Article · 10 min read

Can ESOPs Be Issued to Promoters & Founders? Legal Guide

Startup Movers Free Intermediate India

This is the cleanest answer to why a co-founder should hold shares, not ESOPs, in an Indian Pvt Ltd. It spells out Rule 13 of the Companies (Share Capital and Debentures) Rules: a promoter or director holding over 10 percent equity is barred from receiving ESOPs at all, which is exactly why options are the wrong instrument for a founder. It then lays out the real founder routes (sweat equity shares, the narrow 10-year DPIIT startup exception) and cites the Vijay Shekhar Sharma unvested-ESOP forfeiture as the cautionary tale.

  • Under Rule 13, a promoter or director holding more than 10 percent equity generally cannot receive ESOPs, so options do not fit a real co-founder.
  • Founders take equity as sweat equity shares or subscription at incorporation; DPIIT-recognised startups get a narrow 10-year window to grant founders ESOPs.
  • The Paytm founder having to surrender 21 million unvested ESOPs shows the control and forfeiture risk of dressing a founder up as an option-holder.
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The question it answers

  1. What is the difference between issuing shares to a co-founder and giving them stock options, and which should I use in an Indian private limited company?

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