Just one in three start-ups use employee share options – three top tips you should know

A new survey has revealed only 37% of local tech companies have issued share options in the last three years, with tax reasons cited as the main consideration for their reluctance.

The Australian Employee Share Option Survey, conducted by Deloitte Australia and Norton Rose, is designed to offer insight into the value and complexity of ESOPs, as they relate to Australian tech companies.

Of the 104 technology companies surveyed, 94% think employee share options are a valuable way to incentivise employees.

However, only 37% of companies have actually issued share options in the last three years, with more than 80% citing tax reasons as the main consideration for their reluctance to utilise ESOPs.

Of those that are reluctant to utilise ESOPs, 75% said the complexity of establishing the plans was a further disincentive to issuing share options.

Almost 90% of respondents said they would be more inclined to issue share options if employees were taxed on financial gains at the time of receipt of the ESOP proceeds rather than earlier, as is currently the case in Australia.

In response to the findings, industry experts and business players have offered start-ups some key tips.

Provide employees with a non-recourse loan

“As a company becomes more valuable and the tax upfront becomes more significant, I think the way to do it is this limited non-recourse loan,” Startmate creator Niki Scevak told StartupSmart.

“The company lends the employee money to buy the shares. If the employee buys the shares with this limited non-recourse loan, usually they are able to get around the problem.”

The benefit of this structure is that employees don’t pay tax upfront on the allocation of shares because they are able to purchase the shares at their full value.

Seek help

Sydney-based entrepreneur Michael Fox recently launched an employee share plan at his online business Shoes of Prey. In a blog post, he highlighted the importance of seeking external help to implement the plan.

“The legislation we have is still far from ideal, and setting up an employee share plan is more complex than it needs to be,” Fox said.

“However, once you find someone to do it for you, it’s not that difficult, and paying under $10,000 to set one up is within the budget of start-ups who have received funding and are looking to set one up.”

Rally government

According to Deloitte tax partner Roan Fryer, there is a clear opportunity for business to work with policymakers to improve the current situation.

“ESOPs are left in the ‘too-hard bucket’… [By working with policymakers, business can] help transform them from a barrier into an enabler of innovation,” Fryer said in a statement.

Nick Abrahams, Asia-Pacific head of technology practice at Norton Rose, said in a statement Deloitte and Norton Rose have been talking to relevant stakeholders in government in an attempt to get the rules changed.

“We did the survey to show empirically to government that this is a real issue for our country,” he says.

“We think it is capable of a solution and we are hopeful the government will act to change the laws now.”