Work for equity
Your startup, as you well know, has to face great challenges every day to be able to create an optimal business model and stay afloat in the market. Success is often determined by the presence of loyal and enthusiastic founders and employees, who give their best day after day. But that’s not enough! To make the leap in quality, it is also essential to take advantage of qualified professional services, albeit often very expensive for those who are at the beginning. So why not consider adopting an alternative way of company capitalization, based on the enhancement of the work of partners or collaborators? Below you will find out what it is, how it works and above all who to contact to find the best advice for your startup in work for equity.
Work for equity: what it is and how it works
Work for equity is a remuneration tool for innovative startups introduced by Legislative Decree no. 179/2012 (Growth Decree 2.0), later extended to innovative SMEs by Legislative Decree no. 3/2015. It is a useful tool for the aforementioned companies that need qualified professional and work services, but do not have the necessary initial liquidity. Work for equity, in fact, makes it possible to remunerate consultants and external collaborators in a fiscally convenient way through the assignment of shares, quotas or equity financial instruments, issued against the contribution of work and services or credits accrued as a result of supplying work and services. The company, in fact, manages to operate without the need for financial resources, and self-employed workers have the opportunity to be incentivized in their business through equity participation.
Consultants, professionals and, in general, the suppliers of work and services for innovative startups and/or SMEs other than employees and their continuous collaborators can benefit from the provision in question.
But how does work for equity function?
According to the legislation, the company can assign:
- participatory financial instruments.
Obviously, the company’s bylaws must provide for the possibility of adopting work for equity policies and, specifically, the possibility of issuing participatory financial instruments against the contribution of work or services.
The startups and innovative SMEs that intend to apply this remuneration tool have the possibility to regulate the terms and conditions through the drafting of a specific agreement. This is a document that must give a detailed description of the type of work or service to be rendered and the enhancement of the contributions. Particular attention must be paid, in fact, to the enhancement of the contributions of professionals. To this end, startups and SMEs should prepare an appraisal, drawn up by an expert appointed by the parties, in order to economically enhance the performance of work or services rendered with shares or equity financial instruments. As a consequence of this, the contributions of services rendered against shares of limited liability companies constituted in the form of a paid capital increase must be guaranteed by a specific policy or bank guarantee paid by the subjects who are their bearers. These guarantees can be replaced, if the articles of association so foresee, by the payment of an amount of money as a deposit. In the joint-stock companies, however, the work and services cannot be subjects of conferment.
The various work for equity schemes
From an operational point of view, the use of work for equity can take place using one of the following schemes linked to the assignment of quotas or shares to external collaborators of the company:
- Transfer of the company’s own shares or quotas;
- Allocation of shares or quotas;
- Allocation of participatory financial instruments.
Let’s analyze these possibilities in detail.
Transfer of the company’s own shares or quotas to service providers
The company may provide for the purchase of its own shares or quotas and subsequently assign them to its beneficiaries.
The purchase of the company’s own shares or quotas can take place:
- upon payment, provided that only the available reserves resulting from the latest approved financial statements are used, or
- free of charge.
The competence of approving the purchase of a company’s own shares or quotas and their subsequent sale lies with the ordinary shareholders’ meeting of the company; the board of directors usually carries out the purchase by constituting an unavailable reserve of an amount equal to their value in the financial statements in which the purchase takes place.
This method of providing the actions presents some problems that limit their applicability. First of all, it must be pointed out that it is difficult for startups to apply the compliance with the limit of distributable profits and available reserves for the purchase of the company’s own shares. Furthermore, the sale of the company’s own shares by the shareholders may not always be feasible, also because it is not certain that the capital stock is fully paid up or that the shares are fully paid up immediately. For these reasons, the aforementioned method of applying the work for equity is not used very often.
Allocation of shares or quotas
The allocation of shares or quotas can take place in the following ways:
- Capital increase free of charge: the shares and quotas can be attributed free of charge to service providers, by resolution of the extraordinary assembly, to the extent of the net profits resulting from the financial statements, less the amount to be allocated to the legal reserve. A great limitation to this procedure is the fact that the allocation of shares through a free capital increase can occur only in favor of existing shareholders. The possibility of allocating the capital increase to third party shareholders is admissible only for joint stock companies (Article 2349 of the Italian Civil Code) and only for employees (not for external contractors). Also in this case, therefore, the legal conditions to be complied with end up making this method of allocating company shares rarely used;
- Capital increase upon payment: the shares and quotas can also be attributed by means of paid capital increases offered for subscription to service providers, by resolution of the extraordinary shareholders’ meeting; in the case of a joint-stock company, this resolution must foresee the exclusion of the right of option of the other shareholders. The only precaution concerns the limited liability companies, in fact, in order for a capital increase to be approved for third parties, the articles of association must contain a specific provision. At this point it is necessary to understand the operating procedure to conclude the capital increase upon payment. In this case, the contribution by the service provider is carried out by offsetting the credit claimed for the services rendered. On this point, it must be pointed out that while the conferment of work takes place in the initial phase of the collaborative relationship, the offsetting of the credit can only take place at the conclusion of the work rendered. The extraordinary shareholders’ meeting will determine the issue price of the shares based on the value of the company’s net assets.
