Founder ESOP Before IPO (2026): The SEBI Regulation 9A One-Year Clock That Decides If You Keep Your Options

Last updated: 13 August 2026 · By CS Sapna Malpani, Practising Company Secretary, Bangalore

A founder who holds options over 2% of a company that lists at a ₹4,000 crore valuation is sitting on roughly ₹80 crore of upside. Until September 2025, the moment that founder was named a promoter in the draft IPO papers, SEBI’s rules could force those same options to be surrendered before the company went public. That single line of regulation quietly decided how much of their own company’s growth founders actually kept. The rules on founder ESOP before IPO changed on 8 September 2025, and most startup boards still have not adjusted their grant timing to match.

The problem: how founders lost their own ESOPs at the IPO gate

Indian startup founders rarely start with majority equity. After three or four funding rounds, a founder’s direct holding is often diluted into single digits, and stock options become a meaningful part of how they stay aligned with the company they built. That worked cleanly while the company was private. It broke at the IPO gate.

Under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, promoters, members of the promoter group, independent directors, and directors holding more than 10% of the equity are all excluded from receiving share-based benefits. When a company files its Draft Red Herring Prospectus (DRHP), the founders are almost always classified as promoters. The consequence was blunt: options that a founder had earned years earlier, as an employee, became ineligible the moment the promoter label attached. Boards were left unwinding or cancelling grants worth crores just to get the offer document past the regulator.

This was not a rare edge case. It affected almost every venture-backed company heading for a mainboard listing, from consumer internet to fintech to deep tech. The mismatch sat squarely inside the compliance work of the company secretary steering the pre-IPO process, and it is exactly the kind of governance gap that surfaces in a pre-IPO governance gap analysis months before the banker ever sees the file.

The one-year DRHP clock, visualised

What changed: Regulation 9A and the founder-ESOP carve-out

SEBI took the decision at its board meeting on 18 June 2025 and notified the amendment on 8 September 2025. The change inserted a new Regulation 9A into the SBEB Regulations. In plain terms, an employee who is identified as a promoter, or as part of the promoter group, in the draft offer document may continue to hold and exercise options, stock appreciation rights, or other share-based benefits, provided those benefits were granted at least one year before the draft offer document was filed.

The regulator’s own framing is narrow. Bar & Bench described the move as SEBI’s “clarification on treatment of founder ESOPs” for IPO-bound startups, and law firm commentary from Khaitan & Co and Cyril Amarchand Mangaldas read it the same way: a targeted fix, not an open door. Two boundaries matter. First, the protection covers only what was granted before the one-year window; anything granted inside that window, or after the founder is named a promoter, stays barred. Second, no fresh grants can be made to that person once the promoter classification is on record in the DRHP.

A separate amendment from December 2025 sits alongside this one and is worth noting for anyone valuing sweat equity: SEBI moved sweat-equity valuation from merchant bankers to IBBI-registered valuers, effective 2 January 2026. The two changes together tightened the pre-IPO equity-incentive framework that a company secretary has to sign off on.

What you must do now: a pre-IPO ESOP checklist for founders

If a listing is anywhere on your two-year horizon, the compliance work on founder ESOP before IPO starts long before the banker is appointed. Here is the sequence I walk founders through.

1. Map every founder grant against the one-year line. List each option and SAR grant date for anyone likely to be named a promoter. Anything you want protected under Regulation 9A must be granted and on record at least twelve months before you expect to file the DRHP. If you are targeting an FY27 filing, that clock is already running.
2. Confirm who will actually be named a promoter. Promoter classification is a judgement based on control and shareholding, not just a title. Read it against the SEBI ICDR definition and your cap table before you assume a founder is safe. Our cap table compliance guide covers the common errors that shift this classification unexpectedly.
3. Freeze new founder grants once a filing is realistic. New grants to a founder who will be a promoter in the DRHP remain barred. Bringing forward a genuine grant is fine; back-dating or papering a grant is not, and diligence will find it.
4. Reconcile the private-company scheme with the listed framework. Your existing scheme was likely built under Section 62(1)(b) of the Companies Act and Rule 12. Before listing it has to move onto the SBEB Regulations, 2021, which means a fresh scheme approved by a special resolution and, before any further grant, in-principle approval from the stock exchange under Part D of Schedule I.
5. Get the shareholder approvals right. ESOP schemes and any variation need a special resolution; a separate special resolution is required for grants to employees of subsidiaries or holding companies, and for grants of more than 1% of issued capital to a single employee in a year.
6. Model the tax before you celebrate. ESOPs are taxed as a perquisite at exercise under Section 17(2). Eligible startups notified under Section 80-IAC can defer the withholding under Section 192(1C), but most late-stage IPO candidates have outgrown that window, so founders face real cash tax at exercise. Price the liability into the exercise plan.
7. Document the trail for diligence. Board and shareholder resolutions, grant letters, the scheme document, exercise records and the ISIN/demat position all get pulled in the data room. A clean file here is what keeps ESOPs off the list of deal-killers.

Promoter ESOP eligibility: before and after Regulation 9A

A worked example: two founders, one year apart

Take two co-founders of the same company preparing to file a DRHP on 1 April 2027. Both were granted options over 1.5% of the company in the past. Founder A received her grant in January 2026, fifteen months before the planned filing. Founder B received an identical grant in July 2026, nine months before the filing. Both will be named promoters in the offer document.

