Introduction
In a landmark decision on June 18, 2025, the Securities and Exchange Board of India (SEBI) announced a major relief for startup founders. A long-standing regulatory barrier—disallowing promoters from holding or exercising Employee Stock Option Plans (ESOPs) during IPO preparation—has been relaxed. Now, founders-turned-promoters can retain and exercise ESOPs granted at least one year before filing the draft red herring prospectus (DRHP)
For founders and investors alike, this move marks a significant milestone, smoothing the path to public listing and aligning interests in a founder-driven ecosystem.
What’s Changed?
Previously, promoting status during the IPO meant founders had to liquidate any vested ESOPs before the IPO filing. SEBI’s new ESOP framework introduces two crucial shifts:
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Pre-IPO ESOP grants protected: If options were granted at least one year before DRHP filing, founders can now retain and exercise them post-listing
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New ESOP grants still prohibited: Promoters cannot receive new ESOPs after becoming promoters, preserving corporate governance integrity
Why This Matters
✅ Solves a key startup challenge
Founders previously faced a dilemma: exit their ESOPs early to comply, or forgo them and bear loss if the company grew. This impaired motivation and retention .
✅ Aligns incentives with long‑term performance
That one-year cooling‑off period balances governance with founders’ vested interests, enabling continued equity growth post‑IPO
✅ Supports reverse‑flipping
The relaxation also supports reverse‑flip startups—those reincorporating in India before going public—by allowing them to maintain founder benefits
✅ Promotes public listings
By reducing friction in IPO prep, the policy is expected to encourage more startups to list—without founders suffering diluted interests
Key Provisions at a Glance
| Provision | Previous Rule | New Rule |
|---|---|---|
| Eligible recipients | Founders-turned-promoters | Founders with ESOPs granted ≥1 year before DRHP |
| Retain/exercise ESOPs | Required to liquidate before IPO | Can retain and exercise pre-IPO ESOPs |
| Granting new ESOPs to promoters | Disallowed | Still disallowed |
| Cooling-off requirement | N/A | At least 1 year between ESOP grant and DRHP filing |
Real‑World Example: A Hypothetical Case
Consider Founder A of “TechXYZ,” who received ESOPs on June 1, 2023. TechXYZ files its DRHP on June 1, 2024—exactly one year later. Under the new policy, Founder A can hold and exercise those ESOPs even as a promoter, preserving an important layer of financial upside tied to TechXYZ’s post-listing success.
What Startups Should Do Next
Founders and startup leadership teams should take note:
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Align ESOP timing: Schedule grants for key founders at least a year before planned IPO.
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Maintain documentation: Ensure ESOP grant dates are recorded clearly to prove eligibility.
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Avoid new ESOPs during IPO prep: Promoter-designated founders must not receive fresh ESOPs.
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Review vesting timelines: Ensure vesting and exercise dates align with DRHP filing schedule.
Broader SEBI Reforms: Beyond ESOPs
SEBI’s June board meeting introduced further reforms:
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Simplified QIP disclosures, reducing duplication in offer documents
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Relaxed PSU delisting rules, facilitating voluntary exits when government shareholding exceeds 90%
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Enhanced AIF co-investment norms, expanding institutional investment flexibility
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Mandated dematerialization of securities, improving market transparency .
Together, these cover a wide-ranging push to streamline capital markets, boost listings, and modernize regulations.
Expert Insights
Legal experts underscore the move’s importance:
“It acknowledges the unique dynamics of startup growth… and protects long‑term founder incentives.”
“...allows exercise of ESOP by founders who turn promoters… subject to a sensible one‑year window.”
Important Caveats
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ESOPs granted after DRHP—or less than a year before—remain ineligible.
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No fresh ESOPs for promoters post-filing.
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The policy applies only at IPO prep stage; founders still subject to overall promoter lock-in regulations.
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Precise timeline definitions—like whether cooling-off is tied to board resolution or DRHP submission—may evolve pending official regulation wording
Final Thoughts
SEBI’s updated ESOP rule is a founder-friendly reform thoughtfully balanced with governance safeguards. It addresses a critical startup pain point, enhances alignment between startup leadership and long-term value creation, and supports India’s IPO ecosystem.
If your startup is charting an IPO path, it’s crucial to strategically structure ESOP grants, maintain clean documentation, and work with legal teams to ensure compliance with the one-year rule.
✅ Conclusion
SEBI’s decision to allow founder-promoters to retain and exercise pre-DRHP ESOPs—with a sensible cooling-off period—is a welcome boost for India’s startup ecosystem. It clears a regulatory hurdle that discouraged founder retention and adds clarity for IPO planning.
By protecting valued founder incentives and encouraging public listings, this reform strengthens alignment between startups, investors, and public markets—making it a win-win for all stakeholders.
Frequently Asked Questions (FAQs)
1. What qualifies as “pre-DRHP ESOP”?
An ESOP granted at least one year before filing the Draft Red Herring Prospectus. Anything granted later is ineligible.
2. Can founders receive new ESOPs after the DRHP is filed?
No. While old ESOPs can be retained/exercised, no new grants are allowed once promoter status is active.
3. Does the one-year window start from the board’s IPO decision or DRHP filing?
SEBI has specified one year before DRHP filing, but ongoing consultation may clarify this further.
4. Does this rule benefit founders in reverse-flip startups?
Yes—especially those who reincorporate in India and file DRHPs, enabling continuity of option benefits.
5. Are there any post-listing lock-in requirements?
Yes. Promoter shareholding, including ESOPs, remains subject to SEBI’s one-year promoter lock-in post-IPO.
6. What should startups do to stay compliant?
Ensure ESOP grants and vesting occur well before DRHP filing, document everything, and avoid new ESOPs during IPO phase.
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