Pre-IPO Founders Ask SEBI to Allow ESOPs for Promoters
Why in the news
Several startups heading for IPOs urged SEBI to ease the ESOP rules so that founders, whose holdings shrank through repeated fundraising, can receive stock options.
Key facts
- Rule today: no ESOP grants to promoters after listing.
- Problem: during IPO preparation many founders count as promoters, so they cannot receive options.
- Reason for the plea: equity dilution from multiple funding rounds.
About ESOP
- An Employee Stock Ownership Plan gives staff an ownership interest through company stock; it is often a retirement benefit plan.
- Used for succession planning in closely held firms and to align employee and shareholder interests.
- Structure: held through a trust; funding can come from new shares, company cash or borrowing; offered on a non-discriminatory basis under a fiduciary trustee.
How it works
- The company creates a trust.
- Shares are allocated by contributions, purchases or leveraged loans.
- A vesting period lets employees earn rights over time.
- On retirement or exit, the company buys back shares at fair market value.
Advantages
| For employees | For employers |
|---|---|
| Wealth from share price gains | Higher productivity |
| Motivation linked to performance | Smooth succession in private firms |
| Retirement security | Tax efficiency |
Exam angle
- Regulator involved: SEBI.
- Key term: vesting period.
- Buyback at fair market value at exit.