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SEBI Proposes ESOP Retention for Startup Founders

  • 22 Mar 2025

On 21st March 2025, SEBI proposed a regulatory change that would allow startup founders to retain their Employee Stock Option Plans (ESOPs) even after their company goes public.

  • SEBI aims to support startup founders who receive ESOPs instead of cash salaries in the early stages of their company’s growth.
  • ESOPs help align founders’ interests with shareholders, but as startups raise funds, founders’ ownership stakes get diluted.
  • Under existing SEBI rules, founders are classified as promoters at the time of an Initial Public Offering (IPO), making them ineligible for ESOP benefits.
  • Current regulations do not allow promoters to receive ESOPs, creating uncertainty for founders who had stock options as employees before the IPO.
  • SEBI highlighted that an employee-turned-promoter may have to forfeit vested and unvested ESOPs, which could be considered unfair.
  • The proposed rule change would allow founders to retain ESOPs granted before the IPO, even after being classified as promoters in the Draft Red Herring Prospectus (DRHP).