Sebi Considers Allowing Startup Founders to Retain ESOPs After IPO Reclassification The proposal aims to bring more clarity and fairness to startup founders transitioning to public market roles, ensuring they do not lose out on early-stage compensation once their company enters the IPO process
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The Securities and Exchange Board of India (Sebi) is weighing a regulatory change that would allow startup founders to retain their employee stock options even after being labelled as promoters when their company goes public.
Many founders in the startup and tech ecosystem receive ESOPs instead of high cash compensation in the early stages of building their companies. These equity-linked incentives help align their goals with those of investors and shareholders. However, once the company prepares for a public listing, current Sebi rules require these founders to be reclassified as promoters—a designation that disqualifies them from receiving or exercising ESOPs.
Sebi noted that the existing regulations do not clearly address whether an individual who originally received ESOPs as an employee can continue to benefit from them after being classified as a promoter. The market regulator said that asking such individuals to forfeit already granted stock options would be unfair.
To address this, Sebi has proposed adding an explanation to the IPO guidelines to make it clear that ESOPs granted before a founder is reclassified as a promoter would remain valid and exercisable. However, the restriction on issuing fresh stock options to promoters would still apply once the founder's status changes in the draft red herring prospectus (DRHP).
The proposal aims to bring more clarity and fairness to startup founders transitioning to public market roles, ensuring they do not lose out on early-stage compensation once their company enters the IPO process.
