Purpose
This guide is intended for Muslim start-up founders in the US who wish to stay faithful to the principles of Islamic legal law when building, scaling and exiting their companies. It aims to cover the most common sources of confusion and problems in company building and provide a framework to make ethical decisions. It is not intended to be a legal decree (fatwa) or to be exhaustive in its coverage of topics, opinions or perspectives. Although all opinions below derive from general rulings in Islamic law (fiqh) that are recognized across all schools of thought - both classical and modern - and have been verified by someone trained in the traditional Islamic sciences, you are encouraged to ask a knowledgeable scholar you trust if you have a situation or issue that is specific to you or your company.
Authors & Contact
Zerzar Bukhari is a US-based entrepreneur based in California. He is the founder & CEO of Zynq, a YC-backed B2B SaaS company helping companies manage their offices in 6+ continents and 70+ cities across the world. Previously, he worked as a product manager at Google and Microsoft.
Shaykh Joe Bradford is a well known ethical financial advisor for the North American Muslim community trained in both western finance and the traditional Islamic sciences. He has previously worked as a VP and senior Shari’ah consultant at Al-Rajhi, the largest Islamic bank in the Middle East.
If you notice any errors or have suggestions on how to improve this guide, you can email mfc-us-founders-guide@googlegroups.com.
About this guide
This guide is mostly in Q&A format, structured in chronological order of the different stages of a company’s journey. You are free to read the guide in full, or just the section that is applicable to you. Citations from existing legal rulings (fatawa) or from traditional Islamic sources and additional notes are located at the end of the post.
The Guide
Before You Start Your Company
If you are not yet a founder, you probably have a lot of questions on what kind of ethical issues the world of entrepreneurship will bring. Below, you can find general guidance on when it’s advisable to pursue entrepreneurship as a career, who you should work with, and what you should work on.
The first step, in accordance with the proper manners, is that you must purify your intention1. You should be clear on why you want to start a company, whether that is to improve your character and faith through the company building journey, to build halal wealth in pursuit of spending it wisely, to have the freedom and independence to lead a life closer to Allah’s guidance, or any other motivation you might have. Throughout this difficult but rewarding journey, you will be asking for Allah’s help and guidance, and to ensure all of this struggle is worth it in the hereafter, you should clarify and vocalize your intentions.
Should I start a company?
The general answer to this question is a resounding yes. The world needs more ethical founders and entrepreneurship is a well-known, accepted, and respectable career in Islamic history, with many famous Islamic scholars having been entrepreneurs themselves23. There is no inherent ethical or Islamic legal issue with wanting to start a business.
However, in some cases, it may not be advisable. If you have dependents who are unable to support themselves and for whom you have an Islamic legal obligation to support, financially or otherwise (e.g. your responsibilities to your spouse), then you must decide whether pursuing the entrepreneurship journey will force you to renege on that obligation. Taking a risk is acceptable, but if you are near certain that you will put your dependents in jeopardy by foregoing a stable income for up to two years or more, then you will need to rethink your plan before you take the leap.
In some cases, your parents may not agree with your decision to pursue building a company. While you should heed sound advice from your parents and appreciate their concern and wisdom for your wellbeing, you do not require their approval to become an entrepreneur. Meaning, if they do not agree with your decision and you go ahead with it, you would not be doing something unlawful (haram), nor would you be religiously required to leave your business because of your parents’ dislike for the entrepreneurial path.
What kind of company can I start?
You can start and run any company whose business activities are halal according to Islamic law. Activities that would be impermissible include the sale of haram goods (e.g. alcohol or pork), interest-based financing, harming or oppressing innocent people, anything deceptive or fraudulent or anything involving adult/explicit or immoral content.
In some cases, the activity itself is permissible, but the application of it might be morally ambiguous. Examples of this are weapons manufacturing and cyber offense. If your company is going to build or offer a service that will play a material role in, for example, taking the lives of innocent civilians, defrauding or hurting people, or any unethical outcome, then it is inadvisable to pursue such an idea.
Note that this does not mean that you are responsible for ensuring all of your customers are ethical, but rather that you offer a good or service that is of general public benefit and not customized or designed for specific customers that engage in unethical or morally ambiguous activities.
There are many company ideas that fall somewhere between the dichotomy of these clear distinctions. The general advice is to avoid such a moral gray area4, especially since the act of entrepreneurship is in and of itself an exercise of agency and judgment, and using that judgment to pursue an unambiguously moral good is better than the alternative. However, if you have a specific idea that you are not sure about, you should contact a knowledgeable scholar and get their advice for your situation.
