Employee share scheme reform needs to be more “founder friendly”

The federal government’s changes to the taxation of employee share schemes are not “founder friendly” despite being overall a step in the right direction, according to an Australian entrepreneur who has been consulting with policymakers. 

Rebekah Campbell, founder of Posse, told StartupSmart the government – and Small Business Minister Bruce Billson in particular – have been “great” when it comes to hearing what startups need.  

“They really listened,” she says. 

“I think they have gone a long way to addressing the problems, but there are still a couple of big things from the startup side of things.” 

However, Campbell says the exposure draft, which was released in January this year, needed to take another look at the 10% limit on shareholding provision. 

“The current way the revised employee share plan is structured, if you own more than 10% you can’t defer the tax on those options,” she says. 

“So it’s the biggest problem with the legislation – it is not founder friendly but employer friendly.”

Campbell says 10% is “such a small amount” and most founders will not feel like founders any more if they own that much of the company. Instead, they will feel like employees. 

Reuben Bramanathan, senior lawyer at Adroit Lawyers, told StartupSmart although the draft legislation is good news in general for startups, there are “some gaps” which could cause problems. 

“The 10% limit could be a problem for startups who have already raised funding at a valuation, and later need to bring on a new co-founder or want to increase equity incentives for the original founders,” he says.

“Any shares or options issued to someone who holds 10% or more of the company will be taxed up front. That 10% limit includes shares and un-exercised options.”

Bramanathan also points out that at this stage the proposed changes will not apply to foreign companies which employ Australians. In addition, employees will still need to pay tax on any shares or options they want to keep when their employment with the company ends.

“There has been a strong response from the startup sector to address these gaps,” he says.

“The new legislation really needs to address these things to give Australian startups a level playing field to attract and retain quality employees.” 

The government hopes to push through its employee share scheme reforms by July this year.

This article originally appeared on StartupSmart.