Tax advice : Offered sweat equity in US startup.

[curious11]

I've been offered sweat equity in a US startup.
The company is in early pre-funding stage, no revenue, no value.
I will be granted around 4% common stock which will be vested on schedule based on services provided as a private contractor over 3 years.
I've looked everywhere can I can't find anything that clears up whether I can treat my equity as having nominal value at the time of granting (not vesting) thus avoiding/reducing income tax and NIC liabilities.
I appreciate that this is a long shot and likely to result in nothing, but if it does work out I don't want to be hit with tax bills that I can't pay without selling the equity.
Happy to pay the capital gains of course!

I've seen reference to a "Section 431 election" which allows declaring the value of the shares at the time of granting but I'm not sure if it might apply to US companies and nor do I know how to assign a valuation that HMRC wouldn't quibble over.

Any advice on how this should work?
Thanks in advance for any insight.
c.

[GhostofTarbera]

So basically they want you to work for nothing until they run out of money ?


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[northernladuk]

Any advice on how this should work?

There is a 90% chance it won't.

[ravenscroft]

Just too many variables with added US thing in as well.
This stuff is always a gamble.
I was in a UK start up many years ago and bought the 1p shares for 1p. With the other founding members an EIS Scheme was created for us. Many years later all came good. Point is this was all simple to understand - unlike your statements.
I was paid a living wage at the time, and If this was in any way serious then this should be the minimum. The fact that even this is not on the table tells you everything.
There are 2 Fintech darlings out there at the moment - Starling and Revolut. Have a look at their history and how they were funded from the beginning. Where is the other 96%. 4% is very low if you are in at the beginning in any event. Remember many subsequent funding rounds on 4% drives it right down.
Good luck - but don't bother unless you are the founder own 100% of shares and have a ready to roll MVP, to raise funds yourself.

[NotAllThere]

So basically they want you to work for nothing until they run out of money ?

Did something similar once. Developed an application for a share of the sales profits (so, (price - salesman's commission) * x%). for five years Bit of a punt - wasn't expecting it to pan out, but I had the time to do it.

It quite quickly became the flagship product for the company. Not bad - £0.5M over five years for four weeks work.

[Iliketax]

I've been offered sweat equity in a US startup.
The company is in early pre-funding stage, no revenue, no value.
I will be granted around 4% common stock which will be vested on schedule based on services provided as a private contractor over 3 years.
I've looked everywhere can I can't find anything that clears up whether I can treat my equity as having nominal value at the time of granting (not vesting) thus avoiding/reducing income tax and NIC liabilities.
I appreciate that this is a long shot and likely to result in nothing, but if it does work out I don't want to be hit with tax bills that I can't pay without selling the equity.
Happy to pay the capital gains of course!

I've seen reference to a "Section 431 election" which allows declaring the value of the shares at the time of granting but I'm not sure if it might apply to US companies and nor do I know how to assign a valuation that HMRC wouldn't quibble over.

Any advice on how this should work?
Thanks in advance for any insight.
c.

1. What does "vested" mean? Do you get the stock on Day 1 and the restrictions fall away over three years? If so, a s431 election makes sense as it fixes the tax point and value at the date of grant.

2. If "vested" means you get the beneficial interest in shares over the vesting period (e.g. quarterly) or at the end of the vesting period then the tax point is when you get the beneficial interest. So if the value goes up over the vesting period then you pay tax on the higher value. A s431 election can still make sense as there are likely to be further restrictions on shares in a private company.

3. Who is your employer? If it is your PSC then that has to operate PAYE/NIC on the value of the shares. This is paid through the normal payroll. If you don't reimburse the PAYE within 90 days of the end of the tax year then you get hit by a further penal tax charge. The PSC will have to sign the s431 election with you (and do the annual share plan reporting).

4. If the start up is the employer then they will (should) know whether they have to operate PAYE. It'll be a question of fact whether they have to (depending on whether the shares are "readily convertible assets"). If they don't operate PAYE then you have to pay the tax through self-assessment. You still need the employer to sign the s431 election.

5. If you are self-employed then none of the stuff above is relevant. Just include the value of the shares in your turnover. Ignore s431 elections as they don't apply.

6. What's the value of the shares? No idea. But if you are prepared to work for them they are likely to be worth something. The key question is how much a random stranger (e.g. a bank, a pension fund, a rich investor, etc) be willing to pay for them? If you make the s431 election then how much would they be prepared to pay for them without any restrictions attaching to them? The start-up may well have a value for (i) US tax purposes, (ii) for accounting purposes, (iii) for potential investors, etc and so you could ask them. If that's a non-trivial number then it is worth thinking about the valuation a bit harder (i.e. get proper advice). If your PSC is your employer then I'd suggest retaining some contemporaneous evidence as to the value of the shares.