Starting Your Company
Once you have an idea in mind, you’ll start to put pen to paper on getting the company structure in place, including finding cofounders, setting up the legal entity and defining the operations for the business. Luckily, this part of the company building process is quite straightforward and unambiguous from an ethical perspective as long as you keep the below advice in mind.
Who should I choose to work with as a co-founder?
Apart from the obvious personality and skill match, you should also keep in mind the ethical alignment of who you decide to get into business with. You do not necessarily need to partner with only Muslims - indeed there is generally no issue with partnering with ethical, qualified people of other faiths, although some scholars preferred that this be avoided5. However, you should be careful to protect yourself from a position where you are forced to do something that is impermissible.
To guard yourself against this, you should be clear about your ethical boundaries with your partners up-front and have something in writing (such as adding a morality clause in the company by-laws at formation) that protects you from a future in which the company direction changes and becomes contrary to your values.
How should I setup my legal entity?
There is no ethical issue with adopting any of the legal entities (although a C-corp is most common for technology startups) nor being based in any particular US state. There is also no issue with any of the most common types of stock plans (RSAs, RSUs, options, etc.), with the exception of preferred shares. Having preferred shares that have a financial incentive (as opposed to a controlling incentive to concentrate decision making power), such as liquidation preference for the founders beyond their initial monetary investment in the business, are impermissible due to the inherent unfairness associated with skewed financial outcomes of the shareholders who have put money into the business6. However, if you opt to go for a stock plan that is not one of the common choices for technology startups, you should contact a knowledgeable scholar to make sure it abides by the ethical considerations.
How should I deal with insurance?
There is no issue with purchasing insurance through a mutual insurance provider, where risk is shared equally by all members and only a reasonable management fee is charged to cover overhead expenses. However, for most companies, getting insurance through a commercial insurance provider will be the only viable option at scale, which is technically impermissible due to the issue of Gharar7. In this case, legally mandated insurance (e.g. health coverage for employees) is acceptable even if it is from a stock based provider due to the principle of Umum Al-Balwa8 - i.e. if there is no other way to operate a company legally in the United States without it. It is recommended that you stick to the legally mandated minimums or, in some cases, coverage that is considered acceptable amongst your peer companies. It is not permissible to go beyond what is considered normal when purchasing such insurance.
The reason why it may be acceptable to go above the legally mandated minimum in some cases is because by not matching the prevailing norm in your industry, you will be exposing yourself to a different kind of a risk by operating at a structural disadvantage from your competitors (for e.g. in terms of recruitment or price gouging from providers). This argument might apply even if the insurance you are purchasing is not legally mandated but common in your industry. For any such situation, it’s recommended to consult a knowledgeable scholar to understand the right trade-off between staying faithful to the ethics of the situation and ensuring you can reasonably compete in the market.
Product Development & Marketing
Though you might already have an idea of the good or service you want to bring to market, there is still a lot of work to be done in refining that idea and bringing it to market. On the way, you might run into some ethical questions when trying to market test your idea and get the word out. It’s important to stay faithful to your principles and make sure the ends don’t justify unethical means. Your product or service should benefit people and not defraud or prey upon them. There will be a lot of avenues available for you to publicize your company, and you should try your best to pick the ones that are not only the most effective for the business, but also align with your values.
Can I pretend to sell a product that doesn’t yet exist?
It is permissible to advertise a product that you legitimately plan to build in the future once you are able prove its viability. However, the details in how you do so are very important. You should not take payment for a product that is expected to be delivered right away if you are not able to deliver it in the expected time frame. The general principle you should apply is to err on the side of transparency and not deception, while ensuring that the market test you are doing is still a useful and reliable signal.
It is impermissible to craft reviews and testimonials that are completely fictitious. If social proof is necessary, get people you know to try out even a portion of a real product or a past product of yours and use their feedback instead. In all cases, you should never defraud third party sites that aggregate reviews as this would also breach your contract with them (i.e. their terms of service).
Can I pretend my product or service has a certain feature that it currently doesn’t? (e.g. AI)
This practice is less ethically sound than the aforementioned tactic of selling something that doesn’t exist as you are deceiving a prospect about a feature solely for the purposes of closing a sale. In this case, you are almost surely taking payment under the premise that such a feature exists (e.g. AI-powered when it’s really manual tasks done by a human) and this is unethical even if you plan to build the feature in the future. In this case, the transaction may be permissible or impermissible depending on the details, but if it is fraud according to the law, i.e. the customer would have a valid case against you enforceable in a court of law, then it is certainly impermissible according to Islamic law. If you are planning on taking this approach, we recommend you contact a knowledgeable scholar to ensure you do not violate ethical boundaries9.
Can I advertise on websites or other media that may have unethical content?
