Can ESOPs be issued to promoters/founders?

Employees used to enjoy the benefits of employee stock ownership plan (ESOP) in their company but a common question between employers rises, if they can also get the benefits of ESOPs just like employees or not. This question is obvious for those working hard for their company and vision including the founders. In this blog, we will discuss what ESOP is, ESOP allowed for promoters/founders or not, SEBI rule for founders, etc. To get clarity on these topics, go through the blog in detail. 

What is the Employee Stock Ownership Plan? 

The Employee stock ownership plan commonly known as ESOP is a benefit plan for the employees where they can get a chance to hold a partial ownership in their working company. This ownership is granted in various options including direct stock, profit sharing plans or bonuses. To avail this plan, employees must complete the vesting period along with eligibility criteria set by the employer. A company holds the right to set the vesting period time limit along with who can hold the shares. ESOP works as an investment plan where employees can give their 100% in the company and can get benefits after a particular time period. But is ESOP only issued to employees? The answer is “No”, founders can also get ESOP benefits. 

Legal Framework Governing ESOPs under the Companies Act, 2013

Under the Indian company law, the issuance of ESOPs is governed by Section 62(1)(b) of the Companies Act, 2013, along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

Section 62(1)(b) allows a company to issue shares to its employees under an Employee Stock Option Scheme. This requires approval by shareholders by passing a special resolution. Rule 13 further lays down detailed conditions such as eligibility, vesting period, exercise price, lock-in period, disclosures in the explanatory statement, and maintaining an ESOP register.

As per Rule 13, promoters and directors holding more than 10% of the equity are generally not eligible to receive ESOPs. However, in case of a startup recognized under DPIIT, promoters and founders can be granted ESOPs for up to ten years from the date of incorporation.

Thus, under the Companies Act, ESOPs mainly target employees, while the eligibility of founders depends on whether the company is a startup and what exemptions apply.

ESOPs for Promoters or Founders 

Any founder working hard for its vision should have the rights to get their ESOP benefits. However, earlier there was a time when founders lost their ESOP benefits after listing the company for public. Once the company went for IPO (Initial Public Offerings), no ESOP benefits were allowed for founders. This conversion results in losing all the employee stock ownership plan’s benefits for all the founders of a company resulting in demotivation. However, SEBI later approved an amendment changing this rule and making a relief for founders of the companies.  

SEBI Rule - ESOP Relief for Founders  

On June 18, 2025, SEBI (Securities and Exchange Board of India) brought an amendment to its ESOP guidelines and made a relief for the founders. However, a formal notification was made public in September 2025. This amendment provides a relief for founders and classifies them as promoters even after their company goes public. This change states: 

“Founders identified as promoters during the IPO process are now eligible to retain and exercise ESOPs benefits. However, benefits were granted at least one year prior to the date the company undertook the IPO & before drafting the offer documents.”

This amendment by SEBI helped founders in availing the benefits of ESOPs by identifying themselves as promoters. This change was needed by SEBI for multiple reasons including the following: 

1. No Dump to efforts: Founders used to feel their efforts useless, this change brings the value for their efforts.
2. Motivation: ESOP benefits works as a motivation for founders as well as it is considered an extra income. 
3. Trust of Investors: Considering founders as promoters helps to attract investors as people behind the initiative brings credibility. 

Real Example: In April 2025, Paytm CEO Vijay Shekhar Sharma had to give up his 21 million unvested ESOPs amid regulatory scrutiny because of unclear rules. Later, in September the amendment was made by the SEBI. 

Conclusion 

ESOPs can be issued to founders along with employees but earlier at the time of IPO, founders lose their shares and stocks. However, after the amendment by SEBI (Securities and Exchange Board of India) founders are allowed to use their ESOPs by considering them as promoters. This amendment brings value to the efforts of founders, a sense of motivation and gained trust of investors. This guideline was brought by SEBI in September 2025, while there was a case when Paytm CEO lost his 21 million unvested ESOPs due to earlier unclear rules. However, as per Rule 13, promoters and directors holding more than 10% of the equity are generally not eligible to receive ESOPs. Thus, to answer the question if ESOPs can be issued to founders then the answer is Yes, ESOPs can be issued to founders but if they are holding more than 10% of the equity then in that case they are generally not eligible.