Employee Stock Option Plans (ESOP) and Phantom Shares for Startups under Turkish Law
How global startups and Turkish scaleups structure equity incentive plans (ESOP), conditional capital increases under TCC Art. 463, non-voting dividend certificates (Art. 502), and phantom stock.
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In technology start-ups and fast-growing scale-ups, the most effective instrument for attracting senior engineers and executives and securing their long-term commitment is the Employee Stock Option Plan (ESOP).
Option pools that are highly flexible in the Anglo-American model (the Delaware C-Corp) require deliberate legal engineering under Turkish Commercial Code No. 6102, whose strict capital-maintenance principle, nominal-value rule and share-transfer restrictions were not written with option pools in mind.
This guide examines the three equity-incentive models available to start-ups under Turkish law — the conditional capital increase under TCC Art. 463, dividend certificates under TCC Art. 502 and synthetic (phantom share) contracts — together with the tax regime under the Income Tax Law.
1. ESOP Structures under Turkish Law
The Commercial Code does not prevent a joint stock company from granting employees an option over its shares. In a limited liability company, however, every share transfer must be notarised and approved by the general assembly, so an ESOP should be built exclusively under a joint stock company (A.Ş.).
Three models are used in practice:
Model A: Conditional Capital Increase (TCC Art. 463)
The closest Turkish equivalent to the Anglo-American option pool is the conditional capital increase under TCC Art. 463.
- Mechanism: By amending the articles of association, the general assembly grants employees or managers the right to acquire newly issued shares at a set price (the strike price) by exercising a subscription or conversion right; the pre-emptive rights of existing shareholders are restricted to the extent required.
- Ceiling (TCC Art. 464): The total nominal value of the conditionally increased capital may not exceed one half of the company’s share capital, and each payment must be at least the nominal value of the shares.
- Operation: When the employee exercises the option, the capital increases automatically to the extent of the exercise, and the newly issued shares are delivered to the employee.
Model B: Founders’ and Dividend Certificates (TCC Art. 502)
Dividend certificates (intifa senetleri) confer a share in net profit, or in the value created on a sale of the company (exit), without any vote in the management of the company.
- No voting rights: Under TCC Art. 503 holders of dividend certificates cannot be given shareholder rights; they cannot vote at the general assembly.
- Profit and liquidation share: The articles of association may grant a right to participate in net profit and in the liquidation surplus, or a right to subscribe for newly issued shares.
- Investor-friendly: Employees obtain a financial stake without diluting the control of founders and existing venture or angel investors.
Model C: Phantom Shares (Virtual Shares / Stock Appreciation Rights)
A phantom-share plan involves no shares and no capital increase. It is a bonus contract under the law of obligations between the company and the employee.
- Mechanism: The employee is allocated virtual units indexed to a stated percentage of the company’s shares.
- Payment trigger: On a sale of the company at an agreed valuation (exit), a listing (IPO) or a dividend distribution, the employee receives a cash payment equal to the appreciation in the value of the indexed shares.
- No trade-registry filing: The plan can be put in place quickly by management, without a general assembly resolution or any Commercial Code procedure.
2. Comparison: Conditional Capital vs Dividend Certificates vs Phantom Shares
| Criterion | Conditional Capital (TCC 463) | Dividend Certificates (TCC 502) | Phantom Shares (contract) |
|---|---|---|---|
| Legal nature | Real shares (shareholding) | Security conferring a profit right | Contract under the law of obligations |
| Voting and management rights | YES (unless otherwise agreed) | NO | NO |
| Amendment of articles | REQUIRED (general assembly and registration) | REQUIRED (articles of association) | NOT REQUIRED (contract suffices) |
| Dilution of investors | Capital and votes are diluted | Profit and exit share only | Cash liability only |
| Ease of implementation | Medium to heavy procedure | Medium procedure | Fast and flexible |
3. Clauses Every ESOP Agreement Must Contain
To keep the balance of interests in a technology start-up, the following clauses should not be compromised:
- Vesting schedule and one-year cliff: The international standard is four-year vesting with a one-year cliff. An employee who leaves within the first twelve months earns nothing. At the end of month twelve, 25% vests; the remaining 75% vests in equal monthly instalments over the following 36 months (about 2.08% per month).
- Bad leaver vs good leaver:
- Bad leaver (termination for just cause, breach of non-compete): All options, and any shares already vested, are transferred back to the company at nominal value.
- Good leaver (death, disability, termination without valid reason): Options vested to date are preserved, together with the right to convert them into cash.
- Drag-along: When the majority of the company’s shares are sold to a strategic buyer, option-holding employees are obliged to sell on the same terms as the founders, so that no individual holder can block the transaction.
4. Tax Treatment (GVK Art. 61 and the GVK Art. 17 Exemption)
Two provisions of Income Tax Law No. 193 (GVK) decide the tax position:
- On exercise: Where the employee acquires shares below market value, the difference between the fair value of the shares and the price paid is treated as wage income under GVK Art. 61 and is subject to withholding.
- The GVK Art. 17 exemption (Law No. 7524, Official Gazette 2 August 2024): Article 17, long repealed, was re-enacted together with its heading by Article 2 of Law No. 7524 of 28 July 2024. Where an employer qualifies as a technology start-up company under criteria set by the Ministry of Industry and Technology, shares given to employees free of charge or at a discount, and treated as wages, are exempt from income tax to the extent that their fair value at the date of grant does not exceed twice the employee’s annual gross wage for that year. The exemption turns on the Ministry’s start-up criteria, not on R&D-centre or technopark status.
- Clawback ladder: If the employee disposes of the shares within two full years of acquisition, all of the exempted tax is recovered; within three to four years, 75%; within five to six years, 25% — in each case from the employer, with late-payment interest but without a tax-loss penalty. The holding obligation therefore sits with the employee while the financial risk sits with the employer; the ESOP agreement should contain a recourse clause passing that risk to the employee.
- Limitation: The limitation period for tax not collected because of the exemption starts at the beginning of the calendar year following the employee’s disposal of the shares. The Ministry of Treasury and Finance is authorised to set the procedural rules.
To design a bespoke ESOP, prepare the general assembly documentation for a TCC Art. 463 conditional capital increase and align the plan with your shareholders’ agreement, you can contact our corporate law team.
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Frequently asked questions
Can a limited liability company (Ltd. Şti.) run an employee stock option plan?
In practice, no. Share transfers in a limited company must be executed before a notary and approved by the general assembly (TCC Art. 595), which makes managing an option pool operationally unworkable. Startups planning an ESOP should convert into a joint stock company (A.Ş.) or use a contractual phantom-share model instead.
What happens to the options of an employee who leaves before the vesting period ends?
Under standard terms an employee who leaves before the one-year cliff earns nothing. After the cliff only the vested portion is retained; if the departure is a bad-leaver event such as termination for just cause, even vested shares are transferred back to the company at nominal value.
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