It is advisable to avoid enriching organizations that promote unethical or immoral content. You should try your best to set the proper parameters on what kind of partnerships and placements you allow to associate with your company and product. However, due to the way that advertising platforms such as Google Ads work, it is infeasible to monitor and screen each and every ad placement, and thus, putting in a reasonable amount of effort is sufficient.
Can I sponsor or partner with events or organizations that are not ethically aligned with Islam?
It is not feasible to associate your company only with others who fully comply with Islamic ethics. The principle that applies in this case is the same as what determines whether or not you can invest in a company. If the primary activity of the event or organization is permissible according to Islamic ethics, then it is acceptable to sponsor or partner with them on the permissible activity.
What should I keep in mind when designing ads and commercials for my business?
Whether you produce the ads yourself or hire an external firm, you should ensure there are stipulations to ensure you are exemplifying the proper Islamic etiquette. Avoid promoting or normalizing what is clearly impermissible, such as intimate contact, sexually suggestive content and alcohol. It’s also recommended to set the content you produce in the world you idealize – as opposed to sticking to what is simply the norm or unfortunate reality. This would resonate even more with customers who align with your company’s values and may even give you a competitive advantage. For instance, a travel company does not need to rely on bikini-clad models and alcohol on the beach to paint a picture of a perfect vacation when most vacations are about beautiful places, unique culture and companionship.
Can I host a sweepstake, contest or lottery to promote purchase of my product?
There are three components which constitute games such as these:
Prize or reward for the winner(s)
Chance or luck required to win
Consideration, or effort/skill required to win
Based on these components, the categories of games can be described as follows:
A sweepstake has a prize and requires luck to win, but no skill or trivial effort
A contest has a prize and requires only skill and effort, and there is very little luck or chance
A lottery has a prize, and requires both skill/effort as well as luck/chance to win
According to US law, it is illegal to run a lottery without a license, and doing so would be impermissible according to Islamic law. Sweepstakes and contests are regulated in the US, such as requiring a “no purchase necessary” clause to ensure that there is an alternate means of entry that does not require making a purchase.
It is permissible to run a sweepstakes or contest, as long as you are abiding by the no purchase necessary law, as the same principle exists in Islamic ethics as well10. This may take the form of a random giveaway to customers (and anyone who signs up), to followers on LinkedIn/Instagram/Twitter, anyone who fills out a form, etc. as long as the intention is to market your business and get word of mouth awareness. The most important principle is that there must not be any payment required to enter (this includes running a contest specifically for only those who pay for your product or service or are subscribed to it).
You must also ensure the following11:
The prize/reward you are offering is of sufficient quality such that the recipient is not unpleasantly surprised (e.g. a ripped or dirty t-shirt)
You do not cover the marketing expense by explicitly increasing the price of the product to directly compensate your loss (e.g. everyone who buys this product gets a free pen, but you increase the price of the product to include the cost of the pen) as this would be unethical
If you have multiple prizes, the disparity between the prizes is not so stark as to unpleasantly surprise the winners (e.g. first place gets a car, second place gets a pen)
Fundraising
One of the first things you will do in your startup journey is raise funds to cover the initial operating expenses for the business. There are many ways to raise money for your business, and it is imperative to raise in ethical ways to ensure prosperous success for your business in this world and the next.
Can I raise debt-financing?
Any form of financing that guarantees a return to the creditor (i.e. an amount above the principal) regardless of the outcome of the business is impermissible in Islamic law. This includes all the traditional forms of debt such as venture debt, convertible notes and traditional bank loans.
Can I raise revenue-based debt financing?
If the return above principal is conditional on the success of the business (e.g. revenue share), with no guaranteed payout or multiple, then it may be permissible depending on the details of the agreement.
However, it is important to note that this is different from the timeline of the payment for interest being variable (e.g. depending on revenue share). The impermissibility is because of the guaranteed component (i.e. interest) of the original transaction and not the timeline for payment. This means using most of the popular revenue-based financing companies is impermissible as their return multiple is guaranteed.
Can I raise equity-based financing?
This is the preferred way of raising funds for your business, but you must keep the following conditions in mind:
Preferred shares that result in an outsized financial outcome for an investor (e.g. liquidation multiples), are not permissible.12
The investors must receive equity proportional to their investment, as determined by the mutually-agreed valuation of the company at the time of the investment
Capital invested in the business should be returned from company profits before the founders get a return on their (labor) investment (e.g. through a liquidation preference clause for investors).13
Can I raise via a YC SAFE?
The standard YC SAFE, unmodified, is permissible to use to raise funds for your company. The only ethical issue is that there is no specific time limit on when the investment will convert into actual shares of the company (or a tangible financial outcome) which could be unfair to investors if the company continues to operate indefinitely without an exit or further rounds of funding.
