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Pre-IPO startups urge Sebi to allow Esops for founders post-listing

Pre-IPO startups, where founder holdings have been significantly diluted, are urging the Securities and Exchange Board of India (Sebi) to allow greater flexibility in issuing Employee Stock Options (Esops) to founders—including those granted post-listing. Currently, Sebi regulations prohibit Esop issuance to promoters. However, in a recent proposal, the regulator suggested allowing founders (classified as promoters or part of the promoter group) to retain or exercise Esop benefits granted up to one year before filing draft IPO papers. Legal experts highlight that multiple funding rounds often dilute founder stakes to minimal levels, making Esops a critical tool to retain their alignment with the company's growth. Kaushik Mukherjee, partner at IndusLaw, said, 'While permitting pre-IPO Esops for founders is a positive step, post-listing incentives should also be considered. Founders drive the business, and their continued motivation benefits shareholders and the company alike.' A stock market fintech startup planning an IPO recently petitioned Sebi for relaxation on post-listing Esop issuance to founders, sources said. The appeal gains even more relevance for startups that have 'reverse flipped' to India from jurisdictions such as the US, where Esop norms are more lenient. However, experts doubt Sebi will ease restrictions further. Archana Tewary, partner at JSA Advocates & Solicitors, explained, 'Post-listing, share value is market-driven, and founder incentives must align with broader corporate governance standards. Differentiating startup founders from other listed company promoters raises parity concerns.' Akshat Khetan, founder of AU Corporate Advisory and Legal Services, added that Sebi prioritises uniformity and investor protection. 'Promoter status entails responsibilities beyond stakeholding—it's tied to the company's long-term growth, not just current ownership,' he said. The debate follows a recent case where a fintech founder had to forfeit Esops worth over Rs 1,800 crore due to regulatory constraints. While startups argue for founder-friendly Esop policies, Sebi's stance remains anchored in safeguarding investor interests, say legal experts.