SEBI Proposes ESOP Benefits for Startup Founders Post-IPO

The Securities and Exchange Board of India (SEBI) has introduced a proposal that would allow startup founders to retain their Employee Stock Option Plans (ESOPs) even after their companies go public. This move is designed to support founders of new-age technology companies, who often receive ESOPs instead of cash salaries in the early stages of their startups.

Importance of ESOPs for Startup Founders

ESOPs play a crucial role in aligning the interests of founders with those of other shareholders. They provide an incentive for founders to focus on long-term business growth and profitability. However, as startups raise funds and expand, founders often experience dilution of their ownership stakes. This dilution creates a challenge, as founders may find themselves holding fewer shares than they initially possessed.

Current SEBI Regulations on ESOPs

Under existing SEBI rules, startup founders are classified as promoters when they file for an initial public offering (IPO). The current regulations prohibit issuing ESOPs to promoters, which poses a challenge for those founders who were granted ESOPs as employees before their company went public. The issue arises when these founders are required to forfeit their ESOP benefits upon being reclassified as promoters.

Challenges Faced by Startup Founders

SEBI observed that an employee who becomes a promoter due to their shareholding may be forced to surrender their vested and unvested ESOPs. This rule has been considered unfair by market participants, as it prevents founders from benefiting from stock options they previously earned. Additionally, there has been a lack of clarity regarding whether founders can exercise their ESOPs once they assume the status of promoters.

SEBI’s Proposed Changes

To address these concerns, SEBI has suggested amending the regulations to clarify that stock benefits granted to founders will remain valid even if they are later classified as promoters in the Draft Red Herring Prospectus (DRHP). However, the restriction on issuing new ESOPs to promoters will continue to apply. This proposal is expected to provide relief to startup founders and ensure they retain the equity-based compensation they initially received.

Benefits of SEBI’s Proposal

The proposed rule change will benefit startup founders by:

• Ensuring they do not lose their ESOP benefits after their company goes public.

• Providing clarity on the eligibility of ESOPs for founders post-IPO.

• Encouraging more entrepreneurs to opt for equity-based compensation without fear of losing benefits.

• Promoting fairness by allowing founders to exercise their vested ESOPs regardless of their reclassification as promoters.

SEBI’s Collaboration with DigiLocker

In a separate initiative, SEBI has recently partnered with DigiLocker to help investors track their securities holdings and reduce unclaimed financial assets. This integration aims to enhance investor protection and provide an easy, secure way to access financial holdings.

How DigiLocker Integration Benefits Investors

With SEBI’s integration into DigiLocker, investors will be able to store and retrieve important financial details such as:

• Demat account holdings

• Mutual fund investments

• Bank account statements

• Insurance policies

• National Pension System (NPS) details

This initiative will serve as a centralised platform for managing securities information and improving investor accessibility to their financial records.

Conclusion

SEBI’s proposed amendments regarding ESOPs for startup founders post-IPO will significantly benefit entrepreneurs by ensuring they retain their equity benefits. Additionally, the regulator’s partnership with DigiLocker will enhance investor security and transparency, making it easier for individuals to track their financial assets. These steps mark SEBI’s commitment to fostering a more inclusive and efficient financial ecosystem in India.