Can you grant ESOP to a co-founder?

Background: Whether the co-founder of a company can be granted Employee Stock Exchange Plan (ESOPs) is a debatable topic. Continuing the ESOP series by Anisha Patnaik, she explains of the co-founder of a company can be granted ESOP. In her previous article she explained the working of ESOP.

Granting ESOPs to promoters/co-founders

I often get asked this question, “Can a company grant ESOP to a co-founder who was recently on boarded in my startup?” Well the answer is both yes and a no!

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The Companies Act, 2013 prohibits grant of ESOPs to the promoter of a company. The term ‘promoter’ does not necessarily refer to only a person who is named as a promoter at the time of incorporation of the company. A promoter is defined broadly and includes the following:

• Any person who has been named as the promoter  in a prospectus or is identified by the company in its annual return; or
• Any person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
• Any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Provided that such person is not someone who is acting merely in a professional capacity.

Therefore, typically a co-founder who you bring on board at a later stage, may not be a promoter as stated in the Charter Documents (Memorandum and Articles of Association of your startup) but can still be considered as a promoter, thus restricting him from receiving ESOPs in the company.

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ESOPs to promoters/co-founders of recognised startups

The Companies Act, 2013 has made an exception to the above rule, by allowing startups that are recognised by the Govt. of India to grant ESOPs to founders, as long as the grant of such ESOPs is within five years from their incorporation. This means if your startup has a certificate of recognition from Department for Promotion of Industry and Internal Trade (DPIIT), Govt. of India, then you can grant ESOPs to promoters/co-founders.

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Image courtesy: Lexstart.com

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