shrunk dramatically.

2. Liquidity is discretionary and rare.

3. Their influence declines sharply after Series B.

The implicit deal sold during hiring - “You are an owner in the upside” - often collapses under structural mechanics .

The key insight here: The disappointment is rarely emotional. It’s mathematical.

Betrayal #1: Dilution - The Silent Shrinking

Every funding round changes the cap table.

Early employees typically experience three waves of dilution:

1. New Preferred Shares Issued

Investors receive new preferred shares. Everyone else is diluted.

2. Pre-Money ESOP Pool Top-Ups

Investors often demand the ESOP pool be expanded before their money comes in. That dilution cost is borne by founders and existing ESOP holders - not the new investor .

3. Liquidation Preferences

Most Indian growth rounds carry at least 1× liquidation preference. In moderate exits, investors recover capital before common shareholders (including ESOP holders) see meaningful proceeds .

An employee who thought they owned 0.3% at seed may discover they effectively own below 0.1% by Series C.

But their HR dashboard still shows the same number of options. Ownership feels constant. Economics shrink.

Betrayal #2: The Liquidity Mirage

Even if ownership remains meaningful, liquidity is not guaranteed.

In India, ESOP liquidity comes through:

• Buybacks

• Investor-led secondary sales

• IPOs or acquisitions

All of which are discretionary board decisions .

Unlike Silicon Valley - where secondary markets are deeper and IPO windows more frequent - India historically lacked systematic liquidity infrastructure .

That is changing slowly. And here are some of the examples:

• Swiggy has conducted multiple ESOP liquidity events, enabling over ₹1,000 crore in cumulative liquidity across roughly 3,200 employees .

• Urban Company ran its fifth ESOP secondary sale worth ₹203 crore in 2024, with ₹306 crore enabled cumulatively .

• Flipkart has executed large-scale buybacks totaling roughly $1.5 billion since 2018, including a $50 million programme ahead of IPO .

• Darwinbox completed its third buyback in four years (₹86 crore) .

• PhonePe initiated buybacks worth ₹700-800 crore pre-IPO .

• Groww’s IPO is expected to unlock ₹2,400-2,500 crore in employee wealth .

• STAGE enabled ₹4.2 crore liquidity for early employees after six years .

These companies demonstrate that ESOP promises can translate into bank balances.

But they are still the exception - not the rule.

For many employees, ESOPs resemble “Hotel California”: you can vest, but you can’t exit .

Betrayal #3: Power Shift After Series B

By Series B, startups institutionalize.

Boards formalize. Professional CXOs arrive. Org structures harden.

Early generalists - who handled marketing, ops, hiring, product, and firefighting - often find themselves reporting to newly hired VPs.

Common patterns include:

• Title compression

• “Founder’s office” parking roles

• Scope reductions during reorgs

The same employee who stayed through 18-month salary delays may now be considered “not scaled enough.”

The betrayal is not always malicious. It is structural.

Growth-stage governance rewards predictability, not loyalty.

The Tax Trap: Paying for Illiquid Risk

Indian ESOP taxation adds another layer.

Under Section 17(2)(vi), ESOPs are taxed as salary perquisites at exercise - based on FMV minus strike price .

Employees must:

• Pay the strike price

• Pay tax on notional gains

• Without receiving any cash

This creates the “cash trap” - paying real money for illiquid shares.

Cases like the Flipkart–PhonePe restructuring further complicated matters, with divergent High Court rulings on whether compensation was taxable as salary or capital receipt.

Employees discovered that ESOP risk is not just business risk - it is legal and tax complexity risk.

When It Breaks: TechProcess and Litigation

The TechProcess case became symbolic.

Former employees alleged they were offered ₹13 per share while investors received around ₹202 per share in an acquisition, leading to lawsuits .

Regardless of final outcomes, such cases crystallize perception:

Ownership rhetoric. Investor protection reality.

The more opaque the communication, the stronger the betrayal narrative becomes.

Why This Hurts More in India Than Silicon Valley

Four structural amplifiers:

1. Fewer secondary markets

2. Discretionary liquidity controlled by boards

3. Taxation at exercise without liquidity

4. Slower IPO cycles historically

In Silicon Valley, ESOP millionaires became a cultural myth.

In India, ESOP anxiety has become a cultural reality.

The Emerging Split: Trust Moats vs Retention Theatre

The ecosystem is bifurcating.

Leaders:

Companies with repeated, transparent liquidity programmes and ESOP education.

Lagging Long Tail:

Startups that emphasize ownership rhetoric but lack systematic liquidity paths. The difference increasingly affects hiring.

Senior candidates now ask:

• What percentage of fully diluted cap table is ESOP pool?

• Have you done buybacks before?

• What is the exercise window post-exit?

ESOP credibility is becoming a competitive advantage.

What Early Employees Could Have Done Differently

Employees cannot eliminate risk. But they can model it.

Questions to ask:

• How is the ESOP pool expanded - pre-money or post-money?

• What is the post-employment exercise window?

• Has the company historically run liquidity events?

Track:

• Fully diluted shares over time

• Your percentage, not just option count

• Exit likelihood and timeline

Ownership is a financial instrument. Treat it as one.

The Real Insight: This Is a Design Problem

The “betrayal” narrative is strongest where:

• Ownership is pitched emotionally

• Liquidity is treated as a favour

• Governance conversations are opaque

Companies that design predictable liquidity - like Swiggy, Urban Company, Flipkart, Darwinbox, PhonePe, and Groww - demonstrate that ESOPs can work in India .

The difference is not valuation. It is intent.

Closing: The Trust Premium

India’s next cycle will reward startups with clean ESOP credibility.

Trust compounds. Betrayal stories spread faster than funding announcements.

Early employees are not asking for charity. They are asking for alignment between:

The story told at hiring. And the economics delivered at exit. The companies that understand this will build not just products - but trust moats.

And in India’s tight tech ecosystem, that may be the most defensible moat of all.