AS | Ankit Sarawagi|Founder, CFOmatrix·July 2026·9 min read | Concept guide |
- A SAR pays the appreciation, not the share. The employee receives the increase in value over a fixed base price and never pays an exercise price to buy a share.
- Cash-settled or equity-settled. Cash-settled means no dilution but a cash outflow at settlement; equity-settled conserves cash but issues shares and dilutes.
- No upfront cost for the employee. Unlike an ESOP, there is nothing to buy, so a SAR is attractive when you do not want employees to fund an exercise.
- SAR and phantom stock differ. A SAR rewards only growth from a base price; phantom stock mirrors the full value of a notional share.
- Taxed as salary on payout. The settlement amount is salary income for the employee, with TDS under section 192.
| ₹0 Upfront cost to the employee, unlike an ESOP exercise | 2 Ways to settle: cash or equity | Salary How the payout is taxed for the employee |
| 1. What a stock appreciation right is 2. How a SAR works, step by step 3. Cash-settled vs equity-settled SARs | 4. SAR vs ESOP vs phantom stock 5. When startups use SARs 6. How SARs are taxed |
What a Stock Appreciation Right Is
A stock appreciation right is the right to receive the increase in your company’s share value over a fixed base price, without buying the share. You grant an employee a number of SARs and fix a base price, usually the fair market value on the grant date. If the value has gone up by the time the SAR vests and settles, the employee gets the difference. If it has not moved, the SAR is worth nothing. The employee only gains from the appreciation, which is exactly where the name comes from.
The important word is appreciation. A SAR is not a share and it is not an option to buy a share at a discount. It is a promise that says: whatever this share gains in value from today, that gain is yours on the number of rights I have granted you. Because the employee never pays anything to buy the underlying share, a SAR carries no upfront cost for the employee, which is its defining feature and the reason founders reach for it. For the wider picture of how equity instruments fit together, see our pillar guide on running ESOPs and equity the company-side way.
A quick worked example. You grant 1,000 SARs at a base price of ₹100. Four years later the share value is ₹250. The appreciation is ₹150 per SAR, so the payout is 1,000 × ₹150 = ₹1,50,000, delivered as cash or as shares of equal value. If the value had stayed at ₹100, the payout would be nil.
How a SAR Works, Step by Step
A SAR has four moving parts: the grant, the base price, vesting, and the payout on appreciation. Follow them in order and the instrument is straightforward.
The elegance is that steps one to three cost the employee nothing and cost you no cash. The only cash or share event is step four, and it only happens if the value has actually risen. That alignment, the employee is paid precisely for the growth they helped create, is why SARs read as a clean incentive.
Cash-Settled vs Equity-Settled SARs
SARs come in two flavours, and the only difference is how the appreciation is paid. The value earned is identical in both; only the currency of the payout changes, and that single choice decides whether you dilute or spend cash.
- Appreciation paid as cash
- Employee does not become a shareholder
- No new shares, so no dilution
- Cash outflow at settlement
- Simplest to administer; keeps the cap table untouched
- Appreciation delivered as shares of equal value
- Employee becomes a shareholder
- New shares issued, so existing holders dilute
- Conserves cash
- Adds a name to the cap table
The trade-off is the classic cash-versus-dilution choice. A cash-settled SAR keeps your cap table clean and your ownership undiluted, at the price of a cash payout when the SAR settles, which is why it suits companies that would rather not add shareholders. An equity-settled SAR protects cash but hands out shares, so it behaves much more like an ESOP on the ownership side. Decide which constraint, cash or dilution, is tighter for you before you pick.
SAR vs ESOP vs Phantom Stock
SARs sit alongside two neighbours founders often confuse them with. An ESOP gives the employee an option to buy Equity Shares by paying an exercise price. Phantom stock is a cash bonus that tracks the value of a notional share. Here is how the three line up on the points that matter.
| ESOP | SAR (cash-settled) | Phantom stock | |
| What is rewarded | Value above exercise price on a bought share | Appreciation over the base price | Full value of a notional share |
| Upfront cost to employee | Yes, pays the exercise price | None | None |
| Becomes a shareholder? | Yes, on exercise | No | No |
| Settlement | Shares | Cash | Cash |
| Dilution | Yes | No | No |
| Employee tax on payout | Salary (perquisite at exercise) | Salary | Salary |
Read the table row by row and the family resemblance is clear. A cash-settled SAR and phantom stock are close cousins, both cash bonuses with no purchase and no dilution, and both taxed as salary. The one real difference is what they measure: a SAR rewards only the growth from a base price, so it pays nothing if the value stays flat, while phantom stock mirrors the whole value of a notional share and can even track dividends, so it can pay out on a flat price. The ESOP is the odd one out because the employee actually buys shares and joins the cap table. Read the full companion piece on phantom stock for startups for how that instrument works in detail.
When Startups Use SARs
SARs are not the default startup instrument, but they earn their place in specific situations. The common thread is a founder who wants to share upside without an employee having to fund an exercise and, for cash-settled SARs, without touching the cap table.
A cash-settled SAR still needs a defensible valuation at grant and at settlement, because both the base price and the payout depend on it. Keep dated valuation records the same way you would for an ESOP, so the numbers stand up later.
