Page Contents
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:
- Startup and advisor to enter into an agreement for a cash/equity payout tied to the value of the startups shares
- The underlying number of shares are agreed upon at inception and the consideration is usually payable at the ‘exit event’
- The advisor does not get any ownership rights in the startup as no actual shares are issued to him
Issue ESOPs
- Advisor to be inducted as a director / employee of the startup
- Advisor to be issued ESOP under the ESOP scheme of the company based on the agreed terms
- Startup to issue shares to advisor in lieu of making payment against invoice raised by him for advisory services
- Founders to transfer equity shares to the advisor out of the personal stake
- 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 – |
| 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 |