To mitigate this, if you have the power to modify or create a side letter to the SAFE agreement (whether as the investor or the company), you must add a clause to delimit a specific time frame when the investment will automatically convert into shares of the company or a financial pay-out even if the qualifying conditions are not met.
Although the YC SAFE does specify a liquidation preference for investors, which was mentioned previously as impermissible for the founders at company formation, this is not an issue in the case of investors in a pre-revenue company, as Islamic law treats capital return differently than labor-invested return. However, preferred shares that go beyond liquidation preference and controlling power (e.g. liquidation multipliers) remain impermissible for both investors and the initial founders. 14
There are also no issues with the standard pro-rata side letter alongside the standard YC SAFE.
Can I fund my company via joint corporate ventures, competitions or take free credits & grants?
The general principle on liquidation preference – i.e. the principal of the invested capital is that it is returned before profits are shared between capital and labor should be maintained regardless of the source of the funding unless the funds are simply a gift, incentive or reward15. If this is satisfied, then there is no issue with having another company fund your product or service and/or utilizing their incentives to build your product or service. The same principle applies to funds raised through government initiatives, start up competitions, and other such programs.
However, you must be careful of any additional conditions applied on the funds or credits that are given to your company. If there is any nonstandard clause which gives undue enrichment to the investor beyond their initial investment (similar to a liquidation multiplier, or outsized share of the profits directly or indirectly), then the agreement may be impermissible. As in most cases, it’s advisable to consult a knowledgeable scholar for any specific situation.
Can I take money from friends & family who want to support me?
There is no issue in taking money from people who are giving you their money as a gift or a non-interest bearing loan, without any expectation of reward, based on their relationship to you or knowledge of your skills.
There is also no issue in you giving them a reward (even a financial one above the principal of the original loan), as long as this is done voluntarily by you and without any conditions or expectations from the one who gave you the initial funds. The difference between this and an impermissible interest bearing loan is that the gift is not stipulated or expected and is simply a gesture of thanks done at or after the repayment of the loan, while stipulating a payment above the loaned capital creates an expectation of return and would be impermissible.
Note that this is a different case than crowdfunding from the general public, whose conditions are listed below.
Can I raise money via crowdfunding?
Raising money from the general public, and promising to build a product or service in the future, is generally permissible as long as the conditions below are satisfied:
You must offer something of value in return for their funds (e.g. a discount on the future product, ownership in the company, etc.)
The reward given to investors must be proportionate to the value invested (so a simple gesture, thanks, or token reward is not sufficient)16. This must be satisfied even if investors opt to forego a reward and simply intend to support you, as Islamic principles ensure you must minimize future buyer regret. 17
If you are promising a future product or service, you must make that explicit in the description and attach a specific timeline for completion and general availability.
You must make it clear to buyers that this investment is speculative, and there is no guarantee of a future product or service due to the inherent riskiness of the R&D process.
You must do your absolute best to fulfill the promise to investors, or return as much of their money as possible once you realize the promise is undeliverable.
You should state clearly what you intend to happen if the project or company fails.
Are there any restrictions on who I can fundraise from?
In general, there is no obligation on you to restrict which individuals you raise funds from. However, if you are giving someone a controlling interest in your business as a result of the fundraise, then it is recommended that you be discerning about who that individual is and their moral character.
When taking funds from other entities (e.g., companies), the rule is that you are allowed to accept their funds if the business itself is permissible under Islamic law, regardless of how they finance projects unrelated to yours. This means you cannot, for example, raise funds from a traditional bank, as it is impermissible for a Muslim to invest in or support a company whose core revenue is based on impermissible transactions, such as a traditional bank that earns the majority of its income from interest-based lending. A VC fund, who may or may not issue interest bearing notes, would be different and judged on a case by case basis.
Earning Revenue
Apart from the straightforward restriction of the sale of haram goods or services being impermissible, there are other nuances that must be taken into account when setting up the revenue operations for your company. The general spirit is to be fair, accountable and transparent with your customers.
How should I deal with customers who don’t pay on time?
You have a few options when dealing with such customers and you may intend to do one or more of the following: charge a late fee, attempt to collect the debt, possibly via litigation, sell the debt to a third party, write off the debt, and/or shut off the service or repossess the asset that was sold.
Charging late fees, in principle, is impermissible due to usury (Riba) laws, as the amount due from a sale of the product or service in exchange for future payment is a debt. To charge an amount beyond its original agreed upon price is synonymous with charging interest on any debt, therefore making it the same as an interest-bearing loan.
