ESOP for Founders and Promoters

Can founders and promoters actually get ESOPs in India? The default answer is no, but there are two important exceptions, and getting it right protects your cap table and your IPO. Patron Accounting advises founders and promoters on ESOP eligibility: the Rule 12 bar, the DPIIT-startup exemption, the new SEBI Reg 9A treatment for IPO-bound founders, and sweat equity as the alternative.

Many founders assume they can simply allocate ESOPs to themselves, and most cannot, at least not by default. Getting this wrong creates invalid grants, cap-table confusion and problems in diligence or at IPO. This page sets out exactly when a founder or promoter can hold ESOPs, and what to do when they cannot.

Content is reviewed quarterly for accuracy.

Recognising that in startups the founder is often also the hardest-working employee, the law carves out an exemption.

The 10-year window: a proviso to Rule 12, introduced in 2016 and later extended, lets a DPIIT-recognised startup grant ESOPs to promoters and to directors holding more than 10 percent, for up to 10 years from the date of incorporation or registration. Within that window, the standard exclusion simply does not apply, so founders of a recognised startup can hold ESOPs like any employee.

When it ends: the relaxation falls away on completion of 10 years from incorporation, or earlier if the company stops being a recognised startup, after which the standard bar returns for any fresh grants. So the practical step for most founders is to secure DPIIT recognition early and grant within the window.

The prerequisite: the company must hold DPIIT startup recognition, which itself depends on meeting the startup criteria, including the turnover limit. We help obtain recognition and time the grants.

• At exercise: the spread between fair market value and the exercise price is taxed as a salary perquisite.
• On sale: the gain over the value taxed at exercise is taxed as capital gains.
• Startup deferral: DPIIT-startup employees, including eligible founders, may defer the perquisite TDS under the startup deferral provisions.
• Same as employees: once eligible, a founder's ESOP is taxed on the same basis as any other employee's.

All fees and charges listed are indicative only and do not constitute a binding offer. Final amounts may vary depending on the volume of work and the complexity involved.

Professional service charges for drafting, filing, and representation are separate from the statutory fees. The exact fee depends on the complexity of the case, disputed amount, and number of hearings required. Contact us for a detailed quote.

Get a free ESOP for Founders and Promoters consultation - Call +91 945 945 6700 or WhatsApp us. No-obligation assessment.

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Patron Accounting LLP is a CA and CS firm with 15+ years on founder equity, DPIIT startups, SEBI listing and ESOP governance.

With offices in Pune, Mumbai, Delhi and Gurugram, Patron Accounting serves businesses across India, both in-person and remotely.

Founder grants build on our ESOP management and compliance services, and the DPIIT route runs through startup registration. Designing the plan? See our ESOP scheme design and ESOP valuation services.

Grants are issued via issue of shares, with appointment of director and private limited company compliance supporting the governance. See also the full ESOP services hub.

The exclusion: Section 62(1)(b) of the Companies Act, read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, excludes a promoter, promoter-group member, and a director holding more than 10 percent of the equity from the definition of 'employee' for ESOP purposes.

The startup proviso: a proviso to Rule 12, introduced by the 2016 amendment and extended, disapplies that exclusion for a DPIIT-recognised startup for up to 10 years from incorporation or registration.

Listed companies: the SEBI SBEB and Sweat Equity Regulations 2021 mirror the promoter exclusion, and Regulation 9A, notified in September 2025, preserves founder options granted at least a year before the DRHP through listing.

Sweat equity: Section 54 of the Companies Act permits sweat equity shares to directors and employees, expressly including promoters, as an alternative route for founders.

Authoritative sources: the Ministry of Corporate Affairs (Section 62, Rule 12, Section 54), Startup India / DPIIT (startup recognition and exemption), SEBI (SBEB and Sweat Equity Regulations, Reg 9A), and the Companies Act and Rules.

For founders, timing drives eligibility. The DPIIT exemption runs only for 10 years from incorporation, so grants are best made early in that window; and Reg 9A only protects options granted at least a year before the DRHP, so IPO-bound founders must plan grants well ahead of filing. Decide and document founder equity early, while the exemptions are open, rather than discovering at diligence or at IPO that a grant was never valid.

Whether a founder or promoter can hold ESOPs is one of the most misunderstood questions in Indian equity: barred by default under Rule 12, allowed for DPIIT startups for 10 years, protected at IPO by Reg 9A, and replaced by sweat equity where none of that fits.

Patron Accounting LLP, a CA and CS firm with 15+ years of founder-equity experience, gives the eligibility opinion, picks the right instrument, and structures and documents it cleanly, so your founder equity is valid, tax-efficient and IPO-ready.