Employee Stock Option Plan (ESOP)

Today, one of the most crucial tools utilized by companies, particularly those operating in the technology and entrepreneurship ecosystem, to retain and motivate qualified employees is granting them equity options. This practice is internationally referred to as the Employee Stock Option Plan (ESOP). ESOPs boost employee commitment and encourage workers to directly contribute to the company's success by providing them with the opportunity to acquire company shares under specific terms.

The Concept and Purpose of Stock Option

A Stock Option (or Equity Option) is a mechanism that grants employees the right to acquire shares or benefits associated with those shares, provided certain conditions are met (such as working for the company for a specific duration or meeting performance criteria). In this respect, a stock option does not constitute a direct transfer of shares but offers the option to acquire shares under specific terms in the future.

The fundamental objective of ESOPs is to align the interests of the employees with those of the company and its shareholders. Allowing employees to share in the gains resulting from the company's growth increases motivation and fosters long-term commitment. This system holds strategic importance, especially for startups, as it helps attract qualified talent without disrupting the capital balance.

Which Stock Option Models are Applied in Turkiye?

There is no specific legislation directly regulating stock option plans in Turkish Law. However, these plans are evaluated within the framework of the Turkish Commercial Code, the Turkish Code of Obligations, and the Labor Law. For publicly held companies, the Capital Markets Law and related regulations must also be considered.

Although Employee Stock Option Plans (ESOPs) are not directly regulated in Turkish Law, various models are frequently used in practice. These plans are primarily categorized into two main groups: plans where the employee becomes a direct shareholder, and shadow equity (phantom stock) systems. Among the methods where the employee becomes a direct shareholder, the conditional capital increase stands out; in this model, the company can issue new shares for the purpose of granting equity to employees, provided there is a relevant provision in its Articles of Association. Another method is the commitment to transfer shares by existing shareholders, where the shareholders contractually agree to transfer a portion of their shares to employees. Finally, Joint Stock Companies, conditioned on authorization by a General Assembly resolution, can reacquire (acquire own shares) up to 10% of their paid-up capital for the purpose of providing equity to employees. These acquired shares must legally be transferred to employees or disposed of within a maximum of three years. In contrast, the Phantom Stock Option Plan is another model frequently preferred in Turkey, particularly due to legal ambiguities and ease of implementation. In this system, as the name suggests, no direct share transfer is made to the employee; instead, employees acquire the right to benefit from the financial rights associated with the shares. Thus, employees participate only in financial benefits without possessing shareholder rights such as voting rights.

Step-by-Step Option Process: Grant, Vesting, and Exercise

The process for employee stock options generally progresses through three fundamental stages. First, in the Grant Stage, the right to acquire shares in the future is officially defined for employees in specific positions or meeting certain criteria. Following this, the Vesting Stage begins; in this phase, the employee gradually earns this right by continuing to work for the company for a certain period or by completing performance targets. Finally, the employee has the opportunity to Exercise their fully vested options, meaning they can purchase or acquire the shares at a predetermined price.

The concept of "Vesting" is particularly prominent as a tool to strengthen employee loyalty. The employee is incentivized to remain with the company throughout the vesting period; otherwise, they may lose their right to the options. Therefore, the vesting period should be determined in parallel with the company's growth strategy.

Labor Law and Tax Implications of ESOP

In international practice, ESOPs are typically established under a trust or fund structure. Companies transfer newly issued or existing shares to this fund. The fund holds these shares on behalf of the employees and distributes them over time. Especially in the US, ESOPs involve various tax incentives for both employees and companies. These plans can also function as a retirement system. Employees obtain additional income by liquidating these shares upon retirement.

From the perspective of Turkish Labor Law, stock options or phantom stock plans provided to employees are considered fringe benefits supplementary to wages. Consequently, these benefits must be taken into account when calculating an employee's severance pay and notice pay.

From a Tax Perspective, the increase in value of shares transferred to employees or founders may, in some cases, be considered income and subject to Income Tax. However, since there is no explicit regulation specific to ESOP or vesting plans in Turkish tax legislation, taxation generally varies according to the conditions at the time of share transfer, the contractual relationship between the parties, and the nature of the income.

Conclusion

In conclusion, employee vesting (ESOP) systems are a modern incentive tool that provides mutual benefits for both employees and employers. Despite not having a clear statutory basis in Turkish law, they are increasingly being implemented, especially by startups and technology companies.

Different models, such as direct share transfer, conditional capital increase, or phantom stock, can be chosen based on the company's structure, investment strategy, and the profile of its employees. In every case, it is of great importance that vesting plans are clear, transparent, and based on contractual foundations.

Employee stock options and vesting structures are complex legal processes directly linked to a company's growth strategy.

The academic and practical work we conduct in this field aims to provide a legal basis for the sustainable growth objectives of ventures. This content is for general informational purposes only; it does not substitute for professional legal advice regarding specific cases.