I often get asked this question – “Can I grant ESOPs to a Co-Founder who I recently brought on board my Startup?”. Well, the answer is both yes and no!
The Companies Act, 2013 prohibits the grant of ESOPs to the Promoter of a company. The term “Promoter” does not necessarily refer to only a person who is named as a Promoter at the time of incorporation of the company or holds equity in the company. A Promoter is defined broadly and includes the following:
Any person who has been named as such in a prospectus or is identified by the company in its annual return; or
Any person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
Any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Provided that such person is not someone who is acting merely in a professional capacity.
Therefore, typically a Co-Founder who you bring on board at a later stage, may not be a Promoter as stated in the Charter Documents (Memorandum and Articles of Association of your Startup) but still can be considered a “Promoter”, thus restricting him from receiving ESOPs in the company.
ESOPs to Promoters/Co-Founders of recognized Startups
The Companies Act, 2013 has made an exception to the above rule, by allowing Startups that are recognized by the DIPP, Government of India to grant ESOPs to Promoters, as long as the grant of such ESOPs is within 5 years from their incorporation. This means if your Startup has a Certificate of Recognition from DIPP, Government of India, then you can grant ESOPs to Promoters/Co-founders.