This week the Australian government released draft legislation with changes to the way early-stage companies can give share options to their staff.
Prime Minister Tony Abbott announced in October he would fix the ESOP taxation mess which has long been detested by the Australian startup sector. Changes made under the Labor government in 2009 meant options are taxed upfront on often rubbery valuations, instead of when they’re exercised.
Australia’s startup community has been lobbying for these changes for five years.
Fishburners GM Murray Hurps told Business Insider after reading the draft legislation there isn’t “a single thing I’m still concerned about”.
He went as far to say: “It looks like they’ve nailed it.”
“It’s taken five years, and lots of hard work from government and organizations like #StartupAUS, but it looks like the end result will be a boon for the industry,” he said.
“These changes will make it easier to get motivated talent into startups, increasing the chance of success, and also helping to distribute the returns in future.”
Employee share schemes are one way to incentivise existing employees and attract new talent when a company is in its early stages and not in a position to offer exuberant salary packages.
Here’s what a few Aussie startups had to say about the proposed changes.
P2P lender MoneyPlace CEO Stuart Stoyan
“Any changes that enable employees of start-ups to share in the success and growth of the business are welcomed,” he said.
“Attracting the right talent is the number one priority for a startup, and a critical driver of success. The existing laws have meant that startups need to issue shares directly in the business, which can be cumbersome and does not necessarily enable alignment of employee and founder goals.
“At MoneyPlace, it took us a lot longer to recruit the right team because we did not have the mechanism to easily reward and incentivise our people.
“While the change in law is welcomed, we need to ensure that the process to establish and run an ESS is simple and streamlined. It would be a shame to take a great initiative like encouraging employee share ownership and then wrap it in red tape.”
Vinomofo, Co-Founder Justin Dry
“It’s great for the startup ecosystem in Australia. It gives startups more bargaining power when competing for the best talent and the ability to align team interests with that of the business.”
InfoReady Managing Director Tristan Sternson
“The Australian Tax Office (ATO) are correct in stating that, international research suggests that companies in which employees have an ownership interest are more productive than those that do not. This is not significant enough to stimulate the tech sector startups unless they are offering the Employee Share Scheme (ESS) in very early development stages, which at the same point many of these companies have a very low market value,” he said.
“Bring in an ability to allow startups to allocate earnings dividends to staff with a different class of share or at the discretion of the startup. This means if the company has a hugely successful year the staff can share in this as a non regular dividend and not impact the company by having to increase payroll may not be sustainable in subsequent years if the company does not maintain the same level of earnings. Companies have to act conservatively to ensure longevity and payroll is what keeps all CEO/MDs of these startup companies awake at night. A mechanism that allows key staff to be rewarded through a different mechanism like a dividend would be a win-win for staff and a start up employer.
“There are two types of startups that struggle to attract and retain the right talent in Australia, those who make grow quickly and make great earning but need to continue to grow to take maintain their market position, and those that make no revenue but are building a saleable long term product or service. ESS improvements from the ATO may suit the latter, but the former are still at risk of enormous growth and ongoing risk of instant failure. These are typically companies that employ between 50 and 150 staff and support our economy through employing these staff. The ATO should focus on those companies, because every time one fails between 50 and 150 staff become unemployed – this does not seem to happen overseas.”
Invoice2go founder Chris Strode
“Employee share schemes have become key in attracting top talent in the startup space. Without it, we risk losing our best and brightest to innovative tech companies in the US, UK and other markets globally, which offer extensive tax concessions for their schemes,” he said.
“We’d welcome the changes laid out in the latest proposal, in particular the roll-back of the up-front taxes, but we’re also looking for government to benchmark the process for setting up and maintaining a scheme against other markets, making it easier to offer them. Small, innovative tech startups don’t have time to wade through lengthy process and regulation so they can offer programmes like this.”