Founder ESOPs at IPO: what changed in 2025 for startups

An ESOP, or employee stock option plan, gives a person the right to buy shares at a fixed price later. In India, the rules for listed companies bar promoters from receiving share-based employee benefits. A promoter is the person or group in control of the company, and founders often fall into that bucket in the IPO draft, because they hold a large stake.

The problem was obvious. A founder who held ESOPs and was then named a promoter in the DRHP could lose them, or had to cash them in before filing. In 2025, SEBI changed this for founders. Under the new rule, as of November 2026, options granted at least one year before the DRHP filing can stay in place.

SEBI's board approved the change at its meeting on 18 June 2025. According to law-firm notes, it was notified on 8 September 2025 as a new Regulation 9A in the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, with matching changes elsewhere.

The rule lets an employee who is identified as a promoter or promoter group member in the draft offer document continue to hold and exercise options, stock appreciation rights (SARs) or other share-based benefits. The condition is that the benefits were granted at least one year before the DRHP was filed. The change applies even after the company lists, according to the summaries.

The relief is narrow. New grants to promoters remain barred, so a founder cannot receive a fresh batch of options in the run-up to an IPO or after listing. The one-year gap is meant to stop a founder from topping up options just before going public.

Other IPO rules continue to apply. Promoter shares are subject to lock-in after listing, and the company must disclose the options in its offer document. Whether options that are not exercised yet count as part of the promoter holding is a point that lawyers have discussed, and commentators have flagged drafting gaps in the new rule, including how it interacts with other ICDR provisions. Read the rule text and take advice for a particular case.

Options sit alongside several other IPO rules. A prospectus must describe the share-based schemes, the number of options outstanding and the strike prices. Promoter holdings are subject to a minimum promoter contribution and a lock-in, and how options count towards these depends on the scheme and on whether they have been exercised. Lawyers advise founders to map these rules before the DRHP is drafted.

The one-year gap also pushes planning earlier. A company that wants a founder to hold options after listing needs to grant them well before the filing, so a refresh grant decided a few months before the IPO may not help. This is a reason why startups review the founder pay package a year or more ahead of the planned IPO, as part of the ESOP pool planning covered in the related guides.

Founders of venture-backed startups often take a modest salary and rely on equity. For years, many were advised to exercise or surrender options early, sometimes triggering a tax bill with no cash to pay it. The change removes a forced decision before filing.

It also helps in a quieter way. If founders keep options that vest over time, their pay stays tied to the company's share price after listing, which investors like. For other employees, the rule changes nothing directly, but it may make founders less likely to restructure the pool just before the filing.

In the DRHP, promoters are named based on control and shareholding. A founder who holds a large stake, or who runs the company, is usually named. Some startups name only the founders, others name an investor with board control as well. Where the line falls decides who is affected by the ESOP bar.

The guide on promoter versus founder explains the difference, and the guide on whether founders can get ESOPs covers the earlier-stage position. In an IPO draft, a person who is a promoter is also a founder only if the draft says so.

Before Regulation 9A, the SBEB and SE Regulations did not let a promoter or promoter group member take part in an employee stock scheme of a listed company. A startup founder who had options and was classed as a promoter in the DRHP therefore had to deal with them before filing, usually by exercising them or surrendering them.

Exercising options costs money, since the founder must pay the strike price, and it can trigger tax on the gain, even though no shares have been sold for cash. Surrendering them meant losing part of the reward for years of low pay. Founders of venture-backed companies, who often hold only a small direct stake after several funding rounds, felt this most.

SEBI discussed the point in a consultation paper in early 2025 and then moved it to the board in June. Law firms welcomed the intent, though some wrote that the wording of the rule leaves questions, including how it works with other ICDR provisions on share-based benefits.

These points come from law-firm and press summaries, as of November 2026.

• SEBI board approval: 18 June 2025.
• Notification of the amendment: 8 September 2025, according to law-firm notes.
• Condition: options or SARs granted at least 1 year before the DRHP filing.
• New grants to promoters: still not allowed.
• Where it sits: Regulation 9A of the SBEB and SE Regulations 2021.

A story that says a founder will "retain ESOPs after IPO" usually refers to this rule. It does not mean the founder gets a new grant. It means older options, granted early enough, are allowed to stay.

When a DRHP lists the founders' options, look for the grant dates. Options granted within the year before filing are the ones that may not qualify. Nothing here is legal or tax advice, so a founder should confirm the treatment of specific options with a lawyer and a tax adviser.