Saturday | 10 December 2022 | 15 Jamadiul-Awal 1444
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Fatwa Answer

Question ID: 1663 Category: Zakah
Calculation of "Liquid/Cash Zakatable" assets in a startup company

As Salaam Wa Aalikum Mufti Sahab,

I hope and pray you and your entire team are doing well.

I wanted to ask about calculation of zakat for an investment in a startup company.

My close relative has invested in a startup company, and asked the management to give him the "liquid/cash zakatable assets" of the business. So he can pay zakat on that.

They came back with a reply which needs some clarification on how "exactly" to calculate "liquid/cash zakat assets".

Basically, there are following points to consider:-

a) The number is significantly higher - in millions.
b) The number includes the "net cash + any debt elements". Basically they raised the recent capital using "SAFE" agreement between them and their new investors.

In their own terms:-

"...this is the instrument we used to raise the latest round from a VC fund, and technically in my understanding it is not 'debt' but it does give some rights to get back money first in case of liquidation (adverse event) of the company (so somewhat pseudo equity that is not yet converted into shares but equally have the preference nature to it when it comes to liquidation..."

Please see link below:-

Please do note, this SAFE round is for their recent capital raise. My close relative is already a shareholder in the company, from previous round investment.

It's just that, now they have this sum of "liquid/cash assets" which is significantly higher, and was raised using SAFE agreement. So it kind of does have this form, where the investor has the right to get money back in some adverse event, although it is not debt technically speaking.

So I have following 3 questions in this context, Mufti Sahab

1) In order to correctly calculate "liquid/cash assets" should we try to subtract the "debt or pseudo debt" elements from the total cash, to get to net cash? Or is zakat eligible for the total amount?

2) Also in general what should be done for zakat calculation in case of investment in startups? because normally it is not always possible to get accurate "liquid/cash" assets each year from the management. Can we assume some standard percentage each year? The situation of startups change very drastically from year to year.

3) Also if zakat is coming out to be too much, because of a big increase in the value of share holder, and the investor at the time is not able to pay for that much zakat, what should be done?

JazakAllahu khairan for reading through the question. Please kindly reply ar your earliest convenience.

Thank you
Saad Qureshi

بسم اللہ الرحمن الرحیم

الجواب وباللہ التوفیق

Zakat is not obligatory on the organization but is mandatory on the owners, shareholders, and the investors of the company. According to the research of the scholars and muftian-e-kiram, Zakat shall apply on long-term loans of commercial organizations. However, if the loan is payable in the form of installments, the payment of first year's loan will be deducted from total loan amount, and the remaining amount will be subject to zakat at the rate of two and a half percent. The same principle will apply on successive years, until the entire loan has been paid back.

It is important to calculate the Zakat amount as accurately as possible. During economic instabilities, Zakat shall be calculated using an educated guess. And in that too, it is recommended to   increase the zakat amount a little over the estimated value to cover up for any errors and/or discrepancies.

If the amount of zakat becomes so large that it is difficult to pay it all at one time, then zakat can be paid out little by little in installments. But it is preferred to pay it as soon as possible. 

وقال بعض مشايخنا: إن المؤجل لا يمنع؛ لأنه غير مطالب به عادة لأن الإحتیاط في العبادۃ واجب کما صرحوا بہ في کثیر من المسائل الخ۔ (شامي، کتاب الزکاۃ، باب زکوۃ المال، مکتبۃ زکریا دیوبند ۳/۲۳۱

الثاني لہ ابل، وبقر، وغنم سائمۃ وشک في أن علیہ زکوۃ کلہا أو بعضہا ینبغي أن تلزمہ زکوۃ الکل الخ۔ (الأشباہ والنظائر، القاعدۃ الثالثۃ قدیم ۱/۱۰۸

قال فی البدائع وعلیہ عامۃالمشائخ ففی أنی وقت أدی یکون مؤدیاللواجب ویتعین ذلک الوقت للواجب وإذالم یؤد إلی آخرعمرہ یتضیق علیہ الواجب حتی لولم یؤدحتی مات یاثم ‘‘ … ( ردالمحتار : ۲ ؍ ۱۴ 

فقط واللہ اعلم واتم