However, in practice, late fees are not charged to increase the revenue of companies, but rather to ensure compliance and avoid litigation for outstanding payments. They are also used to cover the cost of recovering unpaid amounts (e.g. for litigation or debt collection) which would otherwise be an expense to the business. The general advice is to avoid having a strict written policy for late payments for this reason, but deciding a reasonable fee on a case-by-case basis that is proportional to the cost of collecting the debt. The fee can be flat or percentage based, but must take into account the financial difficulty of the debtor and make reasonable accommodation as a result. You must also ensure you do not request a repayment in excess of the original amount plus any expenses associated with collecting the debt.
Attempting to collect the debt is the preferred approach, although this may come at considerable expense to the business, especially if there is litigation involved. Charging a fee as mentioned above to cover this cost is an option. You may also employ a company that specializes in collecting debt, but in this case you must ensure this is done ethically, without undue hardship to the debtor, and room for clemency for those who are in genuine financial difficulty18.
You may also choose to sell outstanding debt to a third party, rather than collecting it yourself, and this is permissible according to two of the four schools of jurisprudence. However, this debt must back a real asset (i.e. a product or service that was sold to the customer).
There is no issue with writing off the debt or repossessing or shutting off the original product or service that was not paid in full. In that case, you must return any partial payments that were made unless they cover the expense or partial use of the product or service.
I need to get a specific insurance policy to acquire an important customer, what should I do?
Some types of insurance, though not legally mandated, are essentially required to operate in certain industries. Examples of this include general liability insurance or cyber insurance. If the insurance you require is considered standard industry practice and cannot be avoided, then it is permissible only up to the minimum coverage required. The considerations here are the same as mentioned previously on which insurances you should get when starting your company.
Can I sell to individuals or entities that are immoral or run counter to Islamic principles and ethics?
You are not obligated to vet each of your customers for compliance with Islamic law, principles nor ethics, nor are you restricted to selling only to other Muslims or Muslim causes. As long as the goods or services you are selling are of general public benefit, and not specifically designed for an immoral purpose, there is no further diligence required on your part. However, it is always advisable for you to encourage morality and ethical behavior in all contexts in whichever way you can, and being a provider for an important good or service gives you a unique opportunity to do so.
Can I sell non-Islamic religion-specific goods or services?
Any good or service that is intended to facilitate the worship of anyone other than Allah is impermissible. Note that this would not apply to, for example, the sale of kosher meat, as kosher meat is considered halal.
My product or service is primarily used for unethical activity, even though I did not intend so. What should I do?
If you are aware that your product or service is being used primarily for haram and unethical actions, you are obligated to do something about it, either by putting a stop to that usage, or divesting yourself from the company. Note that this applies only if that is the primary usage of your product or service and that you are aware of it. As mentioned above, you are not obligated to vet each of your customers and ensure ethical compliance.
Can I acquire a company that does not fully comply with Islamic legal principles and let it operate independently?
As long as the primary business activity of the company you are acquiring is permissible according to Islamic law, and the acquisition will not compromise the ethics of your business’ existing income sources, then the acquisition is permissible. However, you must ensure that you are not precluded from making changes to the acquired company, and it’s advisable to have a roadmap for how you will ensure the acquired company will follow the same ethical principles as your company in the future.
Company Finances
Once your company is operational and starts to see some success, you will begin potentially turning over millions of dollars and the amount of services available for you to manage the flow of that money will grow exponentially. In this phase, it is incredibly important to stay disciplined and faithful to Islamic legal principles, as it is far too easy to simply follow the easiest options and mix the goodness you have created with unethical gains.
How should I think about Zakat?
Zakat is due on the current assets of the company, as these are ultimately owned by individuals, but how this is managed is up to the founders. The current assets (cash, receivables, and inventory) represent liquid assets that if held in any other place would be liable for Zakat. You can either have the company pay the Zakat directly, or leave that responsibility to the owners to pay their portion (especially if not all of the shareholders are Muslim). If you choose to have the company pay the Zakat for its shareholders, then you are allowed to make a dual intention, for example by partnering with a charity, using the funds for Zakat, even though it may also give you a marketing benefit.
The Zakat due is not simply on the company’s current account balance because in most cases this does not fully encapsulate the present value of the company and account for non-Zakat eligible assets. There are a few different opinions on how you should calculate Zakat for companies, depending on how liquid the company’s shares are, how certain you are of the company’s actual valuation, and your estimate for the non-Zakat eligible assets (such as tools and real estate). You may utilize online Zakat calculators for existing public companies (i.e. for stock investment) to get an understanding of how Zakat is considered for organizations, but it’s advisable to talk to a knowledgeable scholar to understand your specific obligations. You can also read “Simple Zakat Guide” by Sh. Joe Bradford, specifically the chapter on Business Assets.
