Sweat Equity Vs ESOP and perquisite tax implications

836 votes

Interesting situation which lot of founders / co founders land up in. There is no fixed formula which fits all for this. Will be glad to assist you in this work. We help clients negotiate a win - win situation for both parties, Those are the only agreements which work in the long run. Shareholder , founders, co founders agreement is a must at this stage as more stakeholders join and financial stakes increase this gets more complex. Any disagreement at top ownership / management level is a disaster for the entire project. we will need a lot more information before we can comment or give any advise on this. Choose your legal adviser who understand the business side as well and stay with him for the long run to protect your interest. Thanks,
Deepak Dayal ( MBA, LLB )
Managing Partner,
Dayal legal Associates
( Specialising & assisting Start Up'S )

LawRato LawRato

814 votes

These are specific issues that relate to the realm of security law including change of control which depends on the facts and circumstances. Not all the fact have been disclosed in your query. If you provide us the details, we can structure your transition bake give sound legal advice to represent your interest in the documentation with the company to protect your rights.

Advocate Tahir Ashraf Siddiqui LawRato

556 votes

Thanks for contacting. These are quite complex issues and need careful consideration before coming to an informed decision. Further, any lawyer who is asked to give a view on the issues will need to look at all relevant documents and company policies (if there are any) such as your appointment letter, employment contract, the company's MOA, AOA , company's esop/ sweat equity scheme and other communications exchanged. Prima facie, it looks like you have already opted for the sweat equity route as you may not be paying any consideration for the shares. Also, at the time of issuance of shares there may not be any immediate tax impact unless a dividend is to be declared. So far as the issue of tenure of shares is concerned, it will have to be negotiated between you and the company. Some companies insist upon the shares be surrendered at the pre-determined price or fair value at the time the employee decides to leave the company. I would suggest you share the relevant documents and seek a proper legal examination/ opinion on the queries.

Advocate Joydeep Nath LawRato

969 votes

Hi! You have lot of queries here and I can give you detailed responses by way of a legal opinion. Meanwhile you can read my article on ESOPs online. That should be helpful. Let me know if you would like to connect. In any event, company must have its esop policy in place. 10 years vesting and impact on vesting in case of change in management/ control has to flow from the policy only.

Advocate Mansi Airi Gambhir LawRato

851 votes

A Sweat Equity is more preferable for you if liquidity is a concern since it can be issued at a discount or consideration other than cash also.

However, you may not have an option to bind the company under an agreement for this option as it is upon Company’s discretion. Even if the company issues sweat equity to you till date, you will have to trust the company for the remaining equity.

In case you want to be assured in writing, ESOP is a much better choice wherein you can have the ESOP shares from the date of your joining. Thus, your 1.25% may be exercised currently and the remaining can be exercised within 4 years from your joining, but it should not be later than 90 days of your leaving the job (as is a general practice in company’s to put a term in ESOP).

For a more detailed opinion, please feel free to reach us.

Advocate Atit Jain LawRato

965 votes

To your question no 1 for ESOP or sweta equity - both have advantage and disadvantages like if you don't want locking period then ESOP but then esop comes on consideration prove and has to be paid in cash on the other hand the sweat equity consideration can be partly cash and partly IPRs/value addition or fully non-cash consideration, if you have IPR as you are CTO i am assuming you developed the product. The company in any case shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of 5 crore, whichever is higher, so reach what is best need to see company valuation which is 40 cr you say and 5% is 2 cr so all cool in your case. On the other hand esop there is no such restriction in case of esop. So we need to sit with you to check othe information also to reach decision in your favour like taxation and new companies rules changes for esop etc. So in short please meet us as it required lot of details to check and all information cannot be given here on open forum

Advocate Nischal Arvind Singh LawRato