Rulings on giving employees equity in a company

Question

I am in the process of joining a start-up and they are offering me equity in the company (5%). Information on Islamic Finance and business dealings is scarce on the web (aside from the general stuff) and local shayookh who are familiar in this matter are not available, so I am not sure about the permissibility of this. The company deals in the education sector and does not use interest, so if I were an outside investor purchasing shares, this would be halal. I thought I remembered coming across a fatwa awhile back that said something about how you can't receive equity in a company in exchange for labor - equity must be purchased (or you could receive it as a gift, but not in exchange for doing work).

Does anyone know anything about this, or where I can read more about this type of employment compensation?

Answer 1

I'm not familiar with the exact fatwa you're referring to, but I suspect it's based on the interpretation of a number of ahadith (such as this one) forbidding the sale of unharvested goods (for either labour or trade).

The general meaning of this prohibition is to prevent doubt; you can't really sell what doesn't exist, and if you have a man work for you under the condition that he receives half of the presumed harvest, that man may well end up working for nothing (due to no harvest).

In your case, however, things are a bit different. Despite appearances, you're not really being offered a share in the (presumed) profits of the company, you're actually being offered a share in the company itself. Unlike the man who may earn exactly half of nothing and walk away with nothing, you'll still keep your share in the company which would still have value so long as the company exists.

As an analogy to the above-linked hadith, it would be the difference between promising a labourer half the harvest if he works your field, versus outright giving him half of the field as payment for working the whole. In the later case, he still has half a field which he can do with as he pleases (e.g. sell for money or keep and work for future profit), regardless of the size of the harvest.

Without reading the actual fatwa you're referencing, I obviously can't be sure that my assumptions are correct. But based on my own knowledge, I know no reason why accepting equity as a form of payment would be forbidden, so long as it is has value to you and is yours to do with as you please.