Sweat equity is usually linked to a startup's intellectual property or technical expertise. This equity can be provided as an alternate mode of compensation to retain employees
The government has allowed startups to issue equity shares to their employees and directors for 10 years after registration, raising the earlier limit of five years.
The Ministry of Corporate Affairs (MCA) announced the change to the Companies (Share Capital and Debentures) Rules, 2014 in a circular dated June 5.
Startups are permitted to issue equity not exceeding 50 percent of their paid-up capital.
Sweat equity is usually linked to a startup's intellectual property or technical expertise, unlike employee stock options (ESOPs) that are linked to the employee's performance.
The move is expected to help the companies hire and retain talent.
Industry experts told Business Standard the move will also provide an alternate compensation at a time when several firms and lower the chances of salary cuts.
"Any help to companies and employees in terms of seat equities will help in retention of talent, and the entire ecosystem will, then, benefit considerably," said Naganand Doraswamy, managing partner Ideaspring Capital, a venture fund told the paper.
