ESOP Design Checklist

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CHECKLIST · 30 ITEMS · 25 MIN

ESOP Design Checklist

A 30-item ESOP design checklist for Turkey-resident or post-flip-up companies: decision framework, documentation, tax-compliance, communication-exit. Anchored in Turkish Commercial Code Art. 463-466 and KVKK.

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SECTION 1 8 ITEMSDecision Framework SECTION 2 8 ITEMSDocumentation SECTION 3 8 ITEMSTax and Compliance SECTION 4 6 ITEMSCommunication and Exit

SECTION 1 · 8 ITEMS

Decision Framework

Foundational ESOP decisions that constrain every later step. Set these intentionally: defaults compound poorly.

01Stage timing of ESOP introductionMost VC-backed companies institute the pool pre-Seed or pre-Series A. Earlier = cheaper option strike but smaller talent pool; later = market-rate strike but compressed vesting horizon for early hires.

02Total pool size (% fully diluted)Market norm: 10–15% pool at Series A. Founders often regret allocating less than 12%: burn-down is faster than expected once the team scales past 20.

03Award type: ISO / NSO / RSU / phantom equityTurkey-resident companies typically use share options or phantom equity. US (Delaware) entities post flip-up gain access to ISO (favorable for US employees). Phantom equity sidesteps share-issuance friction but is cash-settled.

04Eligibility scopeEmployees only, or contractors and advisors too? Advisor grants typically use FAST agreement template. Contractor grants require careful tax-residency analysis.

05Vesting cliff and total durationStandard: 4 years total with 1-year cliff. Aggressive: 3 years no cliff (rare). Accelerated: 5 years for senior hires. Document acceleration triggers explicitly.

06Foreign employee handlingNon-Turkey-resident employees of a Turkish entity face tax-residency complexity. Consider parallel grants from a Cayman/Delaware holding company if the structure permits.

07Board approval cadenceSingle-occurrence master approval + delegate grant authority to a Board Committee or Founder. Avoid per-grant board votes: operationally slow at scale.

08Reporting and observation rightsDecide whether ESOP holders see cap table, financials, or board updates. Default: nothing beyond grant-level information.

SECTION 2 · 8 ITEMS

Documentation

The plan, the grant, and their interaction with the rest of the cap table. Vague plans cause litigation; vague grants destroy trust.

09ESOP master plan documentComprehensive plan covering eligibility, vesting, exercise mechanics, termination, leaver classification, and amendment procedure. Approved by Board + shareholder resolution.

10Individual grant agreementPer-grant document referencing the master plan. Specifies: number of options, strike price, vesting schedule, cliff, post-termination exercise window.

11Anti-dilution interactionSpecify whether the pool refreshes on each financing round and how. Most VC term sheets require the pool be sized BEFORE the round at the company’s cost (existing shareholders dilute).

12Share class and treasury managementESOP shares typically a separate class with no voting rights, or non-voting common. Treasury-share vs new-issuance model: pick one and stick with it.

13Dilution waterfall modelMaintain a cap-table model showing fully-diluted ownership at each stage. Founders systematically underestimate dilution; the model corrects this.

14Board consent recordsEach grant must have a board resolution or board-committee minute referenced. Missing consents are the #1 finding in VC due diligence.

15Turkish Commercial Code Art. 463-466 complianceFor Turkish JSC, conditional capital increase mechanism (TTK Art. 463–466) is the cleanest pathway. Implementing this requires articles of association amendment.

16Independent valuation (409A / Turkish valuation report)US 409A valuation if Delaware entity; an independent valuation report for a non-listed Turkish JSC. Annual refresh standard, or after material events.

SECTION 3 · 8 ITEMS

Tax and Compliance

Tax treatment dominates the employee’s economic outcome. Misalignment of grant structure and tax regime destroys most of the perceived value.

