Huge fillip for Australian start-ups from changes to share rules

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Like thousands of other entrepreneurs, I made a promise. When running my digital media start-up, I had offered a prominent journalist a small stake to lure him away from a prestigious job at a large company.

"News that the Coalition has brought Australia back in line with global peers is extremely welcome."
Amanda Gome, Former head of digital and social media, ANZ

Nothing but a stake in our start-up would have got him over the line even though I offered more salary, talked about how exciting life was in a start-up, how fast we were growing and the uncertain future of old media.

He accepted, joined, began making a marvellous contribution – and then in 2009, the Labor Government changed the share equity rules. His package, like so many others, was structured so he received a small stake on arrival and then another equity stake once milestones were met.

He got his first stake before 2009. When the rules changed, options or shares issued attracted tax up front. How on earth was a young bloke with a young family going to pay tax on shares that were being given to him as an incentive? Our cashed-strapped start-up, like many others, honoured the agreement and paid the tax on his second lot of shares.

But after that, we shut the gate. It became far harder to use the lure of a share of the action to attract great talent.

It made me furious for a host of reasons. But one in particular stuck in my throat. Being able to offer employees a share of the company they were helping to build was one of the most satisfying things about being an entrepreneur. Surely sharing the rewards of enterprise with workers lies at the heart of Labor philosophy?

So news that the Coalition has reversed the changes and is bringing Australia back in line with global peers is extremely welcome. It will provide a huge fillip to the entire start-up community. Further, any small discount on a share or option will be tax free for the employee – a new benefit and further incentive.

But it is not just the start-up community that will benefit.

Here is the list of other beneficiaries of the employee share option rules:

Existing employees: it is not just new employees who will benefit. Existing employees who add great value can now be called into the entrepreneur’s office and told they are going to be able to share in the rewards.

Entrepreneurs: this is a game changer, as entrepreneurs can approach great talent that they thought they could not afford and devise a very competitive package that includes equity. Entrepreneurs can prepare to experience the thrill of offering new employees a part of the action.

Small and medium business owners: companies with less than $50 million revenue and unlisted for ten years will be able to access the rules – which includes nearly every company.

Overseas companies: the government has also extended the rules to include overseas companies, allowing foreign groups the ability to offer options to Australian employees.

Large company executives: frustrated at the slow pace of change at large corporates? Executives will be far more tempted to meet with entrepreneurs and discuss taking on some form of role, whether on a board or as full-time employees with shares or options as part of their package.

Growth in boards: pre 2009, many small businesses offered would-be directors a package of shares instead of a board fee of $20,000 to $30,000 a year. Once the director had to pay when the shares were issued, the deal was less attractive. Get ready for bigger, better boards which will be of great benefit to growing companies.

Employees of start-ups and small business: all staff in start-ups and small businesses will benefit from the change of rules. When key staff and sometimes all staff have an equity stake it creates an entrepreneurial culture. If you haven’t worked in an entrepreneurial firm, you should try it!

Big companies: even large corporates will benefit as they will be more likely to take a stake in a small company which is a great way of accessing exciting minds and innovations while providing capital for a start-up.

Employees' families: watch the transformation in mum or dad as they shift in mindset from being an employee to owning a stake in the company. Share in the joy when there is an exit and mum and dad sell their shares and shout everyone on an overseas holiday.

Lawyers: there will be a big rush for lawyers to draw up shareholders plans.

Accountants: ditto as entrepreneurs seek to unwind complex structures they may have put in place since 2009 and set up simple schemes.

Australian taxpayers: while there is a cost upfront, over the long term as people build value in their businesses and exit, they will pay far more tax than they would have when the shares are first issued on a much smaller valuation.