Legal

All About Advisor Equity

Start-ups often seek advice from industry experts and want to onboard advisors to help expand and grow their business. Instead of paying cash consideration for such advice, they may issue equity to these advisors, allowing them to enjoy the upside in case of an exit. This approach also defers any cash outflow for the company. Under the Indian regulatory framework, there is no defined ‘advisor equity’ framework. The most common methods used to give shares to such advisors are provided below:

Phantom shares

  1. Startup and advisor to enter into an agreement for a cash/equity payout tied to the value of the startups shares
  2. The underlying number of shares are agreed upon at inception and the consideration is usually payable at the ‘exit event’
  3. The advisor does not get any ownership rights in the startup as no actual shares are issued to him

Issue ESOPs

  1. Advisor to be inducted as a director / employee of the startup
  2. Advisor to be issued ESOP under the ESOP scheme of the company based on the agreed terms

Issue shares for consideration other than cash

  1. Startup to issue shares to advisor in lieu of making payment against invoice raised by him for advisory services

Shares transferred from founders

  1. Founders to transfer equity shares to the advisor out of the personal stake
  2. Such transfer can be done at book value as mentioned under Rule 11UA of the Income-tax Rules, 1962 3. This method only dilutes the founders stake and not any other party

Key Considerations

Particulars Phantom Shares Issue ESOPs
Does the advisor form part of the cap table? No Yes, on exercise of ESOP
Is there cash outflow from the startup? Yes – at liquidity event* No
Tax implications • 18% GST to be collected by advisor on invoice raised

• Startup to deduct TDS @ 10% on the invoice amount

1) On exercise of ESOPs
Advisor : Perquisite under the head – ‘Income from Salary’
Startup : Perquisite is added to salary income of employee (advisor). TDS u/s 192 is to be deducted accordingly.

2) On sale of shares –
Advisor : Taxable under ‘Capital gains’
Startup : No tax implications

Is there cash outflow from the startup? No No

Other Key Considerations

Particulars Issue Shares (for considerations other than cash) Shares Transferred From Founders
Does the advisor form part of the cap table? Yes Yes
Is there cash outflow from the startup? No No
Tax implications • 18% GST to be collected by advisor on invoice raised
• Startup to deduct TDS @ 10% on the invoice amount
• Gains or loss arising to founders on sale of shares to be taxable as capital gains
The content of this document is for information purpose only and does not constitute advice or a legal opinion. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of this write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

Last Updated on: 8th December 2023, 12:04 pm


Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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