5.05Equity, ESOPs and compensation

ESOPs for second-line employees: grant bands and refreshes

Stage: SeedCore

1. Core idea and who it's for#

The second line is everyone after the founders, the minus-one hires and the executives: the scientists, engineers, technicians and operators who join from roughly hire 6 onwards and soon make up most of the company. Each of their grants is small, but together they use most of the pool. Done badly, ESOPs for the second line become either a token that nobody values or a source of resentment, when people compare notes and find inconsistencies.

The main principle is to stop negotiating each grant and run a system . A good system has three parts:

  1. Grant bands. A band for each level, at each stage. Grants are set within the band by a rule, not by how well the candidate negotiates.
  2. A refresh policy. People who stay, grow or take on more get further grants on a predictable schedule, so their unvested equity doesn't run out at year 3 or 4, exactly when they're most valuable.
  3. Communication. Every grant comes with its value in money, the vesting schedule, the tax treatment and the realistic routes to liquidity. In India that includes the company's buyback history and plans.

There's also a shift to plan for. At first, grants are expressed as a percentage . As the company grows, switch to a notional cash value converted to options at the current price, so grants stay fair as the share price rises. General Catalyst's 2024 refresh survey found that early-stage companies focus on percentage ownership, while more mature ones use notional value (Redefining Work, on General Catalyst).

Who this is for: founders moving from 5 to 50 people, typically between seed and Series B, who need an ESOP policy for the wider team. For the first hires and executives, see 5.04. For pool sizing, see 5.01.

2. Evidence: grant sizes, refreshes and liquidity#

Grant sizes fall fast after the first five hires. AngelList data shows typical grants as a share of fully diluted equity at the time of grant:

  • hires 1–5: 0.5–2.0% each;
  • hires 6–20: 0.1–0.5% each;
  • hires 21–50: 0.05–0.25% each (Stealth Agents, citing AngelList).
  • The Index and Balderton guidance for non-executives, as summarised by SeedLegals, is:
  • managers and key functions 0.2–0.7%;
  • other employees 0–0.2% (SeedLegals).

Refresh grants are common, and timing matters. According to Carta:

  • about 47% of employees at Carta startups get some kind of refresh by year 2; nearly 70% of those who reach the end of their initial 4-year grant receive one;
  • refreshes typically come 2–3 years after the initial grant;
  • a tenure-based refresh is traditionally another 4-year grant with no cliff (Carta).

In 2022–24, about 20% of employees got a refresh at year 1 (Carta Learn). Carta also describes another pattern: a grant made at year 2 or 3 that only starts vesting once the new-hire grant has fully vested, then vests over one year (Carta).

But refreshes are getting more selective. General Catalyst's 2024 survey found that at most companies, fewer than 25% of employees receive refresh grants. Its three types are performance, tenure and promotion grants (Redefining Work). Sequoia's client data shows large refresh grants fell 42% between 2023 and 2025, with AI companies the exception (Inc.).

The practical rule: budget for refreshes, but target them . Plan refreshes before employees have vested about 75% of their first grant (Cris Cafiero).

India: liquidity is what makes ESOPs credible.

  • Since 2020, more than 100 Indian startups have run ESOP buybacks and liquidity programmes worth about $1.7 billion (Tribune, citing TheKredible).
  • In 2025, 12 startups let more than 9,265 employees realise about ₹1,409 crore (Inc42). Q1 2026 alone saw about $220 million of buybacks, more than in all of 2024 or 2025 (Pulse, citing Entrackr).

For a pre-seed deeptech company, buybacks are years away. Still, an explicit intention, such as "we aim to offer a liquidity window when we raise Series B or later", makes second-line ESOPs far more valuable to Indian candidates.

3. Method: bands, a refresh policy and clear communication#

Step 1. Define bands by level. Each band has a target (the midpoint) and a range of ±25%. Express each band as a percentage of salary , converted to options at the current price per share. That keeps grants fair as the valuation rises, and it is easy to explain.

Level Who Seed to Series A target (option
value as % of annual salary)
L3 — lead or manager Team lead, senior scientist 50–70%
L4a — senior IC 5+ years' experience, owns
a domain		 35–50%
L4b — IC Engineer, scientist,
operator		 20–35%
L5 — associate or Junior or support roles 10–20%
technician

These are illustrative starting points, consistent with Index's 40–85% for senior seed hires (5.04), scaled down by level. Calibrate them to your market. To convert a band to a number of options: options = (salary × band %) ÷ price per share . Use the latest preferred price, or the 409A or FMV, and state which.

Step 2. Decide who gets equity. At deeptech startups the default should be everyone full-time , technicians included, because retention matters and the cost is small. If you exclude anyone, write down why.

Step 3. Write a refresh policy.

  • Promotion grant: on promotion, a top-up to the new level's target minus any unvested value remaining from the old grant.
  • Performance grant: once a year, for roughly the top 20–25%, worth 25–50% of the current level's new-hire grant.
  • Tenure grant: at about 2.5 years, for everyone in good standing, so that unvested equity doesn't run out. It can vest after the initial grant ends (back-loaded) or alongside it.
  • Budget: reserve about 20–30% of the remaining pool each year for refreshes. Model it with the hiring plan (5.01, 5.03).

