Serial entrepreneur and StartupSmart mentor Michael Fox has outlined problems with employee share option plans (ESOPs) for start-ups, after being invited to meet with the federal government.
According to Fox, who co-founded Shoes of Prey and Sneaking Duck, ESOPs can help cash-strapped start-ups compete for top talent.
“Attracting top talent, particularly outstanding software engineers and experienced digital marketers, is hard in Australia,” Fox says.
“We’ve had to compete with overseas companies to hire Australians, and on many occasions we’ve had to recruit from overseas to get the right person for the right role.
“We’ve promised all these hires participation in an employee share plan and we’re in the process of setting this up.”
In addition to helping companies attract top-performing employees, Fox says an ESOP also drives employee engagement and loyalty, and allows wealth to be spread more evenly.
But there is a problem with the current tax policy, he says.
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“Current Australian tax policy treats [share] options like compensation rather than capital gains for tax purposes,” he says.
“Employees therefore have to pay a significant amount of tax during the same year as the options are purchased, when, particularly at start-ups, there is a reasonably high probability those shares may never realise any value for the employee.
“There is a complicated way around this that involves a limited recourse loan arrangement provided by the employer.
“We’re exploring this now but it’s relatively complicated and expensive to set up for a start-up, and could be made much simpler.”
Fox says he received an email from Treasury and the Department of Industry and Innovation, which are “undertaking targeted consultation regarding employee share scheme options including their use and impact on Australian start-ups”.
He was invited to meet with the department 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.
Fox met with the department yesterday.
“I think they were interviewing a whole bunch of people over a couple of days,” he says.
“It’s good that they’ve followed up on this from the Prime Minister’s Digital Economy Forum [in October 2012]. It’s good that they’ve seen that’s an issue.
“[I was asked] what’s the one thing we would like to see change with it. They were also interested as to how we would define a start-up.”
Fox says a specific set of rules for start-ups would stop bigger companies taking advantage of the ESOP option.
“Can they change it so it works for start-ups but still doesn’t mean others can take advantage of it?” he says.