SEBI Proposes ESOP Retention for Startup Founders

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).