Employee share scheme reform necessary, but current amendments not perfect

The federal government’s proposed changes to employee share schemes is a step in the right direction but the reforms are far from perfect, according to two Australian entrepreneurs.

The reforms – which were announced in October last year – will see the changes made by the Labor government in 2009 rolled back to encourage employee share ownership and innovation.

So far Treasury has released an exposure draft of the legislation, which aims to introduce further tax concessions for startup employees and streamline the employee share scheme process for businesses.

However, Didier Elzinga, co-founder and chief executive of Culture Amp, told StartupSmart there were “a few technical problems” with the proposed legislation as it stands.

“We’re certainly keen to run our company the way you would run a company in the US and equity is a big part of that,” he says.

“Honestly the share option reforms are somewhat flawed. So we’ve gone through with our own lawyers and actually you can’t use them as a startup. There are a few technical problems with the way they’ve been drafted that make them essentially useless.”

Elzinga says while the intention behind the current employee share scheme reforms is fantastic they are also “not quite there yet”.

“My understanding is that for example they’ve targeted it at startups but one of the things they’ve said is you can’t be forced to sell your shares within X years,” he says.

“Whenever you raise money you get a drag along provision which essentially can force somebody to sell shares if we were to be bought by a large company or whatever. So we instantly fall out. So little things, points of technical law but still affect as a startup whether we can use those provisions.”

Niki Scevak, founder of the Startmate accelerator program, told StartupSmart a major problem with the proposed changes is they “haven’t been locked in just yet”.

“It’s really befuddling to me that one simple concept – which is you pay tax when you sell the shares – is such a hard concept for the government to get their head around,” he says.

“Nothing financial in the early stages shows a company is worth X dollars, so who knows what the real valuation of the company is. Why not just tax the person when they make the money? If you do that, a lot more people would give away equity.”

Scevak says if everyone gave away a lot more equity, then there would be a lot more successful companies and “a lot more tax for the tax office”.

“But it’s stuck in this micro-optimisation of trying to get the most tax in the beginning, which is self-defeating because they won’t get more tax in the longer term,” he says.

“The legislation is definitely a step forward, though. It fixes probably 95% of what was wrong – at least for early stage startups. It can be nothing but a good thing that these changes are being brought in but there are obviously ways things can be improved and made better.”

Follow StartupSmart on Facebook, Twitter, and LinkedIn.