7. You will pay CGT on any future growth in value when you sell them (at up to 20% up the moment).

8. If the start-up is flexible and you work for it (not your PSC, not self-employed), it can be very attractive to get the share through an EMI option.

I know people make life changing amounts from this sort of thing. But there are many more who didn't.

[WordIsBond]

2. If "vested" means you get the beneficial interest in shares over the vesting period (e.g. quarterly) or at the end of the vesting period then the tax point is when you get the beneficial interest.

If it is a US company, "vested" probably means this. That seems to be the most common usage of the term on that side of the pond.

3. Who is your employer? If it is your PSC then that has to operate PAYE/NIC on the value of the shares. This is paid through the normal payroll.

Not necessarily. You can A) leave them in your company B) personally buy them from your company C) distribute them as 'scrip' dividend.

A) saves you paying any personal tax on the value, which is nice if it goes under and they never end up having any real value. B) is reasonably clean and as long as you buy them at the price at which they 'vested', whatever price that is, it should have no personal tax ramifications. (Obviously, if you pay cash dividends to get the money to buy them, that has tax ramifications.) C) means you have Corporation Tax and dividend tax on the value of the shares, but that's likely to be lower than PAYE/NIC taxes. ('Scrip dividend' usually means you are issuing shares in the same company but effectively for tax purposes this is equivalent.)

5. If you are self-employed then none of the stuff above is relevant. Just include the value of the shares in your turnover. Ignore s431 elections as they don't apply.

I'd be very inclined, if it were me and I wanted to do something like this, to do this outside my LtdCo as a self-employed person. Although if you were to do it as an employee of the US Co, it would be exempt from employer NI, which has its appeal.

6. What's the value of the shares? No idea. But if you are prepared to work for them they are likely to be worth something. The key question is how much a random stranger (e.g. a bank, a pension fund, a rich investor, etc) be willing to pay for them? If you make the s431 election then how much would they be prepared to pay for them without any restrictions attaching to them? The start-up may well have a value for (i) US tax purposes, (ii) for accounting purposes, (iii) for potential investors, etc and so you could ask them. If that's a non-trivial number then it is worth thinking about the valuation a bit harder (i.e. get proper advice). If your PSC is your employer then I'd suggest retaining some contemporaneous evidence as to the value of the shares.

Usually the company is valued, the percentage you own is applied, and then, if it is unlisted, a discount is applied to minority shareholdings based on how minor the shareholding is.

8. If the start-up is flexible and you work for it (not your PSC, not self-employed), it can be very attractive to get the share through an EMI option.

Is EMI a possibility for a non-UK company?

[Iliketax]

If it is a US company, "vested" probably means this. That seems to be the most common usage of the term on that side of the pond.

My experience with US start-ups is that they typically go for RSAs rather than RSUs because of the ability to do an 83(b). Listed US companies are different.

Not necessarily. You can A) leave them in your company B) personally buy them from your company C) distribute them as 'scrip' dividend.

...

B) is reasonably clean and as long as you buy them at the price at which they 'vested', whatever price that is, it should have no personal tax ramifications.

I struggle to understand what "clean" means. Let's say things go well (£1 is now £1m) and you buy them from your company at the much higher vested value on vesting (£1m). The company then has to pay a lot of tax on the gain it makes (18% x £1m). You then want to take the cash left in your company out (£820,000) at sometime in the future and so you will have lots of tax to pay (38.1%+ on £820,000). As a rule, if a share has a high growth potential and low initial value then it is very unattractive from a tax perspective to leave them in a company.

Although if you were to do it as an employee of the US Co, it would be exempt from employer NI, which has its appeal.

Employer's NIC depends on a lot of things. There's not enough info to say whether any would be due if the start-up was the employer (if the shares are RCAs on vesting there can be in many circumstances - e.g. the employer has a branch in the UK, under host employer rules, etc). The key is to make sure that the NIC liability is not transferred to the employee (or if it is your PSC, it doesn't have to pay it on the value at vesting).

Is EMI a possibility for a non-UK company?

Yes.

[curious11]

So basically they want you to work for nothing until they run out of money ?


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Indeed! Well, I am well aware this is a long-shot.
I'm treating this as an opportunity for self-improvement (learning new skills), fun (it's something a bit different from the day to day) and with the outside change I might make something back at the end of the day.

[curious11]

Thanks for the interesting replies.

As it happens I called HMRC and managed to make it past their infuriating AI call handling system and spoke to one of their technical advisers who basically said he couldn't think of any reason they would be able to tax me other than on liquidation of the shares.

I appreciate verbal statement over the phone is of little consequence if it ever comes to dispute though. He did suggest I send in a detailed written request if I wanted anything in writing from them, but it did sound like he didn't see a problem.

Assuming I'm not going to get hit with NIC and IT then it seems like a punt worth taking. As said in a previous reply, should it all come to nothing I'll have learnt new skills and had some fun along the way!

Thans again for the replies. Much appreciated.