board membership

Finland has seen the rise of very positive new breed of business accelerators in recent years. They are called professional board members. Many of them are also angel investors and experts in various topics like law, business, internationalization, finance, technology etc. Professionalism towards Board of Directors work has been a much welcomed change into the old culture where only founders/owners of the company used to occupy board seats, entirely despite of their competence in actual board work. Finland has benefited tremendously from this new level of professionalism; networks, specific expertise in advising growth, finding funding, providing valuable insight, advice, mentorship, sparring and acting as a credible list of known names that back the company up by being members of its board (which is legally liable if the company behaves badly, mind you). Countless growing companies have benefited from these board professional experts who make it their professional competence to really excel in responsibility carrying, decision making and strategic level board work.

The basic business of a professional board member has up until now gone as follows:

A professional board member, or a group of them, establishes a company, often a limited liability company. Then the company offers its employees (the board pros) to startups and other firms as professional board members. The people sit on the board of directors, carry on the legal responsibilities associated with board work, and help the company in a multitude of ways; often relating to their own specific field of expertise. Many companies have had more than one professional board member contributing throughout the years. They also often do assignments for the company outside the scope of normal board work: like for example work extensively on the company's sales, technology, financing plans or other such major engagements that might often result in weeks of work. I have even seen board professionals who work on jointly creating marketing materials for the company, or participate in trade shows and conferences for the company in other countries etc. Often also this is done together with business angel activities: investing into the very same companies that then become clients to professional board member services.

Naturally this is also something that the Vigo accelerators often do: they invest into their portfolio company, and a manager from the accelerator team often takes up a board seat.

For all of this activity it has been the standard business model that the professional board member company sends an invoice (often a monthly invoice, or per project invoice) to the company it is helping, and this relationship has been quite similar to normal management consultant work - with the exception that the person is a member of the board of directors of the client company, and that the work is typically much more longer term and larger/wider (more strategic) in scope.

Naturally many VC funds and VC firms do this as well: they have venture managers, investment directors and partners who frequently sit at the boards of their portfolio companies - and just as frequently do more extensive projects for the companies and often mutually agree upon sending an invoice as compensation for their work to the company.

Well all of this is now illegal in Finland. Here's why:

Finland's Supreme Administrative Court in alliance and ruling based on advice from the Finnish tax authorities has made a very interesting recent ruling. It can be found here:

http://www.kho.fi/paatokset/54322.htm

From the case you can read between the lines that the "company X" they are talking about is in fact Capman, Plc. a VC firm listed in the NASDAQ OMX stock market.

This decision stacks on top of previous decisions made by the tax authorities, and now as combined to the previous decisions forms the final link in declaring all of professional board member work to be illegal.

Here's what the ruling means together with the old rulings and rules from recent years:

1) anything paid to the board member is considered as income, and under the income tax. This is despite the form of payment: even if you pay in stocks, in options, or in anything the result is the same; they are all considered income.

2) while the person is a board member he or she cannot do any consultancy work at all for the company: any such work cannot be invoiced from the company, it has to be paid as income instead (and taxed as direct income) - and this situation forms a temporary relationship of employment between the parties.

3) while the person is a board member the company cannot pay for or compensate in any way for any travel, flight tickets or such costs: these are also always considered income and in some cases this also can form a relationship of employment between the parties. The logic here however has been that since a board member is not a "normal" employee of the company; the company cannot pay him for travel costs. The tax authorities expect the board member to pay for all travel himself, or then pay income tax for all the travel cost the company pays for him. This changes if the board member is doing a consultancy assignment that is paid to him as regular income (thus forming an employment relationship) if this is the case then travel costs can be paid. But if there is no consultancy agreement, no income salary, just regular board work: then travel cannot be paid without avoiding this.

With that ruling they effective just ended professional board of directors work in Finland. A situation where a person is a member in, let's say, 8 different boards; all this becomes quite impossible. He would pay income tax from 8 different sources and would be frequently temporarily employed by all of those companies when ever there is a more time demanding task or any travel associated.

So now, all professional board members will either have to:

I) Resign their board assignments and become consultants. (my own tax advisor recommended to me that I should do this)

or

II) Become employees of the company they help and pay income tax from everything they do and get compensated for.

You cannot act as a professional, offering board member services and advice, and invoice for your services anymore. Not even if you are a partner in a VC firm and you sit on the board of your portolio company: even then you aren't allowed to do this.

For Vigo Accelerators this means that either;

a) their managers can't have board seats in portfolio companies at all.

b) or they will have to have separate roles; one
manager is a board member and is banned from doing any consultancy at all, while another manager does all the consultancy (the acceleration) without being a board member.

Or they can also, do c) act as up until now and pay huge amounts of income tax personally for accelerating all those startups.

That's how Finland encourages growth, entrepreneurship and economic success. What a wonderful climate to be in!

This is very very sad for Finnish growth companies.

This also pretty much kills the new breed of professional business accelerators from growing and rising any further: now that the whole practice is declared illegal and made totally idiotic in terms of taxation, now there won't be any more professional board members then... great.