If your company is fully private and there is no secondary market for shares, then, as a shareholder, your Zakat eligible assets (company shares) are not currently liquid, and therefore it is not possible for you to pay Zakat from them. This is also true if company funds are themselves inaccessible by condition or custom (i.e. the investors have stipulated or expect 100% reinvestment into the business and no profits are paid out to anyone), which is the norm for early stage technology companies. In both these cases, Zakat of 2.5% will be due only at the moment the shares or funds become liquid, regardless of how much time has passed.
Can I keep company funds and/or working capital in an interest bearing account?
No, this is not permissible and you should avoid it as much as possible. If it is a stipulation from investors, then you are obligated to find alternatives as soon as possible. If you are already in this situation, then you should contact a knowledgeable scholar to determine the best next steps to remedy the situation.
Can I have a company credit card?
Technically the contract you sign with credit card companies is impermissible, due to the stipulation of interest. However, in this case, the principle of Umum al Balwa applies, as shunning the use of credit cards entirely, along with the fraud protections, rewards and partnerships they provide, would significantly affect the competitiveness of most businesses. Therefore, it is permissible to use company credit cards, but only if you ensure all issued cards are paid in full every month and never accrue interest. You should also ensure the company has enough funds to cover the possible future balances of the cards and adjust the limits accordingly.
What should I do if my company can’t cover its debt and must accrue interest or dissolve?
If it is a dire need and the only option for the survival of the company and the employment of its employees, then it is permissible, provided that you minimize the interest paid and get out of the situation as quickly as possible. Although you cannot guarantee future survival of the company and must take a risk, you must take honest stock of the situation and not delay the inevitable death of the company by continuing to roll over debts month over month.
Can I offer a managed 401K plan, even though it may invest counter to Islamic ethics?
There is no issue with offering a managed 401K plan to non-Muslim employees, as paying them the same amount in cash would not preclude them from doing what the managed plan would be doing anyway.
However, you should work with the 401K provider to offer a shariah-compliant option for your Muslim employees if possible.
People Management
Once you start hiring employees, you will be faced with brand new ethical and moral questions that will be difficult to traverse. As with everything else, the general principle is to treat your employees fairly and ensure they feel empowered to do their best work while upholding the company’s moral foundation. You must also ensure you fulfill your obligations to them, the primary of which being to pay them on time and with fair compensation.
How do I navigate topics like support for causes that go against Islam, such as LGBT?
The general advice is to keep the business’ focus on its primary revenue-generating activity and avoid supporting specific causes orthogonal to the business that may alienate certain employees or violate Islamic principles. This does not preclude people from supporting any cause they wish in a personal capacity.
Your employee pool will be diverse, and your company policy should reflect that by allowing and not restricting individuals to take time off for or support causes that are meaningful to them on a personal level.
If this is impossible, legally or practically, then you must do only what is the necessary minimum to ensure the survival of the business, avoiding as much as possible. However, if it is simply a means to achieving more incremental success for the business, then it is impermissible.
Can I hire non-Muslims, especially for leadership positions where they will be making important decisions?
There is no issue with hiring non-Muslims, even for the highest leadership positions, as long as they are expected to follow the same company-wide principles to ensure the company is ethically sound. You should ideally ensure you have a written set of guidelines of what all employees should do and how the company should operate and ensure compliance. If you believe a certain employee cannot uphold that standard, regardless of their religious affiliation, then you must take action to remedy the situation.
However, if an employee makes a mistake or fails to follow the company guidelines (e.g. by making a profit by violating Islamic ethics), then you are not obligated to forego the entire earnings if the earnings could have been earned in a halal way. Your obligation is only to reprimand the employee and take remedial action to ensure future compliance.
If you are selling a Muslim-specific product or service (e.g. a product for Hajj pilgrimage), then it is advisable to have oversight provided by a Muslim at some level of the organization, to ensure there is empathy for the customer and proper compliance.
Can I use company funds to pay for non-Halal food, including alcohol for non-Muslims?
There are several situations in which you may confront this issue including catering lunch for your employees, hosting happy hours for morale, or having sales meetings with prospective customers.
In all cases, it is impermissible to facilitate the sale or consumption of alcohol or pork, which are clearly haram, using company funds even if it is for company morale or to close a sale. You must find alternatives (e.g. a different morale event or a restaurant that does not serve alcohol) whenever possible.
There is a difference of opinion on the issue of facilitating the consumption of non-Halal meat (not including pork) due to there being legitimate historical legal rulings for its consumption in the US; however it is still preferable to avoid it.
