Thursday, 15 May 2014 04:15

ESOP fable – all talk and no action on share options Featured


Representatives of Australia’s information and communications industries, and industry commentators, are near universal in their condemnation of the Federal Budget.

Coming in for most criticism is the cutting of funding to NICTA and the emasculation of the CSIRO, but many other areas have also disappointed many.

One of the most telling of these is the Government’s failure to follow through on its promise change the taxation treatment of employee share option plans (ESOPs), while at the same time axing many schemes that help startup businesses.

The Australian Information Industry Association (AIIA) is not known for its disagreement of the Government. It is usually supportive of its initiatives. But CEO Suzanne Campbell, was uncharacteristically critical:

“In delivering his budget speech the Treasurer said 'the Government's focus will be on strengthening the overall business environment so that enterprise large or small can create more jobs in Australia.' In this context it is disappointing that the Government did not seize the opportunity to announce changes to the current Employee Share Scheme."

The existing share scheme has been roundly criticised, even by many in the Government, as putting Australian startups at a competitive disadvantage compared to the US and many other countries. Malcolm Turnbull said only a few months ago it should be changed.

"The AIIA is seeking to better understand how the establishment of the Entrepreneurs' Infrastructure Program will redress the abolition of programs including Commercialisation Australia, Enterprise Connect, Industry Innovation Precincts and Industry Innovation Funds, to ensure that Australia is well positioned to create sustainable prosperity and meet emerging global competition."

StartupAUS, which represents startup companies is not impressed. “The Government must move quickly to fill gap left by abolition of Commercialisation Australia, Innovation Investment Funds, and take swift action on Employee Share Schemes,” it said in its budget response.

“The budget presented the Government with the ability to demonstrate its commitment to supporting Australian tech entrepreneurs, and correcting market failures that have held back the development of our startup ecosystem. The abolition of Commercialisation Australia removes a vital lifeline for Australian startups and much needed support for angel investment.

“Commercialisation Australia has been a vital lifeline to Australian startups. It has so far supported over 500 companies with grants in excess of $200 million. Much of this funding has gone to companies such as ingogo, Liquid State and 121cast who take this initial funding, build a viable business, and go on to raise additional private funds.

“StartupAUS hopes that closure of the Innovation Investment Funds, which has involved the investment of more than $300 million in Australian venture capital (VC) funds, does not signal the end of government support for Australia’s VC industry.

“StartupAUS would like to see future funding that develops and supports a world-class cohort of VC fund managers, allocates capital to the most deserving funds, adopts a transparent decision-making process and effectively deploys funds to stimulate a vibrant VC industry in Australia.

Steven Baxter, board member of StartupAUS and managing director River City Labs said: “The reality is there’s nothing in this budget that indicates the government wants to support tech startups in Australia.

“The concerning top-level conclusion is that a ‘saving; of $845.6 million over five years is another way of saying the Government will reduce its support for innovation by nearly $170 million a year.

“Whilst we can understand the Government’s rationale in regulating support for corporates, they are in danger of throwing the baby out with the bathwater. Commercialisation Australia and the IIFs were not handouts, they were valuable early stage funding mechanisms that enabled great ideas to be commercialised and startups to get their product to market. Their loss pulls the rug out from under a large number of startups, and will have an immediate impact on our startup ecosystem.”

Baxter said the current tax treatment of startups is having a detrimental impact on Australia’s ability to attract and retain the best workers.

“This was recognised in Budget 2014, which stated: ‘Removing unnecessary obstacles to business formation and investment by start-up companies is a critical part of establishing an effective innovation system. High costs of entry and exit have the potential to discourage the type of start-up companies that often pioneer new technologies and work practices, and may also shield incumbent firms that may be less efficient from new competitors’.”

But there was Baxter no action. StartupAUS is calling for three key steps for ESOPs:

  • Impose the tax upon and at the time of sale of the employee shares – i.e. during or after a liquidity event.
  • Define Startup clearly and broadly with appropriate metrics to achieve certainty of the ESS, and with sufficient flexibility to be beneficial to the appropriately eligible startups.
  • Deploy clear, simply drafted and standardised Employee Share Option Programs and Employee Share Schemes, and a reporting system for startups.



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Graeme Philipson

Graeme Philipson is senior associate editor at iTWire. He is one of Australia’s longest serving and most experienced IT journalists. He is author of the only definitive history of the Australian IT industry, ‘A Vision Splendid: The History of Australian Computing.’

He has been in the high tech industry for more than 30 years, most of that time as a market researcher, analyst and journalist. He was founding editor of MIS magazine, and is a former editor of Computerworld Australia. He was a research director for Gartner Asia Pacific and research manager for the Yankee Group Australia. He was a long time weekly IT columnist in The Age and The Sydney Morning Herald, and is a recipient of the Kester Award for lifetime achievement in IT journalism.



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