Equity as consulting compensation at a Startup in Zurich

Taxes
1

Hi all!

I thought I might ask here before spending some money on it because I’m sure there are a lot of startup founders here.

Basically, I’m doing a 1 year gig for a very early stage startup (3 months old) and I’m thinking of taking ONLY (not cash) equity or options as compensation.

But, the trick is I don’t want this to be taxed as income. Makes no sense to pay income tax on something that might be worthless in the future.

Anyone had a similar situation? I read about special treatment for startups and private (non tradable stocks) in Zurich. I’m completely fine to pay taxes at some point in the future if the company is acquired or if there is an liquidity event. Or if it’s options to convert it to real equity at some point.

Dunno, any ideas on what’s the standard (minimum tax upfront) approach?

2

I want to be paid all in cash and not have it taxed as income too!

You could try looking at getting stock options or potentially RSUs with vesting far in the future to reduce the tax burden.

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3

Maybe it came out wrong but I don’t want cash, I jsut want to make sure that the equity that i get now is not taxed now, but only when sold. Happy to pay taxes when/if i actually make profit on this.

4

Try working in Dubai, maybe they’re more lax?

Your compensation replaces an income for which you would be paid monthly. In this case, it will be considered as income by your canton’s tax authorities.

All income from an activity carried out within the framework of an employment relationship, whether governed by private or public law, is taxable, including ancillary income such as compensation for special services, commissions, allowances, seniority bonuses, gratuities, tantièmes, appreciable cash benefits deriving from employee shareholdings and other appreciable cash benefits (art. 17 al. 1 LIFD).

If I were a taxman, I would consider your compensation to be an appreciable cash benefit, and therefore income in the final analysis.

Another way of taxing your compensation would be under the aegis of art. 17a LIFD, The following are considered to be employee shareholdings in the strict sense of the term (a) shares, profit-sharing certificates, participation certificates, company shares and any other shareholdings offered to the employee by the employer, the parent company or another company in the group. (b) Options giving entitlement to the acquisition of the shareholdings referred to in letter a. Expectations of simple cash compensation are considered to be employee shareholdings in the wrong sense of the term.

In fine, it will hard to not consider your compensation as income for the tax authority.

This could be an interesting option.

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5

Seems like you’d want a non-genuine participation (taxable when exercising).

(You can’t avoid being taxed, it’s just about when the tax event occurs)

(It’s generally worse because you don’t benefit from tax free capital gain, so especially for a company that has potential it’s not clear it’s the best option. Genuine+enough salary to cover taxes is probably better)

6

This is the best what i got to with ChatGPT :smiley: This is why i wanted to check here because it can give crazy solutions.

:one: Monthly Consulting Agreement

• You provide services every month.

• Instead of receiving CHF X in cash, you receive CHF X worth of shares at FMV.

:two: Fair Market Value (FMV) Calculation

• Each month, the company determines the FMV of the shares (based on the most recent valuation).

• The number of shares issued is calculated as:

\text{Number of Shares} = \frac{\text{Consulting Fee (CHF X)}}{\text{FMV per Share (CHF Y)}}

:three: Tax Considerations

• Since shares are issued at FMV , there is no taxable income at the time of issuance .

• When you sell the shares later, any gains may be tax-free under Swiss capital gains rules.

I was also considering reverse vesting. How it works in the US is:

  1. You buy the total amount of shares for x CHF (usually very low) for the entire year compensation
  2. You have a vesting period of 12 months
  3. In case you are fired on month 5 you need to sell the unvested part back to the company and keep the vested part.

p.s. I’m not an employee of the company, just a contractor.

7

Yeah don’t trust chatgpt, it’s all bogus. Read the pestalozzi article, it’s not so complicated :slight_smile:

edit: in general I’d say this might be more interesting than cash only if you 1) strongly believe in the upsides for the company 2) you wouldn’t have access to the company shares otherwise.

(in any case you’ll pay at least the same amount of taxes as if you were paid the FMV at vesting in cash)

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8

That really sucks for startups.

You don’t have enough cash to pay proper salaries. So now you pay low salaries to employees but also they have to pay tax on the equity that they received. :frowning:

9

But presumably that equity is almost worthless?

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10

That’s my thinking as well. But let’s say you agreed to receive 5K CHF / month for consultancy in equity.

Wouldn’t that mean that that amount is worth “at least” 5K? As far as I understood that’s the amount on which AHV/income tax would be paid.

The problem is then, that you can’t actually sell that equity because it’s an illiquid startup. And potentialy, in the future it’s worth zero. So you basically “bought” 5K CHF worth of potentially worthless stock.

This is where i get lost.

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11

Yes, it’s 5k/month of compensation, and thus taxable income. Whether it’s liquid or not does not matter for income tax (but actually matters for wealth tax).
The way around that is stock options, then you delay the tax event until your exercise them.
But the later you exercise them, the more taxes you pay (presuming the stock value rises of course).

I’m not aware of all the rules, but I assume you can have options with a strike price of 0.

12

That’s super bad. Why would anyone then take equity only during the startup phase unless they are insane and ultra super buillish on just an idea that’s not even implemented and profitable yet.

We really need some sort of a startup equity relief which would incentive people more.

13

like i said in my reply, you can reduce the tax value by locking it up for a long time. and also, if you expect the value to go up substantially in the future, you can pay the tax now at the low price (reduce further by lockup) and then sell it tax free later when it is worth a lot.

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14

Anyone taking equity only should indeed be ultra super bullish… regardless of taxation. For employees the equity is a bonus, but you shouldn’t count on it having much value.

I don’t really see why equity should somehow have preferential treatment.

You can already avoid paying the taxes at vest if that’s what you want (making the grant a non-genuine participation, tho as I mentioned it’s not in your interest if you actually believe the company will have massive growth). Lockup period can also reduce the taxable value of the options.

Also the valuation of a startup should actually be fairly low (so taxes should be accordingly low).

There’s also a lot of tax advantages for companies (e.g. deducting more than 100% of R&D work, etc.)

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