Government looks at employee share schemes for start-ups

The government is exploring options around the impact of employee share schemes (ESSs) on Australian start-ups.

It has released a discussion paper, Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements, which outlines the current arrangements and possible options for changes to the ESS system.

Measures to address the barriers faced by start-up companies include:

• Developing guidance to reduce the administrative burden (meaning the cost of valuing shares and options) of establishing an ESS;
• Adjusting the valuation methodology of options; and
• Examining the point at which share options are taxed for start-up companies.

The closing date for submissions is 31 August and the review will report back to government by December 2013.

However, Guerdon Associates executive director Michael Robinson argues that the narrow definition of "start-up" company proposed by the government will seriously limit the benefits of any changes. In particular, the exclusion of listed companies suggests the government really does not understand the important role ESSs can play in small, cash-strapped listed companies.

The proposed "start-up" definition would require that a business:

• Have 15 or fewer employees.
• Have aggregated turnover of less than $5 million and not be a subsidiary, owned or controlled by another corporation.
• Have been in existence for less than five or seven years (to be confirmed).
• Be providing new products, processes or services based on the development and commercialisation of intellectual property.
• Be unlisted.
• Have the majority of its employees and assets in Australia.

"It is unfortunate that there appears to be a very limited understanding of the various capital raising stages that start-ups need to go through, whereby seed and angel capital, while progressively diluted with additional raisings and new stock issues, stand to receive mammoth returns if the investment comes good. Investors know this," says Robinson.

"The proposed concessions, which would only be available in the initial (unlisted) start-up stages, will not do much to encourage investment unless they are allowed for employee option grants at the next three stages of capital raisings. This is because options are provided in lieu of cash salaries for talented and entrepreneurial employees. If tax deferral is not permitted, investors will need to find extra cash to pay for the extra employees at each stage – thereby reducing the funds available for investment and potentially hampering growth. If this is not permitted, the good ideas and the entrepreneurs who created them may best decamp to California where this is permitted. And the value created initially in Australia (and subsidised by tax deferral) will be monetised in the US.

"Bizarrely, the government has also indicated that companies involved with mining and mineral exploration, which form a significant proportion of Australian start-ups, may be excluded. In these cases the dirt will just remain undug."