A cash-settled SAR is a promise to pay cash later, so it is a real liability, not free equity. If a lot of SARs settle in a strong year, the cash outflow can be large and lands exactly when everyone is celebrating a high valuation. Model the settlement cost before you grant at scale.
How SARs Are Taxed
The tax treatment of a SAR is refreshingly simple on the employee side. Because there is no purchase step and no share to buy, there is no separate perquisite-on-exercise event as there is with an ESOP. The taxable event is the settlement payout itself. When the SAR settles and the employee receives the appreciation, that amount is treated as salary income in the year it is received, and the employer must withhold TDS under section 192, exactly like any other salary component.
“With a SAR you strip out the part employees find hardest about ESOPs, which is finding the cash to exercise. There is nothing to buy. The payout just arrives as salary and is taxed as salary. That simplicity is a large part of the appeal.”
Ankit Sarawagi, CFOmatrixOn the company side, the accounting depends on how you settle. A cash-settled SAR is a cash-settled share-based payment under Ind AS 102, which means it is generally recognised as a liability and remeasured to fair value each reporting period until it settles. An equity-settled SAR is treated as an equity-settled award, closer to how an ESOP is accounted for. The difference matters for how the charge moves through your profit and loss, so bring it up with your auditor early. For the employee-side view of how equity awards are taxed more broadly, see our detailed guide to ESOP taxation in India.
Frequently Asked Questions
What is a stock appreciation right?
A stock appreciation right, or SAR, is the right to receive the increase in a company’s share value over a fixed base price, without buying the share. The company grants a number of SARs at a base price, usually the fair market value on the grant date. When the SAR vests and is settled, the holder receives the difference between the share value at settlement and the base price, multiplied by the number of SARs. If the value at settlement equals the base price, the SAR is worth nothing, so the holder only gains when the value has risen. Because the holder never pays an exercise price to buy shares, a SAR carries no upfront cost for the employee.
How does a SAR work?
A SAR has four moving parts. First, the grant: the company issues a number of SARs to the employee. Second, the base price: the reference value, usually the fair market value on the grant date, that the appreciation is measured from. Third, vesting: the SARs vest over time, commonly a four-year schedule with a one-year cliff, so the holder earns the right gradually. Fourth, the payout: once vested and settled, the holder receives the appreciation, meaning the settlement value minus the base price, times the number of vested SARs. That payout is delivered as cash, or as shares of equivalent value, depending on whether the SAR is cash-settled or equity-settled.
What is the difference between a cash-settled and an equity-settled SAR?
The difference is only in how the appreciation is paid out. A cash-settled SAR pays the appreciation as cash, so the employee never becomes a shareholder and the company issues no new shares, which means no dilution but a cash outflow at settlement. An equity-settled SAR delivers the appreciation as shares of equivalent value, so the employee becomes a shareholder, the company conserves cash but issues new shares and therefore dilutes existing holders. In both cases the value earned is the same appreciation over the base price; only the currency of the payout, cash or shares, changes.
What is the difference between a SAR and an ESOP?
Under an ESOP the employee is granted options and, on exercise, pays the exercise price to actually buy Equity Shares, becoming a shareholder. Under a SAR the employee is granted the right only to the appreciation over a base price and pays nothing to buy a share; a cash-settled SAR does not even make them a shareholder. So an ESOP involves an upfront cash outlay by the employee at exercise and issues shares, while a SAR involves no purchase cost for the employee and, if cash-settled, no share issue and no dilution. The economic upside can be similar, but the mechanics, the cash flows and the dilution differ.
What is the difference between a SAR and phantom stock?
Both are cash-based incentives that track share value without the employee buying shares, but they measure a different thing. A cash-settled SAR pays only the appreciation, the increase in value over a base price, so it is worth nothing if the value does not rise. Phantom stock usually tracks the full value of a notional share at settlement, and some phantom plans also mirror dividends, so it can pay out even when the price has stayed flat. In short, a SAR rewards growth from a base price, while phantom stock mirrors the whole value of a share. Both are settled in cash and taxed as salary.
How are SARs taxed in India?
For the employee, the payout from a SAR is treated as salary income in the year it is received, and the employer must withhold TDS on it under section 192, just like any other salary component. There is no separate purchase step for the employee to be taxed on, because a SAR has no exercise price; the taxable event is the settlement payout itself. For the company, a cash-settled SAR is generally accounted for as a liability and remeasured to fair value each period under Ind AS 102, since it is a cash-settled share-based payment, whereas an equity-settled SAR is treated as an equity-settled award. This is general information, so confirm the treatment for your specific plan with a tax and accounting advisor.
Sweat Equity Shares: A Founder’s Guide
Running ESOPs and Equity: The Company-Side Guide
This is general educational information for founders, current to mid-2026, and is not legal, tax or investment advice. Benchmarks such as vesting schedules are indicative and vary by plan. Tax and accounting treatment (section 192, Ind AS 102) depends on the specific structure of your plan and can change; verify the current position or consult a professional before acting on a specific matter.
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. This guide draws on hands-on experience helping founders design and administer equity incentives, from ESOPs and SARs to phantom stock, correctly and from the first grant. |