Exercise price and FMV: how shares are valued for ESOP purposes

The exercise price is what the employee pays to convert options into shares. The FMV is what the shares are actually worth, the difference is the perquisite.

For unlisted companies, FMV for ESOP purposes must be determined by a SEBI-registered merchant banker or a CA using the prescribed method under Rule 11UA. This is not the same as the VC round valuation, it's a separate computation based on DCF or NAV method. Exercise price can be as low as ₹1 (face value), which maximises employee value but maximises perquisite tax. A higher exercise price reduces perquisite but also reduces benefit. Most startups set exercise price = FMV at grant date (so perquisite at exercise = growth in FMV, not total value).