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Drafting Sweat Equity Agreement



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What is Sweat Equity?

As per Sec 2(88) of the Companies Act 2013, Sweat Equity shares mean shares issued by a company to its directors or employees for non cash consideration or at a discount for making rights available in the nature of intellectual property rights or providing know-how or any value additions in any form.

Points to keep in mind while drafting a Sweat Equity Agreement?

-Sweat Equity is an entitlement or right you have to exercise to buy the shares within a certain period of time, at a certain price (whether at face value or discount value, as per the terms). ONLY THEN shares will be transferred TO THE EMPLOYEE. Just vesting of sweat equity shares doesn’t necessarily mean transfer of sweat equity shares to the employee. It has to be BOUGHT.

- Vesting Schedule
[Fear of employer - what if the employee runs away next day after sweat equity is transferred to th employee?]
To take care of this problem, not all sweat equities are vested all together, vesting period is spaced out between a period of say 5 years. For example, 20 shares per year for 5 years.

-Transfer of shares
[Fear of employer -what if the employee sells my shares to my rival tomorrow?]
To take care of this problem, clause can be added to take written permission of the Company before selling the shares to a third party

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