Employee Stock Options (Vesting/ESOP): A Setup Guide for Startups

Short answer: Granting employees stock options (ESOP – Employee Stock Option Plan) is the standard way for early-stage startups to retain a highly qualified team by giving them a stake in the company's future value instead of cash compensation. Turkish law has no direct equivalent of the Anglo-Saxon "option" concept; the Turkish Commercial Code (TCC) subjects capital increases and share transfers to strict formal requirements. For this reason, an ESOP in Turkey is generally made legally enforceable through a combination of an option agreement to purchase shares + a vesting schedule + (where applicable) a profit-sharing certificate (intifa senedi). In addition, Provisional Article 84 of the Income Tax Law, added by Law No. 7420, introduces a significant income tax exemption for gains employees of qualifying venture companies derive from stock option plans — a key factor that must be considered when designing the plan.

What is an ESOP, and why set one up?

An ESOP/option plan grants an employee the right — not the obligation — to purchase company shares at a pre-determined price (the exercise/strike price) over a set period (the vesting period). As the employee earns (vests) this right under the plan's terms, they may choose to exercise it. For startups, the appeal of an ESOP is that it allows them to hire and retain qualified engineers, designers, and managers during periods of constrained cash flow, by giving these people a stake in the company's long-term success.

The core problem under Turkish law: conditional share transfer

The TCC subjects share transfers and capital increases in joint stock companies (TCC Art. 421, 456 et seq.) to strict formal requirements. A commitment such as "the employee may purchase shares in four years if they wish" does not, by itself, create share ownership; for such a commitment to be enforceable, one of two routes is generally followed:

• Option agreement + capital increase commitment: The company (and/or the founding shareholders) sign a "share purchase option agreement" with the employee. This agreement sets out the vesting schedule, the exercise price, and a commitment that, if the option is exercised, shares will be issued through a capital increase. As a practical matter, it is necessary for the founding shareholders to prepare in advance the capital increase resolutions needed for the option pool (or to provide a power of attorney/voting commitment to that effect).
• Profit-sharing certificates (intifa senedi, TCC Art. 348, 502): In some structures, instead of receiving shares directly, the employee is allocated a "profit-sharing certificate" that grants a right to share in profits and in the liquidation surplus. Holders of such certificates are not shareholders and therefore have no voting rights — this is a tool that allows founders to give employees a stake in the company's economic success without losing control. However, issuing profit-sharing certificates also requires a general assembly resolution and provisions in the articles of association.

Option pool size and timing

In practice, a startup at the incorporation stage typically sets aside an option pool in the range of 10% to 20% of total capital. The size of this pool and when it is created (at incorporation, or just before an investment round) is an important point in investor negotiations — because creating the pool before an investment round places most of the dilution cost on the existing shareholders (the founders), while creating it after the round also dilutes the new investor. This issue, known as the "option pool shuffle," should be explicitly negotiated in the term sheet.

The vesting schedule: cliff, vesting period, acceleration

A standard vesting structure includes the following elements:

• Vesting period: Typically four years. The employee earns all of the options over this period, in monthly or quarterly tranches.
• Cliff: Typically one year. If the employee leaves before this period ends, they earn no options at all; at the end of the first year, 25% (under a four-year plan) vests in a single block, with the remainder continuing to vest monthly thereafter.
• Acceleration clauses: "Single trigger" or "double trigger" (sale plus termination) clauses that cause some or all of the remaining unvested options to vest automatically if the company is sold (a change of control).

Good leaver / bad leaver distinction

What happens to vested but unexercised options if an employee leaves or is terminated before the vesting period is complete is governed by "good leaver / bad leaver" provisions:

• Good leaver (resignation, retirement, health reasons, etc.): Vested options can generally be exercised within a set period (e.g., 90 days); if not exercised within that period, they are forfeited.
• Bad leaver (termination for cause, breach of non-compete, fraud): The company may have the right to buy back even vested options — typically at nominal value or at the exercise price.

Drafting these clauses consistently with labor law (the definitions of just cause/valid cause for termination under the Labor Law) avoids future disputes over whether the loss of options upon termination should be treated as a penalty clause.

The tax dimension: the exemption under Provisional Article 84 of the Income Tax Law

Provisional Article 84 of the Income Tax Law, added by Law No. 7420, provides that for qualifying fully liable venture companies — within a certain period from their incorporation date (as set out in the legislation) and actually engaged in commercial, agricultural, or professional activity — gains realized by employees from stock option plans (whether upon exercise of the option or upon disposal of the resulting shares) are exempt from income tax up to a certain amount, provided the employee has worked at that workplace for at least 12 months. For the exemption to apply, the company must qualify as a "start-up" and the terms of the plan must be documented in accordance with the procedures set out in the relevant communiqués. This exemption should be factored into the plan's design from the outset (for example, in the choice between shares and profit-sharing certificates, and in the timing of the exercise date); otherwise, the benefit an employee realizes upon exercising an option may be taxed as employment income.

Practical setup steps

1. Determine the size of the option pool (as a percentage of total capital) and align it with current and future investment rounds.
2. Prepare the plan document (option plan rules): vesting schedule, cliff, the method for determining the exercise price (typically based on the valuation of the most recent financing round), and good/bad leaver definitions.
3. Sign an individual option agreement (grant letter) with each employee.
4. Align the capital increase mechanism to be used upon exercise of options (including any advance commitments/powers of attorney from the founding shareholders) with the company's articles of association and shareholders' agreement.
5. Track, on a per-employee basis, whether the conditions for the Provisional Article 84 exemption are met (the 12-month employment requirement, and the company's continued qualification as a start-up).

Conclusion

When properly set up, an ESOP is one of a startup's most powerful hiring and retention tools; when set up incorrectly or ambiguously, it can lead to legal disputes with departing employees and unexpected dilution debates in new investment rounds. The vesting schedule, the good/bad leaver definitions, and the mechanism for converting options into shares or profit-sharing certificates in a TCC-compliant manner must all be designed together when the plan is created. Bringing together both the company law and tax law dimensions of such a plan, obtaining support from an attorney from the outset helps prevent disputes and tax risks down the road.

Sources

1. Turkish Commercial Code No. 6102, Art. 348, 421, 456-484, 502 (profit-sharing certificates and capital increases).
2. Income Tax Law No. 193, Provisional Article 84 (added by Law No. 7420) — income tax exemption for stock option plans granted by venture companies to employees.
3. Labor Law No. 4857, Art. 17-25 (notice of termination and the distinction between just/valid cause).
4. Ministry of Treasury and Finance, General Communiqué on Income Tax (implementation principles of Provisional Article 84).

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