“We are granting options to the team in Istanbul — could you prepare the board consent?” A few months after the flip-up, the request arrives in almost those words every time. The consent runs to a page, the plan came out of another firm’s template, the cap table is current. Nobody asks which law this issuance answers to. Rule 701 exempts a non-reporting company’s compensatory issuances of shares and options from US federal registration; it is an exemption under the Securities Act of 1933, not a plan.
It answers to a second legal system as well, because the person receiving the option lives in Türkiye under a Turkish employment contract (iş sözleşmesi). The Delaware question is whether the conditions of the exemption are met. The Turkish questions are where the option sits within the employment relationship, what happens when the employee leaves, and which local obligations arise on exercise. In structures built after a flip-up, only one of the two layers gets thought about. It is the American one, because the drafting firm sits there. The Turkish side is quietly filed under “something HR handles”.
The bill does not arrive straight away. A missed exemption, or a plan that told the employee nothing, surfaces later — in the legal review of a funding round, or in the first exit conversation. Fixing it then costs more than building it properly at the outset.
What does Rule 701 exempt, and what does it leave standing?
The exemption relieves the issuer of registration and nothing else. The company still needs an employee share option plan, board approval of each grant, an exercise price resting on a defensible valuation, and a signed grant agreement for every award. Rule 701 creates none of that; it says only that where those documents are in order, the issuance need not be registered with the SEC. It is a federal exemption, so the local securities layer where the company or the recipient sits is assessed separately.
The second boundary is that the grant must genuinely rest on a compensatory relationship. Shares issued to an investor, to a corporate partner, or for raising capital fall outside it and are tested against a different exemption such as Regulation D. The sentence that stops a negotiation is this one: “We gave our adviser options, and he found us our investor.” One award paying for services and for capital-raising at once puts the exemption in question.
The ceiling in the twelve-month window
The exemption is not open-ended. The amount that may be sold in reliance on it in a 12-month period is capped by the greatest of three measures: 1 million US dollars; 15% of the issuer’s total assets; 15% of the outstanding amount of the class of shares concerned. At an early-stage company the binding measure is the first, because total assets and the outstanding share count are both small. After a large round closes, the ceiling rises quickly. What matters is that the calculation is kept for a rolling twelve-month window, not a calendar year.
The second threshold is disclosure. Once the aggregate sales price exceeds 10 million US dollars, recipients must be given a summary of the material terms of the plan, the risk factors and the financial statements, delivered a reasonable period before the sale. That threshold was raised in 2018 from 5 million dollars to 10 million dollars, which is why older templates still occasionally carry the old figure. For a team in Türkiye the consequence is blunt: above a certain size, your financial statements and risk factors land on your engineers’ laptops. The answer is not to avoid disclosure but to write the confidentiality obligation properly into the grant agreement and to treat the package as a recurring process.
Covered persons, and those left out
The exemption works for employees, directors and natural-person advisers genuinely providing services to the company. The load-bearing phrase is “natural person”, and in Turkish practice that is where we get stuck: much of the team invoices through a sole proprietorship (şahıs işletmesi) or its own limited company. Name that entity as counterparty in the grant agreement and the relationship the exemption depends on blurs. The fix is simple — the grant goes to the individual, the invoicing arrangement runs separately, and neither document cross-refers to the other.
- An adviser on paper, an employee in fact. In Türkiye this reaches beyond the option side into employment law: the risk of the arrangement being characterised as an employer–employee relationship exists independently of the paperwork, and the option itself can be used against the company in that argument.
- Leavers and transfers. A fresh grant for services rendered after departure and the exercise of an already vested option are different things; a plan that does not separate them creates a tangle that is awkward to unpick.
- Names close to the investor side. Awards to a fund’s operating partner, to an angel who made an introduction, or to a corporate partner’s employee look compensatory but differ in substance, and sit more safely under a separate exemption.
What happens if the exemption is lost?
Losing the exemption does not make the grant void; it makes the issuance an unregistered one. Two consequences follow. The first is that a shareholder may, in defined circumstances, demand the price paid back. The second, far more common for founders in Türkiye, is that the problem surfaces in the legal review of the next round or of an exit. Buy-side counsel will find it, and will ask not for a price reduction but for warranties and indemnities, with part of the consideration held in escrow.
The remedy is a retrospective clean-up: re-approving grants, completing missing paperwork and, where needed, offering the affected individuals their money back. All of it is possible, none of it is cheap, and it lands in a week when the company has other things to do.
What the plan document actually tells an employee in Türkiye
A document that is flawless on the American side does not necessarily mean anything to the person reading it. When an engineer in Türkiye receives a long plan in English template language with a grant agreement attached, three things register: how many, at what price, when. The rest is learnt during the first crisis. We now put a Turkish-language summary alongside the grant paperwork as standard, drafted so that it cannot contradict it; it does not replace the legal text, but it says plainly what has not been earned.
The second matter is how the option relates to the employment contract. Plan documents routinely state that the option is not salary (ücret), that vesting depends on continued employment, and that the company retains broad discretion. Those clauses belong there, but should be drafted knowing that they are not decisive on their own under Turkish employment law, where the character of an arrangement is assessed against how it has actually been applied and the expectation the employer has created. Equally, a post-termination exercise period left at the length treated as standard in the United States can, for a leaver in Türkiye, amount to losing the award. As a deliberate choice that is fine; adopted without anyone noticing, it becomes the argument that arrives later.
The third matter is exercise itself. For someone resident in Türkiye, exercising an option engages local tax and foreign-exchange rules, assessed in that person’s own circumstances rather than settled in the plan. The company’s useful contribution is to say in the paperwork that this assessment must be made before the exercise date, and to plan the size of the option pool, the pace of granting and the dilution effect with the founders in advance.
The 83(b) election, and the real work
An 83(b) election belongs to transfers of restricted shares, not to option grants: it arises for founders’ shares under reverse vesting, or for shares taken up under an early-exercise feature where the unvested portion stays repurchasable. Under Treas. Reg. § 1.83-2 the election is made within 30 days of the transfer of the shares. That period is not extended and missing it cannot be repaired; for a founder with US tax exposure the cost can be serious. For an employee resident in Türkiye with no US filing position it usually does not arise — worth knowing before the paperwork is signed rather than after.
What remains is the company’s real work: keeping records. The running total issued in reliance on the exemption over the rolling twelve-month window, the board approval and date for each grant, the valuation behind each exercise price, signed grant and exercise documents, the vesting position of every leaver, and the consistency of all of it with the cap table. Where that file is kept, legal review takes a few days; where it is not, the same exercise becomes an archaeology project falling in the tightest week of the deal.
Rule 701 is an exemption, not a plan, and on its own it gives nobody anything. The task is to know what you are handing out and document it so both systems can read it at once: on the American side, meeting the conditions and tracking the thresholds; on the Turkish side, settling in advance where the option sits in the employment relationship, what the departure scenarios look like, and which local obligations bite on exercise. Handled separately, those two exercises are expensive. Handled together, this is ordinary work.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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