Sebi's New Rule: Empowering Startup Founders with ESOPs Post-IPO

SEBI’s ESOP Reform: A Quiet, Powerful Win for Startup Founders

Let’s face it—building a startup in India has never been for the faint of heart. Between razor-thin margins, repeated equity dilution, and the weight of regulatory scrutiny, founders have had to balance long-term vision with short-term survival. And for years, there was a peculiar irony: once a startup made it big enough to list, the rules punished the very people who got it there.

SEBI’s latest move, announced on June 18, 2025, changes that.

So, What Was the Problem?

Until now, startup founders were banned from exercising Employee Stock Options (ESOPs) after their companies went public—simply because they were classified as “promoters.”

This might’ve made sense for old-world industrialists with controlling stakes. But for tech founders? It was a mismatch. Most of them take home modest salaries, watch their equity get diluted over multiple funding rounds, and rely on ESOPs as their last real link to long-term wealth creation.

This rule—meant to prevent promoter misuse—was tying the hands of the very entrepreneurs India needs to retain.

What’s Changed?

SEBI’s June 2025 decision does something refreshingly logical: it allows startup founders to hold and exercise their ESOPs even after their company goes public, provided two simple conditions are met:

The ESOPs must have been granted at least one year before the company files its DRHP (Draft Red Herring Prospectus).
Full disclosure of these options must be made in the DRHP.

That’s it. No smoke, no mirrors—just a clear path that balances founder incentives with investor transparency.

Why This Matters—Far Beyond the Headlines

1. It Makes Indian IPOs Viable Again—for Startups

Founders no longer need to choose between going public in India and retaining their ESOP upside.

Previously, some startups even explored listing abroad or resorted to cap table “hacks” to work around this restriction. Those days may now be behind us.

2. It Aligns Founders with Public Shareholders

Let’s not forget—ESOPs aren’t handouts. They are performance-linked, taxable, and contingent on the founder staying with the company. Allowing them post-IPO ensures founders have skin in the game, just like their retail and institutional shareholders.

3. IPO Planning Just Got Cleaner

This reform removes a major legal and structural complication from IPO prep. No more reshuffling ESOP pools or hiding grants in grey zones. Startups can plan with clarity, and public investors know exactly what they’re buying into.

4. It Strengthens India’s Startup and Capital Market Story

This is one more step in a broader trend—right after SEBI’s work on the Innovators Growth Platform, simplified IPO disclosures, and reverse-flipping support. Together, these moves say one thing clearly: India wants to be the home market for its own unicorns.

5. It’s a Moral Signal, Too

Founders who built something from scratch—often with small teams, tight paycheques, and near-total risk—can now participate in the wealth they helped create, even after going public. That’s not just good policy. It’s fair.

But What About Safeguards?

SEBI hasn’t thrown caution to the wind. Here’s how the reform still protects market integrity:

The one-year rule: No pre-IPO windfalls. If you’re granting options to founders, it needs to be well before the IPO plan kicks off.
Mandatory disclosures: All such ESOPs must be declared in the DRHP—no hidden equity, no post-facto surprises for investors.

It’s a well-calibrated balance: founder flexibility with full investor visibility.

Who Benefits Right Now?

Several companies now gearing up for IPOs—Flipkart, PhonePe, Zepto, Pine Labs, and others—are expected to gain from this change. Many of these firms have founders who’ve taken deep personal risks, diluted their stakes across funding rounds, and still stuck around to build something lasting.

Now, they can continue that journey without being cut off from their own equity upside.

SEBI’s Reform in Context

SEBI Chairman Tuhin Kanta Pandey summed up the move well: “It protects public investors while respecting startup realities.” That’s a rare line to walk, and SEBI deserves credit for navigating it without overreach.

Across the industry, reactions have been overwhelmingly positive. Investors, startup boards, legal experts, and founders themselves are calling this a “breakthrough,” “timely,” and “founder-first”—terms not usually heard in regulatory circles.

Final Word: A Correction Long Overdue

This isn’t a tweak. It’s a structural correction—one that brings Indian capital market regulations in line with how modern companies are actually built.

For years, we’ve asked our entrepreneurs to build companies of global scale. Now, for the first time, we’re giving them a domestic IPO path that respects their journey, protects public shareholders, and keeps wealth creation aligned across the board.