Structuring Advisor equity in startups to maximize gain and minimize pain - My experiences

  • I — Indian advisor getting equity in Indian Company
  • II — Overseas advisor getting equity in Indian Company
  • III — Indian advisor getting equity in Overseas Company i.e. inversion structure (US / Singapore)
  • IV — Overseas advisor getting equity in Overseas Company
  • Phantom options — this means that everything remains contractual. Phantom options are not recognized under company law, but the company can still contract to give the difference between exit price and exercise price, to the advisor on the sale of options/liquidity event.
  • Keep it “Options” till exit — just keep the equity in form of options, don’t convert it till the time liquidity happens. IN that case, it may also happen that the options are being canceled by the acquirer and the option holders/advisors paid off. The flipside is that GST and withholding tax will get triggered as it will be more or like advisory fees being paid. If GST credit is not been borne by the company (which anyways is available for set-off against output tax liability on revenues), this will become a cost for advisors
  • Structuring the share issuance at the early stage of the company in form of investment — Issuing shares today when the book value of the company is low and buying unvested shares later. The only problem is that when a buyout happens if the company has considerable book value, that may need to be factored for the purpose of a buyout. This may become problematic considering that the liquidity and tax issues creep in.
  • Doing it OCPS way — another option is to issue Optionally Convertible Preference shares to the advisor and factoring vesting conditions/schedule in the conversion ratio. So there is no requirement to buy out, but it falls flat when multiple advisors have to issued options with different vesting schedules. In that case, OCPS class has to be kept separate, making the entire thing complex.
  • Inversion structures — this is kind of becoming the norm as Singapore and USA are pretty flexible in issuing the shares to consultants without any consideration and without even triggering any tax or regulatory implications. Globally, the option to advisors can even be issued under the ESOP scheme, as against in India, wherein advisors cannot partake in an ESOP scheme. This is without considering the fact that the advisors are just like employees, who are putting in sweat as against the fee and are participating in the journey of startups.




Leading the legal and Transaction advisory practice of the firm with a special focus on funds and startup ecosystem

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Akhil Bansal

Akhil Bansal

Leading the legal and Transaction advisory practice of the firm with a special focus on funds and startup ecosystem

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