Deloitte has partnered with law firm Norton Rose to conduct a survey on employee share option plans in order to present the government with hard-and-fast data on the issues affecting start-ups.
According to Deloitte, the survey is designed to help gain an understanding of the Australian technology sector’s view of the value and complexity of ESOPs in incentivising employees.
Norton Rose partner Nick Abrahams, who heads up the firm’s technology practice for the Asia-Pacific, says the survey has already attracted a strong response.
“I’ve worked with a lot of fast-growth companies… It’s very difficult for fast-growth companies to use ESOPs as a way of incentivising employees,” Abrahams says.
“Australia is in stark contrast to the US where you look at Silicon Valley or Austin… Options are a critical part of the remuneration package.
“It’s part of the lifeblood of a fast-growth company. We risk having our innovation community being stymied by this.”
Abrahams says the Australian government is concerned large corporates may use share options in ways that could have an adverse impact on the government’s revenue.
“But we’re talking about small to medium businesses,” he says.
One of the main issues surrounding ESOPs is the cost required to put them in place.
“You have to spend money on lawyers and accountants. For fast-growth companies, there should be no real need to spend money on that type of thing,” he says.
“Money that could otherwise be spent on growing an innovative business is being spent on trying to satisfy a regulation.”
Roan Fryer, a Deloitte partner in tax, says the issues surrounding ESOPs are particularly apparent when a cash-strapped start-up attempts to hire a chief executive.
“Australia calls itself an innovation country. There are a lot of people out there who come up with smart ideas – they will develop and research the idea,” he says.
“Unfortunately, that is where their skills end and they now need someone to help them run the business, take it to market and grow it.
“They need to attract an established CEO and they have no money… The best way to do that is by allowing [the CEO] to participate in the equity.
“Under Australia’s share scheme rules, which were changed about three or four years ago, you now get taxed upfront on the receipt of options… That’s what we’re seeing is a real issue.”
Abrahams says Deloitte and Norton Rose intend to show the government the data they collect from the survey.
“With the results of the survey, we then have data to go to the government and say, ‘This is an issue’. At the moment, it’s all anecdotal,” he says.
“Before suggesting a solution, we need to understand what the government’s concern is and try and work with them.
“We think the government is interested in helping… We would love an opportunity to talk to government, and then we can apply our knowledge to [their concerns].”
Last month, Michael Fox, co-founder of Sydney-based start-ups Shoes of Prey and Sneaking Duck, was invited to meet with the Department of Industry and Innovation to discuss ESOPs.
Specifically, Fox was invited to discuss the experiences of start-ups when offering an employee share scheme, including how the current tax and other regulatory requirements may limit their ability to offer such schemes.
“It’s good that they’ve seen that’s an issue,” Fox told StartupSmart.