A less-than-ideal alternative is to allow employees a reimbursable allowance, that they may spend on food of their choice, including for meals with clients. In this case, you are not directly purchasing the impermissible food, although you should still have guidelines restricting what will be reimbursed. Although this approach is preferred to the direct purchasing of impermissible food, it is still disliked and should be avoided if possible unless you can put strict restrictions preventing the purchase of pork and alcohol.
Can I hire an employee or do business in a country that forces Muslims to contradict their faith, for e.g. by requiring them to remove their hijab?
If this is a legal requirement in the country, then it is best to avoid such a situation, especially if one is contracting with the government responsible for such a law. However, this does not apply if the situation is caused simply by social pressure and not by legal code.
What should I do to accommodate employees’ religious obligations?
You should make sure to have reasonable accommodation for your employees to take time off for religious obligations on a regular basis as well as for special occasions such as observing religious holidays. This can take the form of allowing all employees to take short breaks during the workday (which would allow Muslims to use this time to complete their daily prayers). For longer breaks that can affect operations (e.g. Friday prayers, which usually require an hour including travel time), you can have an expectation for the employees to make up such time on another day by working overtime. Having a diverse set of employees may help streamline your operations, ensuring that there are enough people to work on days where some may be observing a religious holiday and allowing all who observe to take the time off.
You do not have an obligation to make space for your employees to pray, but if you are able, this may be to the benefit of your employees and business.
Can I defer and/or modify payroll for employees if it saves the business from certain dissolution?
Paying employees on time and their due compensation is one of the foremost obligations for an employer according to Islamic law and ethics. If you are not certain that you will be able to pay employees their due compensation at a later date (because the company dissolves and is without means), then it is impermissible to defer payroll and you must pay your employees on time. However, if it is possible to defer and still make payroll in the future, then this may be permissible especially if the alternative for the employees is immediate termination.
However, it is advised that you should not try to force your employees to accept this decision, or even pressure them to accept it due to the power dynamics at play which makes the agreement inherently one-sided. At best, you can consider asking employees to volunteer to defer their compensation (making clear that there will not be any retribution to those who don’t volunteer) after explaining the situation to them.
Exiting Your Company
Congratulations! You’ve created a valuable company and now have the opportunity to either have it acquired, or go public. You will, God willing, be rewarded both materially in this world and in the hereafter due to your intention to do this in the way that God has ordained. There are a few things to keep in mind when deciding the next major step for your company.
Who can I sell my company to?
It is permissible to sell your company to any entity as long as the following conditions are satisfied:
The primary activity of the acquirer is permissible
You don’t believe your company or product will be used for an immoral or unethical purpose
Your personal role post-acquisition will be permissible according to Islamic ethics
The acquisition offer is either all cash (and not stock of the acquirer) or the stock of the acquirer is liquid and can be sold at any time
If the acquirer's stock is illiquid and the offer includes stock compensation, it's not recommended to proceed. This would involve exchanging your company's illiquid stock for the acquirer's illiquid stock, over which you have less control. If the offer includes an executive role with decision-making power, it may be permissible. In such cases, it’s advisable to consult a knowledgeable scholar for specific guidance based on your situation.
Can I sell my company to an acquirer whose primary activity is not permissible?
The first consideration is that you must avoid selling your company if you are aware that your product or company will be used for an immoral or unethical purpose. Otherwise, there are two cases:
If the acquisition is purely in exchange for cash (i.e. you will not be getting any stock from the acquirer) and you will not be working for the acquirer post-acquisition, then it is permissible regardless of what business the acquirer is in19.
If the acquisition includes stock compensation then you must be able to immediately sell all of the stock (e.g. because the acquirer is a public company) and you must not work for the acquirer. Otherwise, it is impermissible.
What if the potential acquirer of my company makes the sale contingent on future performance?
As long as the price and terms are decided mutually and up-front with full transparency, there is no issue in having a clause that would void the sale or change the compensation terms depending on how the company or product performs post-acquisition.
Should I list my company on an exchange where I know there will be speculative investing, options trading and other impermissible activity on my stock?
There is no issue with you listing your company on any stock exchange. You are not responsible for how others trade your stock in the public market.
Are tender offers okay?
Tender offers are permissible regardless of whether or not it is restricted to only certain shareholders. This is because it’s the company’s responsibility to do what’s best for the company as a whole, even if that may come with adverse trade-offs for some employees.
Can I offer a pre-IPO discount to early investors and during the roadshow?
There is no issue with offering a pre-IPO discount to investors ahead of a public offering.
What about underwriters?
There is no issue with offering discounted shares to the underwriters of your IPO.
What kind of role can the underwriter play in the IPO?
