Let's dive into the world of advisory shares — those little pieces of equity that startups often give out to their trusted advisors. If you've ever wondered what they are, how they work, and whether they're worth your time (or your advisor's), we will break it down for you in this article.
Understanding Advisory Shares
Advisory shares, often used interchangeably with share options or with real shares, are a token of gratitude given to company advisors who aren't on the payroll. It's like saying, "Hey, thanks for your brainpower; have some ownership instead of cash." For startups, especially those still counting their pennies, it's a savvy move—save the cash, spread the equity.
Are there any tax implications for advisory shares?
When it comes to taxes, advisory shares can be a bit of a mixed thing. While employees often enjoy tax breaks for stock options, advisors usually miss out on these perks. These tax reliefs are designed to keep employees loyal and invested in the company for the long term, a benefit that doesn’t typically extend to advisors.
But hold on — there are exceptions. Take Estonia, for instance. Here, favorable tax treatment can apply to non-employee individuals, as long as they're not legal entities — read here! Do you know of any similar cases? Let us know!
Types of Taxes to Watch Out For
The tax implications for advisory shares vary depending on the advisor's country of tax residence or where they provide their services. Whether the advisor receives the shares as an individual, a self-employed entrepreneur, a business, or a legal entity can influence the tax consequences.
Generally speaking, expect to encounter income tax or capital gains tax in some form. It’s also wise to verify if obtaining advisory shares could trigger other taxes like value-added tax (VAT), wealth tax, securities transaction tax, or others.
- Income tax might be due if the shares are given instead of a salary, with tax paid on the share's value. This scenario is rare for advisors since they aren’t employees, but it’s always best to double-check with your tax advisor.
- Capital gains tax is a more common method of taxing share income. This tax usually comes into play when the advisor sells the shares at a profit. Such profit is often taxed at a lower rate than regular income.
- Value-added tax can be an unexpected twist. In the EU and some other countries, VAT applies to the supply of goods or services. When advisory services are compensated with shares, the tax authorities might want to add VAT to the mix as well.
How The Advisory Shares Work?
Imagine you're a startup founder with a killer idea. You reach out to a known expert in your field. Instead of cash which startups often lack, you offer them a slice of the equity pie. These advisory shares are like a thank-you note written in shares instead of ink.
Examples of Use
Example 1
- Who: A Silicon Valley angel with the know-how for scaling tech startups.
- Why: They provide strategic advice on product development and market entry.
- Outcome: Their advisory shares align their interests with yours — they win when your startup wins.
Example 2
- Who: A digital marketing guru who can make your product go viral.
- Why: They guide your branding strategy and customer acquisition efforts.
- Outcome: Advisory shares motivate them to go all-in, leveraging their network and expertise for your success.
Pros and Cons of Advisory Shares
The Dark Side: Risks to Beware
Now, let's talk about the darker side of advisory shares. While they can be great when used wisely, there have been cases where things went sideways. From advisors not pulling their weight to disputes over equity stakes, the startup world can be unpredictable. So choose your advisors wisely, document everything clearly, and keep communication open.
Conclusion: Should You Use Them?
Advisory shares is a very useful tool for any startup. They can attract top-notch talent, align incentives, and propel your startup forward faster. But like any equity tool, use them wisely. Understand the risks, set clear expectations, and nurture those advisor relationships like you would your favourite succulent (with just the right amount of water and sunlight).