Step 4. Communicate every grant properly. Every grant letter should include:

  • the number of options;
  • the strike price;
  • the vesting schedule;
  • the value at the current price, and at two illustrative exit values;
  • the tax treatment where the employee lives;
  • the exercise window after leaving;
  • the company's intentions on liquidity.

Hold a 30-minute equity session for each new cohort.

Step 5. Review once a year. Check the bands against market data, check pool usage, and check fairness: compare grants by level, gender and location for unexplained gaps.

Worked example (illustrative)#

A medical-imaging startup with 18 people, after its seed round, has a price per share of $2.00 at the last round and a 409A or FMV of $0.40. Its policy uses the bands above, at the preferred price.

Hire Level Salary Band Option value Options = value ÷ $2.00
Imaging scientist L4a $140,000 40% $56,000 28,000
Firmware engineer L4b $120,000 30% $36,000 18,000
Lab technician L5 $60,000 15% $9,000 4,500

Two years later, at the Series A price of $6.00, the imaging scientist is promoted to L3. Her new target is 60% of a $160,000 salary, or $96,000. Her unvested original grant is worth 14,000 options × $6 = $84,000. Her promotion grant is therefore ($96,000 − $84,000) ÷ $6 = 2,000 options .

Because the shares have risen in value, a smaller number of new options keeps her at target. That is the point of granting by value. Her grant letter shows all of this, and her tenure refresh is scheduled for month 30.

4. India / US / UK differences#

India#

  • Tax hits twice. The perquisite is taxed at exercise on the difference between FMV and the exercise price, and there is capital-gains tax on sale. Eligible DPIIT startups (with an IMB certificate) can defer the perquisite tax for employees until the earliest of: 60 months (for allotments from 1 April 2026), the sale of the shares, or the employee leaving the company (5.01). Explain this in every grant letter, because many candidates assume ESOPs mean an immediate tax bill.
  • Liquidity history matters. Indian candidates value ESOPs by the liquidity they've seen. Use the buyback evidence in section 2, and state your own intentions without making promises.
  • Exercise windows after leaving are set by the plan. Many Indian startups now allow long windows, or exercise only at a liquidity event, which reduces the cash burden on employees.
  • One-year minimum vesting applies under Rule 12, so refreshes also need at least one year before any shares vest.
  • ESOP trusts are often used to hold shares and run buybacks or secondary sales. Set one up before your first liquidity programme.

US#

  • ISOs are standard for employees. The $100,000 a year exercisable limit rarely binds for second-line grants.
  • The exercise window after leaving defaults to 90 days for ISO treatment. Many startups extend it to 5–10 years, converting to NSOs. That is employee-friendly, but it uses up more of the pool.
  • A 409A refresh is needed at least every 12 months, or after a material event, before new grants are made.
  • Refresh structure: a common pattern is a grant that vests over 4 years with no cliff, or annual grants that vest over 1–2 years.

UK#

  • EMI suits most second-line employees. There's no income tax at exercise if the option was granted at market value, and Business Asset Disposal Relief may apply to gains. From April 2026 the company limit is £6m, so it rarely binds at seed.
  • Leavers. EMI has a 90-day window for tax advantages after leaving employment. The plan may allow later exercise, but as non-EMI options.
  • Refreshes count towards the individual £250,000 limit at grant value, which only matters for senior people.

Scripts#

Explaining a grant to a new hire:

"Alongside your salary, you're getting 18,000 options. At our last round price that's about $36,000, vesting over four years with a one-year cliff. If we reach our Series B plan, the same options could be worth several times that. If we don't, they could be worth nothing. Here's how tax works for you, and here's what we intend to do about liquidity."

Explaining the refresh policy at an all-hands:

"Everyone gets a grant on joining, sized by level. On top of that, there are three ways to get more: promotion, strong performance at the annual review, and a tenure grant at about two and a half years. The rules are written down, so nobody has to negotiate for them."

When someone compares grants:

"Grants are set by level and by the share price on the day you joined. People who joined earlier got more options because each one was cheaper and the risk was higher. The value at grant should be similar for the same level. If you think yours isn't, let's look at it together."

Common mistakes#

  1. Negotiating every grant, so the best negotiators end up with more equity, not the best people.
  2. Granting a percentage forever. Once the price rises, fixed percentages become too expensive for the pool.
  3. No refresh policy, so your best people run out of unvested equity in year 3 or 4 and leave.
  4. Refreshing everyone equally, which uses up the pool without rewarding performance.
  5. Grant letters with only an option count. Employees can't value them, and so don't.
  6. Leaving out Indian tax and liquidity context, so candidates value ESOPs at zero.
  7. A 90-day exercise window by default with no thought about the cash burden on employees who leave.
  • 5.01 ESOP pool sizing
  • 5.02 ESOP plan design: India vs US
  • 5.03 Pool top-ups
  • 5.04 Allocating equity by level
  • 5.06 Vesting schedules and back-loaded vesting
  • 6.02 Hiring the minus-one team

Sources#

The bands and the worked example are illustrative, so calibrate them to your market and stage. Last checked November 2026.

← 5.04 Allocating equity by level: founding team, minus-one hires, executives, individual contributors6.02 Hiring the minus-one team before funding or PMF →