Employee Stock Option Plans (Esop): The Legal Way To Build Loyalty In Start-Ups Without Conferring Partnership

The most critical competitive arena for start-up companies is attracting and retaining qualified human resources. Employee Stock Option Plans (“ESOP”) are flexible incentive instruments that align key employees with the long-term value creation of the company, yet can be structured without necessarily giving rise to actual share ownership and a partnership relationship. Although Turkish law contains no integrated, standalone regime specific to ESOPs, the share and option instruments of Turkish Commercial Code No. 6102, the principle of freedom of contract and the tax incentives expanded over the past two years provide fertile ground for establishing a binding and attractive incentive relationship without making the employee a direct shareholder. In this information note prepared by our team, the legal models, design elements and current tax framework of ESOPs are addressed together with the compliance steps to which employers should pay attention.

1. General Framework and Position under Turkish Law

ESOP is the general name for plans that grant employees the right to acquire company shares (an option) at a predetermined price at the end of a vesting process, or an economic benefit tied to share value. As Turkish law contains no single statute regulating ESOPs, such plans are constructed contractually by combining the share-transfer and capital provisions of the Turkish Commercial Code, the freedom of contract under the Turkish Code of Obligations and the wage provisions of the Income Tax Law. While this flexibility allows the plan to be shaped to the company’s needs, the absence of a standard legal framework makes careful contractual architecture essential.

2. Two Core Models: Real Share Options and Phantom Shares

Two core models predominate in practice. Under a real share option, the employee actually acquires company shares at the end of vesting and exercise and gains the status of shareholder. Under the phantom share model, the employee is given no share or partnership right whatsoever; only a cash benefit indexed to the value of the share and contingent on an exit or defined events is undertaken by contract. The most direct way to build loyalty without conferring partnership is this second model, since the employee is offered the economic upside of ownership while voting, information and general-assembly rights and the distribution on the cap table are preserved.

3. Legal Instruments: The Source of the Shares

In real share options, the shares to be granted to the employee may come from three main sources: the issuance of new shares through a capital increase, a transfer of shares from existing shareholders, or the company acquiring its own shares and allocating them to employees. The Turkish Commercial Code permits a joint-stock company to acquire its own shares up to one-tenth of its principal or issued capital and subject to certain conditions (Article 379 et seq. of the TCC). The source of the shares should be planned from the outset in terms of the dilution effect on existing shareholders, valuation and tax consequences.

4. The Distinction Between Joint-Stock and Limited Liability Companies

The company type is decisive in ESOP design. In a joint-stock company, shares may be transferred freely and without formality, share certificates or interim certificates may be printed, and this matters both for ease of transfer and for tax advantage. In a limited liability company, by contrast, a share transfer is, as a rule, subject to a written transfer agreement with notarised signatures and the approval of the general assembly, which complicates the operation of an option. For this reason, start-ups planning to grant real shares to their employees are frequently advised to choose, or migrate to, a joint-stock structure at an early stage.

5. Vesting, Cliff and Leaver Scenarios

The loyalty-building function of an ESOP rests largely on the vesting schedule. Rights are usually spread over a period (for example, four years) and often subject to a “cliff” during which no rights accrue until the first year is completed; performance-based vesting is also possible. The provisions applying on the employee’s departure — the distinction between a good leaver and a bad leaver, forfeiture of rights and the company’s call option to repurchase shares — are the most critical and most dispute-prone part of the plan and must be drafted with the limits of labour law in mind.

6. Exercise, Strike Price and Valuation

In real share options, the employee acquires the vested shares against a predetermined strike price. The valuation method used to determine that price and the value of the share is fundamental to calculating both the benefit provided to the employee and the resulting tax burden. When and upon which event the exercise right arises — for example, an exit, a public offering or a specified date — should be carefully structured so that the plan does not create a tax and financing burden on the employee before liquidity materialises.

7. Managing the Cap Table and the Partnership Relationship

In real-option models where the employee actually becomes a shareholder, managing the cap table and the partnership relationship comes to the fore. So that new shareholders do not adversely affect company decisions and future investment rounds, pre-emption rights, rights of first refusal, tag-along and drag-along rights, voting agreements and share-transfer restrictions should be regulated consistently between the ESOP documents and the shareholders’ agreement (SHA). This need does not arise in the phantom model, since the employee does not appear on the cap table.

8. Tax Framework: The Wage Regime and the Tech-Initiative Exemption

The share or share-linked benefit provided to the employee is, as a rule, in the nature of wage and is subject to income tax at the moment it passes into the employee’s legal and economic disposal. However, under the exemption introduced in Article 17 of the Income Tax Law by Law No. 7524 dated 28 July 2024, a certain amount of the market value of share certificates granted free of charge or at a discount to employees by companies designated as a “tech-initiative company” (teknogirişim şirketi) by the Ministry of Industry and Technology is exempt from income tax. Law No. 7582 dated 4 June 2026 strengthened this exemption, raising the ceiling from one to two times the employee’s gross wage for the relevant year and shortening the holding periods for the shares.

9. Conditions of the Exemption and Clawback

The exemption is not unconditional. Where the shares are disposed of early, the exempted tax is collected from the employer on a graduated basis and with default interest (without a tax-loss penalty): the full amount if the share certificates are disposed of within two full years of acquisition, three-quarters if within three to four years and one-quarter if within five to six years; no clawback arises where the shares are held beyond six years. In addition, at the sale stage, the printing of share certificates or interim certificates and their retention for two full years affords a separate exemption possibility in terms of capital gains. It should be particularly noted that these exemptions do not apply to limited liability companies or to companies resident abroad.

10. Intersection with Labour Law

Because the ESOP benefit is in the nature of wage, it also produces consequences under labour law. Whether the plan is an element of the employment contract or a separate, unilateral incentive programme, the employer’s duty of equal treatment, the validity of forfeiture provisions on departure and their interaction with mutual-termination (ikale) agreements should all be assessed with care. Repurchase and forfeiture provisions based on the good-leaver/bad-leaver distinction must remain within the limits of the principle of protection of the employee and the rule of good faith.

11. Contractual Architecture and Compliance

In the absence of a standard legal framework, the security of an ESOP depends on the quality of its contractual architecture. A well-designed structure comprises the ESOP plan document setting out the general framework, the individual option or phantom-share agreement concluded with each employee, and their alignment with the shareholders’ agreement and the company’s articles of association. The processing of employees’ personal data within the scope of plan administration must be conducted in compliance with Personal Data Protection Law No. 6698, and records of tech-initiative status, valuation and vesting should be kept ready for audit.

12. Assessment and Implementation Steps

When properly structured, an ESOP is one of the most powerful talent-attraction and retention tools available to start-ups. Employers are advised, first, to take decisions on company type and, where necessary, migration to a joint-stock company and the printing of share certificates; to document tech-initiative status or begin the application process; to make a strategic choice between the real-option and phantom-share models; to regulate vesting, clawback and leaver scenarios clearly within the limits of labour law; and to model the taxation and double-taxation dimension from the outset in structures with foreign shareholders. These steps will both strengthen employee loyalty and protect the plan owner from legal and tax risks that may arise in the future.