Work for Equity il the Italian (startups and SMEs) Law

1. Introduction
2. What is work for equity
3. What is the work for equity for
4. How work for equity works
5. Prerequisites
   1. The ‘objective’ prerequisite
   2. The ‘subjective’ prerequisite
   3. The ‘statutory’ provision and types of company
6. Future scenarios of work for equity: new Startup annd SMEs Italian Draft Law

Introduction

Setting up, running and growing a company and finally scaling up often requires (soft and hard) skilled and highly professional services that can be very costly.

On the other hand, companies, especially small or newly established ones, may lack the liquidity to meet this financial commitment.

In this regard, the work-for-equity instrument that allows innovative start-ups and SMEs (small and medium-sized enterprises) to assign work and service providers shares or stakes in companies is very useful.

In this way the company can obtain these services without the need to have the relevant financial resources at its disposal, and at the same time.

What is work for equity

Work for equity is a very useful form of remuneration for innovative startups and SMEs (small and medium-sized enterprises) that need both work and professional services, often lacking the necessary liquidity to meet the expenses related to remuneration.

Thanks to work for equity, business consultants, professionals and in general those who provide work or services can be remunerated by different means than cash payments.

It is an (atypical) contract introduced for innovative start-ups with Law Decree No. 179/2012 (Startup Act), and extended to innovative SMEs with Law Decree No. 3/2015.

What is the work for equity for

The work for equity basically has a twofold function.

On the one hand, it is useful for the company that needs professional services from external collaborators.

On the other hand, it allows the providers of their work or service to be incentivised in their activity thanks to the participation in the company’s profits as well as thanks to the tax benefits related to this instrument.

How work for equity works

Work for equity is therefore a form of remuneration that can be provided for providers of works and services.

The instruments used in work for equity are those of social participations.

Instead of payment, the work performed by the professional/service provider is rewarded with shares or stock.

Prerequisites

In order to use the work-for-equity instrument, certain prerequisites must be met, which can be summarised as follows.

The ‘objective’ prerequisite

Among the prerequisites for the application of this instrument, the first one to be considered is the ‘objective’ one.

Indeed, it is important to emphasise that work for equity can be used only by innovative startups and innovative SMEs.

The ‘subjective’ prerequisite

From a ‘subjective’ point of view, on the other hand, the instrument is applicable to all providers of works or services, other than employees and continuous collaborators (other instruments called ‘incentive plans’ are provided for these two categories).

The ‘statutory’ provision and types of company

The provision for the use of work for equity must be specifically included in the company statute.

In this regard, it is necessary to emphasise a thing. It is true that the work for equity may be provided for the corporations (for a little insight into the difference between partnerships and corporations: Partnerships and limited companies: main differences and types – The Legal Nook (antonellolawfirm.com), but also it must be stressed that there may be limitations to its use in the case of simplified limited liability companies, as there is a standard company statute that cannot be amended, and which does not contain the possibility of using the work for equity.

Future scenarios of work for equity: new Startup annd SMEs Italian Draft Law

To date, the Startup Act represents the main regulatory reference in the field of innovative startups and innovatve SMEs in Italy, but it is worth mentioning the recent (July 2024) approval, by the Council of Ministers, of a Draft Law that contains some important innovations on the subject.

No specific reference to work for equity (or incentive plans) was included in the Draft, but what attracts attention in reference to the topic is the provision concerning the obligation to hire at least one employee.

This indication, poorly grafted into an ecosystem that in practice often relies on the skills contributed free of charge by founders and partners, or on work for equity or incentive plans.

It must be remembered that the Draft has not yet completed its approval process, so on this point, is not mandatory and all that remains to be done is to await its eventual evolution.