The summary of the problem is that if you’ve got a startup with some value and you offer options to an employee or advisor then they need to consider them as income and pay tax on it upfront, even though it might never end up being valuable. Most countries just charge a tax if you make a capital gain.
Here is a quick video from Foundry on how they “work”;
Here is why I’m helping make it an issue;
- Focus. We picked one thing that we thought would help and we’re focusing on it. We pushed it at Julia Guillard’s event last year, we push it in media and we got to speak to the government team investigating it. We’re not obsessed by it, and it’s only 1% of our time, but instead of trying to push 10 things.
- It’s complicated. Niki is right that there are ways around it with convertible notes, preferred equity, etc plus option premiums, buy backs and non-recourse loans. But they are all just a little (or very) messy. There is a lot to get done and a lot to focus on as your growing out your startup and it would be better not to have to worry about this one.
- It’s currency. When you start a startup you’ve got your big idea, lots of determination, bucket loads of free tools for engineering and marketing, lots of mentors but…. very little money. To convince your best friend to convince his wife to give up that high paying contract to join you for 6 months on no salary. Options are a good way to incentivise them and motivate them for the long term.
- Skipping Australia. There is a bit of a trend of startups in Australia setting up an American company day one. Often called a Delaware Corporate or C Corp. This allows you to do options easily and get a US bank account easier. It’s obviously horses for courses and we’d do it if it was the best thing for the business. But if this becomes default I feel it’s a moral defeat. Even though you could still be a big, successful Australian company employing lots of people here it would still feel like a US company (Or Singapore or UK…). If we get our options (plus 9 other things) sorted then it increases the likelihood of a company starting Australian and staying Australian. Every bit helps.
My idea to keep it simple is to have options not taxed up front while the business is under the $2m revenue threshold. The same number is used to force businesses to operate under an accrual accounting basis as opposed to cash so there is some logic to the amount. It means that the CEO of a huge mining options can’t get options for free but a CTO of a growing startup