SEBI cheers start-up founders with new ESOP retention rule
What's the story
The Securities and Exchange Board of India (SEBI) has introduced a new rule that allows start-up founders to retain their Employee Stock Ownership Plans (ESOPs) even after being classified as promoters.
The move has been widely welcomed by investors, founders, and policy experts in India's tech ecosystem.
The change is seen as a solution to the long-standing conflict between India's listing regulations and the realities of high-growth start-ups.
Regulatory change
Previous regulations and challenges for tech startups
Previously, Indian regulations did not differentiate between traditional promoters and start-up founders, preventing both from holding stock options.
This posed challenges for tech start-ups where founders often take low salaries, face multiple dilution rounds, and depend on ESOPs as deferred compensation.
Many had to rework their cap tables before IPOs to remain eligible.
The new SEBI rule eases this burden by allowing founders to hold or exercise ESOPs post-IPO under certain conditions.
Rule details
SEBI's new rule: Conditions for exercising ESOPs
Under the new SEBI rule, founders can hold or exercise ESOPs after going public, provided the stock options were granted at least one year before filing the Draft Red Herring Prospectus (DRHP).
These grants also have to be disclosed in the DRHP.
The move is part of a larger effort to improve ease of doing business and increase flexibility in public listings.
Positive response
Founders and investors welcome SEBI's new rule
Siddarth Pai, founding partner at 3one4 Capital, called the change a "fantastic step in the right direction."
He said that the previous framework created unnecessary complexity around founder ESOPs.
Vinod Murali, co-founder and managing partner at Alteria Capital, also welcomed the reform as an excellent move.
"This relaxation allows founders to participate further in value creation beyond the listing timeline where real value gets created in the long run," he added.
Leadership impact
SEBI's rule strengthens continuity at leadership level
The new SEBI rule also strengthens continuity at the leadership level, not just for listing but also for long-term operations.
Mayank Kumar, co-founder of BorderPlus and upGrad, said this change incentivizes promoters and founders for the long term.
The Startup Policy Forum hailed SEBI's decision as "a big relief to founders of new-age companies" and a step that "will enable them to avail skin-in-the-game benefits."