Risk begets rewards. That is the fundamental principle that undergirds any business venture. But regulators have been more than leery of brash whizz-kids with lightning fortunes. The founders of new-age technology companies are dream merchants with brilliant ideas and a burning desire to make it big. Their hopes are yoked to two Panglossian realities: an incentive called sweat equity and a flurry of crazy funding rounds that have unhooked the valuations of start-ups from any realistic measure of business performance. At some point, these unicorns aspire to go public, enabling the founders to rake in even more moolah by cashing out a significant part of their holdings when these entities list on the bourses. However, listing brings its own set of challenges and the nouveau fat cats often chafe at the new set of rules that they must comply with. One of these relates to the residual rights embedded in the employee stock options that were not exercised before the initial public offering.

The Securities and Exchange Board of India has now decided to allow founders of start-ups to retain stock options even after the company goes public. There is a rider: only the stock options granted at least a year before filing the draft prospectus for the public issue can be retained. Under the extant rules, founders with a collective shareholding of more than 10% of the paid-up capital when the draft papers for the public issue are filed are automatically designated as promoters and no longer permitted to issue fresh stock options to themselves. As long as these firms showed no desire to list, the founders were permitted to issue ESOPs and compensate for the dilution of their shareholding as a result of multiple funding rounds. One of the main reasons for granting this relaxation is to encourage ‘reverse flipping’ — persuade founders of start-ups based in foreign jurisdictions to relocate to India. Anecdotal evidence suggests that founders of Indian start-ups have in the past opted to operate out of countries like Singapore because of the ease with which they can kindle the interest of a wide range of global investors who baulk at the idea of funnelling money into Indian entities because of excessive regulation and legal complications that hinder hassle-free exit. Lately, a number of companies like Razorpay, Zepto and Pine Labs have shifted their headquarters to India. But it must be said that start-ups remain wary of relocating operations until there is greater clarity on taxation and regulatory compliance and freedom from tortuous legal processes.