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Published 21 September 2012 10:48, Updated 24 September 2012 05:48
Everybody is talking ESOP. An improved taxation regime for employee stock ownership (or share options) plans is a rally cry from start-ups around the country. It’s true that the call is getting more air time. Articles in metropolitan and national newspapers are raising the issue. Start-up founders such as Mitchell Harper and Eddie Machaalani from Bigcommerce are even penning their own opinion pieces. Although I share the view that this is a real problem for local start-ups, I’m not convinced there’s change on the horizon soon.
For those not familiar with the problem, if an employee is given shares in a company they are taxed when they receive them. In other jurisdictions, the tax is levied when the value of the shares is realised, such as when a company is sold or listed on an exchange. When a start-up is first getting off the ground, it can not afford to offer huge salaries to attract the best people. One way to get around this is to offer shares in the company, banking on the hope that these will be worth a lot of money one day. But employees are less interested in taking shares if they are going to be hit with a tax bill up-front. The current regime thwarts the best intentions of start-ups to attract the best employees.
I was having a chat with a start-up guy the other day who was confident that because of the coverage ESOPs have been getting in the financial and technology press, government would change the taxation regime.
To that I would say, keep dreaming. And here’s why.
1. Although the local start-up scene has become more organised, it does not have a united front to lobby government, fund advertising campaigns and generally sway public opinion. Networks and meet-ups such as Silicon Beach, Innovation Bay and River City Labs are great initiatives for encouraging collaborative working and linking entrepreneurs with investors but they are not vehicles for talking to government. Just like the Minerals Council of Australia rallied the public against the mining tax and the unions fight against draconian workplace laws, the start-up scene needs to get organised and serious. In the US companies like AOL, eBay and Facebook have joined forces in a lobby group - The Internet Association - although the group’s main remit is “strengthening and protecting a free and innovative internet” according to TechCrunch. Organisations such as the Council of Small Business of Australia are inadequate for (and not necessarily interested in) fighting the ESOP issue.
2. This is not going to happen because start-ups don’t know how to play the political policy game. And they’re too focused on their own businesses, probably as they should be.
3. The general public, and even many employees, don’t understand ESOPs. In a previous article, Atlassian’s Mike Cannon-Brookes explained he was forever emphasising the benefits of holding options on Atlassian shares to employees who were considering moving on (I wouldn’t mind some of those). “It’s like ‘see these options over here, these are going to be worth a lot of money’,” he laughs “And they’re like ‘oh really’. It’s a piece of paper in their head.” Because of this, it’s a tough policy platform to make an election issue.
4. Similarly, be it the tall poppy syndrome or the portrayal of a socially awkward, but also calculating and manipulative Mark Zuckerberg in the movie The Social Network, I’m not confident that the public will take fondly to start-up founders crying poor. People who aren’t involved in the start-up, or even business scene, often build their perceptions of what it’s like from popular culture and news snippets of rich, successful playboys.
This has all been a bit negative for a Friday morning. And I don’t want to kill the dream. It’s still possible that this or a future government will consider changes to this taxation regime but these four issues can’t be discounted. Coverage in relatively niche media outlets is a start but there’s more to do.