Startups take stock of their options

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This article appeared in the May 2014 issue of CRN magazine.

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Startups take stock of their options
Scott Frew

You likely haven’t heard of Bonnie Brown but she is a Silicon Valley legend.

In 1999 and as Google employee No. 41, Brown, now 58, traded her fledgling massage business to be the part-time masseuse at the search engine startup. Able to pay her just US$450 a week, Google founders Larry Page and Sergei Brin awarded her stock options.

After cashing out five years later, Brown was a millionaire.

Alas, owing to Australia’s Byzantine tax code, there are no Bonnie Browns queuing to relieve the tired and stressed muscles of startup founders. That is because in Australia, unlike in the US or even Britain and New Zealand, options are taxed at receipt rather than when traded on the open market.

Stock options – or what the Silicon Valley set call ‘Golden Handcuffs’ – are startup currency: they cut wages bills and cash burn, motivate employees, and attract and retain talent. In the US, they have lucrative tax benefits for companies.

Prior to the last federal election, the Gillard-Labor government committed to reforming how options were taxed after the former Rudd-Labor government changed the rules.

Deloitte tax partner Robert Basker says the defection of high-profile former startup Atlassian to Britain has put the debate into sharp relief.

“Both sides of government think there’s a problem,” Basker says. “There should be urgency to fix this and stop the flows of Atlassians looking elsewhere.”

Among Deloitte’s recommendations for reforming options tax law are a crisp definition of a startup, providing tax breaks to employees who earn less than $180,000 a year and a streamlined valuation process.

Scott Frew, founder of iAsset and Distribution Central, does reward his top staff with options but says valuing what a share may be worth is painful and open to interpretation. He says relief should be granted to any privately held company and options taxed only when sold. “My problem is that if I want to issue options to a lower-paid employee, they have to pay tax [upfront],” Frew says.

In the situation where options can only be cashed in the case of a sale or public float, employees could potentially be out of pocket to the taxman – if anything, a disincentive.

The lack of an options culture has also led to a brain drain, says Frew.

“Trying to get developers is like pulling teeth. Most of the great talent has left the country and has gone to the Valley and that’s more painful than anything.

“The federal government should roll back laws to what it was before the Labor government screwed it up. It’s simple, the Australian government should be doing everything to help entrepreneurs soar.”

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