Founder A clears the one-year test comfortably, so Regulation 9A protects her options; she can hold them through the listing and exercise them afterwards. Founder B’s grant sits inside the twelve-month window, so it stays barred and has to be unwound before the draft is filed. If the company lists at a ₹5,000 crore valuation, 1.5% is worth ₹75 crore of exposure. The only difference between keeping that upside and surrendering it was six months of grant timing that nobody costed at the point of the grant. This is why the grant calendar, not the drafting stage, is where the value is won or lost.

The deeper implication

According to CS Sapna Malpani, Regulation 9A does more than protect a founder’s paper wealth; it changes when the pre-IPO compliance work begins. “The value now depends on a decision made a year before anyone talks to a banker,” she notes. “Grant timing has become a governance question that the board and the company secretary own together, not something you fix in the drafting stage of the prospectus.”

The practical effect is that ESOP hygiene moves up the pre-IPO calendar. Founders who want the benefit have to be deliberate about grant dates well before the listing conversation is public. Looking ahead, I expect SEBI to keep refining the promoter-incentive framework rather than reopen the wider bar on promoter ESOPs, so the safe assumption for the next filing season is that the one-year rule is the ceiling, not a stepping stone to something more generous. Boards that treat it as a planning constraint today will not be the ones surrendering options at the gate next year.

Where founders confuse the provisions

Three regimes get mixed up here, and the difference decides eligibility. A private company issues ESOPs under Section 62(1)(b) of the Companies Act read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014; that route bars promoters and directors holding more than 10% equity, though DPIIT-recognised startups get a ten-year window where that bar is relaxed. A listed company runs its share-based benefits under the SEBI SBEB Regulations, 2021, which is where Regulation 9A now lives. Sweat equity is a third path entirely, governed by Section 54 of the Companies Act for unlisted companies and by the SBEB Regulations for listed ones. If you want the full split between option types, our guide on ESOP vs sweat equity vs RSU lays it out, and the base mechanics of issuing options sit in our ESOP compliance guide for Indian startups.

Sources and references

• SEBI, Legal / Regulations portal, SEBI (SBEB and Sweat Equity) (Amendment) Regulations, 2025: sebi.gov.in/legal/regulations
• SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (base text): sebi.gov.in/legal/regulations
• Bar & Bench, SEBI’s clarification on treatment of founder ESOPs for IPO-bound startups: barandbench.com
• Khaitan & Co, Amendments to the SEBI SBEB & ICDR Regulations (19 September 2025): khaitanco.com
• Cyril Amarchand Mangaldas, Corporate blog commentary on SBEB amendments: corporate.cyrilamarchandblogs.com
• Ministry of Corporate Affairs, Companies Act, 2013, Section 62(1)(b) and Section 54: mca.gov.in

Frequently asked questions

Can a founder keep their ESOP before an IPO in India?

Yes, within limits. Since Regulation 9A of the SEBI SBEB Regulations was notified on 8 September 2025, a founder who is named a promoter in the draft offer document can retain and exercise options, SARs and similar benefits, provided the grant was made at least one year before the DRHP is filed. Anything granted inside that twelve-month window, or after the founder is classified as a promoter, is not protected. This is the core of how founder ESOP before IPO now works, and it rewards early, deliberate grant timing rather than last-minute fixes.

What is SEBI Regulation 9A?

Regulation 9A is a provision inserted into the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, through an amendment notified on 8 September 2025. It creates a narrow exception to the general rule that promoters cannot hold share-based benefits. An employee identified as a promoter or promoter group member in the DRHP may continue to hold and exercise benefits granted at least one year before the draft offer document is filed. It does not permit any fresh grant to that person once the promoter classification is on record.

Why are promoters normally excluded from ESOPs?

The SBEB Regulations, 2021, exclude promoters, members of the promoter group, independent directors, and directors holding more than 10% of the equity from share-based benefit schemes. The policy aim is to keep employee-incentive schemes pointed at employees rather than at those who already control the company. Regulation 9A softens that only for pre-existing founder grants that meet the one-year test; the broader exclusion for promoters remains in place for new grants.

How is a private company ESOP different from a listed company ESOP?

A private or unlisted company issues ESOPs under Section 62(1)(b) of the Companies Act, 2013, read with Rule 12 of the Share Capital and Debentures Rules. That route bars promoters and directors holding over 10%, though DPIIT-recognised startups get a ten-year relaxation. A listed company runs share-based benefits under the SEBI SBEB Regulations, 2021, which require a fresh scheme by special resolution and in-principle stock-exchange approval before any grant. Regulation 9A applies to the listed framework, which is why pre-IPO founders have to reconcile the two before filing.

When should a founder grant ESOPs if an IPO is planned?

Work backwards from your expected DRHP filing date and add at least twelve months. If a founder grant is to be protected under Regulation 9A, it has to exist at least one year before the draft is filed. For a company aiming to file in FY27, that means the grant should already be approved and recorded. Leaving it late is the single most common way founders lose the benefit, so the grant calendar belongs in your pre-IPO planning from the start.

How are founder ESOPs taxed at exercise?

ESOPs are taxed as a perquisite in the employee’s hands at the time of exercise, under Section 17(2) of the Income-tax Act, on the difference between the fair market value and the exercise price. Startups notified as eligible under Section 80-IAC can defer the tax withholding under Section 192(1C), but most companies close to an IPO have grown beyond that eligibility, so founders should expect a real cash tax cost at exercise and plan the timing of exercise and any sale accordingly.