In general, there are no issues with the traditional underwriting process ahead of an IPO. However, as always, be wary about potential ethical issues that may arise and aim to be transparent with both your underwriter as well as the general public.
Personal Finance
As an entrepreneur, your personal finance matters will differ from a typical salaried employee and thus you may have specific questions that are not covered by the general fatawa for Muslims in the US. Below you can find some common questions and guidelines on how to think about your own funds.
How can I pay Zakat on my share of the company if the shares are illiquid?
Zakat on your share of the company will be due the moment the shares become liquid and thereafter, and not while they are illiquid. Note that the Zakat calculation is not simply on the latest valuation of the company; see the answer to the previous Zakat question for more details.
Can I employ a non-Muslim wealth manager to handle my personal finances?
There is no issue with this as long as you provide the appropriate Islamic legal parameters to them and they agree to follow them. If they make a mistake and perform an impermissible transaction with your money, you are not obligated to give up the profits but must ensure you take action to avoid such mistakes in the future.
Can I invest in other companies via equity-based financing or a SAFE?
Yes, but you should employ the same principles mentioned above (e.g. ensuring the SAFE has a time limit for conversion).
Can I be a Limited Partner in a fund that sometimes invests in impermissible companies or issues venture debt?
You should try your best to avoid situations in which your money is used in impermissible ways. Therefore, if you know that your money will be used to issue interest-bearing debt or inevitably be invested in immoral or unethical companies, then it is impermissible for you to invest in such a fund.
However, the nature of the venture capital industry is that startups pivot, their balance sheets and activities are not public, and therefore it is impossible to guarantee certain outcomes. Therefore, the general advice is to be as diligent as is reasonable and invest in funds that most closely align with your values. If you are able to put conditions on how your funds are used, you should do so.
Miscellaneous Questions
There are some issues that don’t neatly fit into the categories above, but are still important and common enough to cover. Below you will find some of the most common issues and suggestions on how to think about them.
Am I obligated to have a public stance on current issues and/or support causes pertinent to Muslims (e.g. Palestine) even if it comes at a cost to me and my business?
You are obligated to have a personal position on the side of ethics and morality and cannot support or pander to anti-Muslim causes or oppression of any kind to any group of people.
However, you are not obligated to make your stance public, although it is recommended to do so in a personal capacity so long as it does not cut off your livelihood. It is important to recognize that circumstances differ, but everyone should strive to do what they can in the ways they are able to depending on their situation.
I lost majority control in my company and am now forced to make non-shariah compliant decisions. What should I do?
It is preferable for you to leave this situation as soon as possible. If the company’s primary activity becomes impermissible according to Islamic law, then it is an obligation for you to leave as soon as possible and divest yourself from the company.
If you are in this situation, but fear that taking such a decision would cause significant personal loss to you, you are encouraged to reach out to a knowledgeable scholar who will be able to help with your specific situation.
How should I think about my company shares in my succession planning (e.g. will)?
Your responsibility is to ensure that your financial assets (including company shares) are passed on to your family in the event of your death. It is recommended to take estate planning seriously and ensure company documents align with how you intend your company shares to be dealt with after your passing.
The obligation is specifically for the financial value of the assets – it’s not required for you to pass the ownership or decision making power to your inheritors, although you can do so if you wish.
Thank you for reading to the end of the Muslim Founders Guide. If you have a question not answered by this guide, we encourage you to reach out to a knowledgeable scholar who can help you. If you have any comments or suggestions about the guide itself, you can contact mfc-us-founders-guide@googlegroups.com
Sunan an-Nasa'i 3794
Jami`at-Tirmidhi 2518
Al-Qahtani et al., Mawsūʿat al-Ijmāʿ fī al-Fiqh al-Islāmī, 4:606.
Sahih al-Bukhari, al-Sultaniyah ed., 9:133.
Dibyan Al-Dibyan, Al-Muʿāmilāt al-Māliyya Aṣāla wa Muʿāṣira, 4:331.
Dibyan Al-Dibyan, Al-Muʿāmilāt al-Māliyya Aṣāla wa Muʿāṣira, 4:355
Shari’ah Standard No. (12): Sharikah (Musharakah), and Modern Corporations. 4/1/2/14
Shari’ah Standard No. (13): Mudarabah, 8.
Baber, Hasnan. "Crowdfunding Framework in Islamic Finance." In Handbook of Research on Theory and Practice of Global Islamic Finance. Hershey, PA
Encyclopedia of Islamic Fiqh (Egyptian Ministry of Awqaf) 11:184.
Fatwas of the Fatwa and Shariah Supervisory Board of Dubai Islamic Bank, Fatwa No. (94) Fiqh al-Muʿāmalāt, 3:353.