For instance, an individual joins a startup on January 1, 2020, and receives 500 ESOPs with a 1 year cliff and bi-annual 4-year vesting period with the vesting price set at INR 200. The first vesting date in this scenario will be the June 1, 2021 and on that particular date, the individual will have the option to purchase 125 stocks of the company for INR 200 each. In case the price of the stock has increased to INR 500, the individual can exercise the option made available to him and purchase 125 stocks for INR 200 each, thus making a profit of INR 300 on each stock by simply exercising his option to purchase at the vesting price. This of course comes with tax implications.
Now, in case the value of a stock reduces from INR 200 to INR 150, the individual does not necessarily have to exercise his / her option to purchase stock as doing so will result in a loss of INR 50 per share. Instead, he / she can wait for prices to rise again and then exercise their option to purchase for a potential profit.