Nepal's burgeoning startup ecosystem has taken a significant leap forward with the government’s introduction of sweat equity provisions. Aimed at fostering innovation and addressing resource constraints, this new regulation allows startups to reward contributors through equity for their expertise, skills, and goodwill instead of financial capital.
The recent ordinance amending Nepal’s Company Act permits startups to allocate up to 40% of their paid-up capital as sweat equity, while established companies can offer up to 20%. This groundbreaking move is expected to attract skilled professionals and foster a culture of collaboration and innovation.
The development aligns with the IT sector's growing contribution to Nepal's economy. A report by the Institute for Integrated Development Studies (IIDS) reveals that in 2022, Nepal exported IT services worth $51.5 million, marking a 64.2% growth from the previous year. IT services now account for 1.4% of GDP and 5.5% of foreign exchange reserves.
As startups increasingly rely on technology-driven ideas, the availability of sweat equity provides a viable solution for businesses unable to afford high salaries but keen to attract top-tier talent.
Sweat equity is widely practised internationally, and its implementation in Nepal is a first.
Siddhantaraj Pandey, President of Nepal Private Equity Association, remarked, “This provision addresses a long-standing gap, enabling startups to formally recognise and reward non-monetary contributions. It opens avenues for innovation by making room for experienced professionals to engage with startups.”
The ordinance introduces a framework to evaluate expertise, skills, and goodwill, converting them into equity. This measure also bridges the gap between financial constraints and the need for intellectual capital.
For startups, sweat equity is a win-win proposition. Co-founder of Aloi Pvt. Ltd., Sonika Manandhar, emphasised its relevance, saying, “Startups often cannot afford high salaries, but with sweat equity, they can attract skilled professionals who contribute significantly to the company’s growth.”
Additionally, this provision aligns with global practices like the Employee Stock Option Scheme (ESOP), empowering startups to retain and motivate talent effectively.
While the ordinance provides a promising framework, its practical implementation and acceptance will determine its success. Abhay Paudel, Treasurer of Nepal Association for Software and IT Services Companies (NAS-IT), highlighted, “Sweat equity has been a long-standing demand in Nepal. This step not only incentivises skilled contributions but also addresses a critical resource gap in startups.”
Currently, Nepal hosts over 600 IT companies, with more than 300 focusing on exports. The introduction of sweat equity is anticipated to further enhance the sector's growth trajectory.