17Turkish income tax exit timingTurkey taxes at exercise (income tax) and at sale (capital gains). Liquidity event without prior cash injection creates dry-tax risk. Structure to avoid.

18Employer SGK and withholding exposureEmployer responsible for SGK and income tax withholding on exercise. Material amounts at scale; finance team must model cashflow impact.

19US 83(b) election for flip-up structuresFor US Delaware entities, restricted stock grants benefit from 83(b) election within 30 days. Missing the deadline is unrecoverable.

20Double taxation treaty analysisForeign employees may be taxed in two jurisdictions. Treaty residency analysis under OECD model determines primary taxing right; tax credit mechanics matter.

21KVKK compliance for employee dataGrant agreements process employee personal data (compensation, identifiers). Add to VERBIS notification under data processing inventory. Privacy notice update required.

22Treasury and exercise financingMost employees lack cash to exercise. Options: cashless exercise, company-provided loan, secondary sale alongside investor round. Document mechanics in the master plan.

23M&A change-of-control treatmentSingle-trigger (accelerate on acquisition) vs double-trigger (accelerate on acquisition + termination within 12 months). Double-trigger is acquirer-friendly and now market norm.

24Bad-leaver and good-leaver classificationDefine termination categories precisely. Bad leaver typically forfeits unvested + vested-unexercised; good leaver retains vested. Vague definitions trigger litigation.

SECTION 4 · 6 ITEMS

Communication and Exit

An ESOP only motivates if employees understand it. Documentation alone is not communication.

25Onboarding deck and grant letterFirst-day comms covering: how the plan works, what it is and isn’t worth, vesting mechanics, exercise mechanics, what happens on leaving.

26Quarterly valuation communicationCommunicate fully-diluted share value at each valuation event so employees track their grant value in real time. Avoid surprise on exit.

27Liquidity event preparationPre-acquisition or pre-IPO: lawyer + tax advisor walks employees through their personal tax outcome. Spreadsheet per employee with worst/middle/best case.

28ROFR and transfer restrictionsRight of first refusal on vested-exercised shares. Transfer restrictions during lockup, around financing events, and at exit.

29Secondary sale programPeriodic secondary offerings let employees take partial liquidity before exit. Reduces dry-tax pressure and improves retention.

30Annual review and plan amendmentPool size, vesting norms, valuation refresh, eligibility scope, market benchmarking. Document each annual review and any amendment.

Decision Matrix: Is Our ESOP Sound?

How your checked items distribute shows your ESOP maturity:

Section 1 7+/8: Decision framework clear. No structural error.
Section 2 7+/8: Documentation complete. Ready for VC DD and M&A.
Section 3 7+/8: Tax-compliance structure sound. Dry-tax risk minimized.
Section 4 4+/6: Communication and liquidity preparation functioning.
Section 1-2 weak: Plan still nascent: redesign with advisor required.
Section 3 weak, tax unplanned: Dry-tax risk high: liquidity preparation critical.
Section 4 weak: ESOP not motivating: communication gap destroys value.
All four sections above threshold: ESOP maturity at upper range. Lock in annual review procedure.

Legal notice. This document is for informational purposes only and does not constitute legal advice. The Turkish Commercial Code, Income Tax Law, KVKK and other legislation referenced are general references; applying them to your company requires evaluation by a lawyer and tax advisor. Vircon Legal: [email protected]

Sources. Turkish Commercial Code No. 6102 and Law No. 6698 on the Protection of Personal Data (KVKK). Statute links open the official consolidated Turkish texts on mevzuat.gov.tr.

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Any information provided herein is for general informational purposes only and does not constitute legal, financial, accounting, or tax advice. Vircon Legal advises exclusively on the laws of the Republic of Türkiye and does not provide legal advisory services in the United States or any other foreign jurisdiction.

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ESOP Design Checklist

ESOP Design Checklist

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Decision Framework

Documentation

Tax and Compliance

Communication and Exit

Decision Matrix: Is Our ESOP Sound?

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