Denham Sadler
August 13, 2019

Employee share scheme withers

StartupLand

Employee share scheme withers

Alan Jones: The employee share scheme needs to be less restrictive for tech companies

The government is yet to reveal how it would proceed with proposed changes to Employee Share Schemes, nearly nine months after they were first revealed.

Treasurer Josh Frydenberg announced last November that the Coalition planned to make a series of tweaks to the employee share scheme, which has been popular among early-stage tech startups. Treasury then quietly opened a consultation period, which closed at the end of April.

There hasn’t been any public announcement on the changes since then, and the government is yet to unveil the necessary legislation. Submissions to the consultation process have not been made public.

Employee Share Schemes (ESS) allow a company to offer employees shares in the business as a way to compete with higher salaries at larger companies and for workers to have a stake in its operations.

But the current ESS framework was “too complex and fragmented and ultimately discourages businesses from offering ESS’s”, Mr Frydenberg said.

The government proposed doubling the limit for ESS options to $10,000 for unlisted companies along with further exemptions for startups and small businesses from reporting requirements and disclosures.

The announcement received a lukewarm reaction. While the changes were welcomed, there were hopes that government would go further to make ESS more attractive and simple for early stage companies.

The government quietly released a consultation paper on the changes at the start of April, just before the federal election in May, with Treasury accepting feedback until the end of the month.

The proposal included increasing the limit for ESS options from $5000 to $10,000 per worker per year, and creating a dedicated exemption from disclosure, advertising and on-sale obligations under the Corporations Act for early-stage companies.

This would allow a startup to offer ESS to its employees without having to publicly disclose “commercially sensitive financial information”.

In the paper, the government acknowledged that the current scheme is seen as being “overly restrictive”.

“While the current regulatory framework provides a range of exemptions to facilitate ESS offers, these exemptions are complex and fragmented, increasing the time and cost associated with offering ESSs,” the Treasury consultation paper said.

“It may be difficult for employers to understand how the various statutory exemptions and ASIC relief work, given the relief is located across both the Corporations Act and ASIC class orders. The differing scopes and conditions associated with the exemptions and ASIC relief adds to the legal complexity.”

But a number of stakeholders and respondents to the consultation paper have said these changes do not go far enough in addressing the issues surrounding the current ESS model.

M8 Ventures general partner Alan Jones said the delays are frustrating, and the proposed changes wouldn’t be effective anyway.

“Even if the changes to the employee share ownership legislation had been passed by now they would still be too small to be effective,” Mr Jones told InnovationAus.com.

“Startups should be able to grant up to $100,000 per year to employees, to compensate for risk and for salary forgone at senior leadership levels,” he said.

Mr Jones said the 20/12 rule, where a company must issue a disclosure document if it offers shares to more than 20 investors in a 12 month period, should be scrapped for early stage tech companies.

“The 20/12 rule should be exempted entirely for tech startups up to $20-30 million in turnover and significantly simplified for all tech companies, and the $50 million cap on exemptions on tax treatment should surely be offered for all technology companies headquartered in Australia,” Mr Jones said.

“And it should have taken six months to consult, formulate and pass these legislative amendments.”

In its submission, Chartered Accountants ANZ said the government’s changes would “only result in minor benefits to support small business”, and that the real barrier to the scheme is how the shares are taxed.

The Australian Investment Council also called for further reforms to make ESSs “even more widespread and increase their effectiveness in incentivising employees to share in the common goals of business growth and success”.

“This ESS consultation process presents a compelling opportunity to make meaningful reforms to not only provide startups, scale-ups and other high-growth companies with valuable remuneration and recruiting tools in the form of ESSs, but also to help boost Australia’s startup and innovation ecosystem over the long term,” the AIC said.

The AIC is pushing for a further increase of the ESS cap to $20,000 along with a range of tax concessions.

StartupAus has also been campaigning for improvements to ESS for several years. The organisation’s key recommendation was not taken up by the government in its proposed changes – that of the scrapping of the 20/12 rule, where a company must issue a disclosure document if it offers shares to more than 20 investors in a 12 month period.

Startups are likely to fall foul of this investor ceiling with ESSs and would then be required to produce “burdensome” documents, StartupAus has said.

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