Allocation of participatory financial instruments
Companies can issue equity financial instruments, whether established in the form of joint stock companies or limited liability companies, whose characteristics, terms and conditions must be contained in the articles of association and in a specific regulation. Participatory financial instruments do not attribute the status of shareholder nor do they allow participation in the capital stock; however, they may confer property and administrative rights. The regulation for the issue of equity financial instruments could also foresee their conversion into shares or quotas upon the meeting of certain conditions or performance of the company, thus allowing the beneficiaries to become shareholders of it. The allocation of participatory financial instruments in favor of the beneficiaries must be approved by the extraordinary assembly.
Work for equity taxation and tax breaks
The allocation of shares, quotas, or financial instruments in the context of work for equity is exempt from taxes and does not contribute to the formation of the taxable income of the service provider, neither at the time of completion of the work or service nor at the time of the actual issuing of these shares, quotas or financial instruments.
There are no restrictions on the subsequent sale of securities and financial instruments allocated in the context of work for equity on the part of the beneficiaries. The transfer of these instruments to the issuing startup itself, therefore, would not entail the forfeiture of the tax relief system.
In any case, any capital gains generated on these transfer deeds upon payment will normally be subject to taxation to the transferring subject at the time of the transfer.
The application of VAT on the related service remains, if due, and therefore, in these cases, the service provider will still be required to issue a regular invoice.
Work for equity for startups: advantages
With work for equity, there are undoubtedly many advantages both for startups and for the self-employed workers who collaborate with it. For the startup, this means a lower cost (financial, because the service is paid in kind, but also economic, given the tax relief mentioned above). For the contractor, on the other hand, against partial sharing of the business risk (shares/quotas are received which, in the event of project failure, will have no value) there is a greater involvement (quotas/shares correspond to voting and control rights). This allows for (or at least should allow for) the creation of a group determined to pursue the same objectives. In summary, the main advantages are:
- Startups can take advantage of the professional services they need, essential for starting the business, by issuing financial instruments, instead of making payments in cash;
- Professionals can acquire financial instruments, against the performance rendered, thus increasing their participation in the company without having to calculate them for tax purposes, in the calculation of the total income.
Supply for equity: the B-PLANNOW® proposal
The work for equity in the original idea of the legislator should have been an innovative tool to facilitate you in their scale-up but the legislation is not immediate and easy to implement and therefore discourages its use.
The logic behind the law was to incentivize and to keep the service providers of the innovative startups and/or SMEs faithful by establishing the possibility of providing services in exchange for equity instruments and decreeing the fiscal and contributory irrelevance of the financial instruments allocated to them, which would otherwise constitute income. In this way, the use of a work for equity plan by innovative companies should have been increased and facilitated. However, to date, there are actually no adequate tools to achieve this goal.
First of all, the legislation on innovative startups on these points is rather incomplete and one wonders if the regulatory gap should be filled by referring by analogy to the current legislation on the subject of joint stock companies both for financial instruments and for the purchase of the company’s own shares. Furthermore, the implementation of these innovations would involve the completion of a series of formalities and the forecasting of costs that have so far discouraged innovative startups and/or SMEs from making use of these provisions, despite the proposed tax and social security benefits.
I’ll give you an example: if yours is a limited liability company, the purchase of shares for the purpose of allocation to work providers and services requires the signing of deeds of sale with a notary public, the approval of the ordinary meeting which must verify the existence of available reserves and the preparation of an incentive plan that establishes the terms and conditions for the allocation of shares. The issue of financial instruments in favor of third parties must then be expressly foreseen by the articles of association and a specific regulation must be approved by the general meeting. Finally, third parties who undertake to provide work and services against the allocation of quotas or shares or equity financial instruments must agree with the beneficiary company on the contents and characteristics of the work or services and must present an insurance policy or bank guarantee for the entire value of the work or services, which will be appraised by the beneficiary company once completed.
It therefore appears evident that the work for equity legislation is not immediate and easy to implement and it is understandable why this tool is in fact used very little by startups and cannot be considered innovative.
Over the years B-PLANNOW® has prepared, with a pool of professionals, an innovative “supply for equity” contract that solves all regulatory problems, eliminates formalities and eliminates costs, allowing you to dedicate yourself to the scale-up with the aid of a startup mentor who will work alongside you for free in exchange for participatory tools.
Now that you know everything about what it is, how it works and above all who to contact to find the best work for equity startup consultancy, all you have to do is contact us, submit your idea and find out if we can share the business risk together!