FinTech community

Now we have an Employee Share Scheme… what’s next for startups?

By Luke Hally @dragonbillHQ · On July 8, 2015

Startups and the government

Startups and government involvement are getting a lot of airtime lately. I’ve been involved in talks and events with many people and the discussion about government involvement in startups seems to come’s down to:

Should the government foster an environment for startup innovation or
Should the government make investments into individual startups

I sit firmly in the former camp, I think the government should encourage the ecosystem, not individual businesses – stand back and let us play.

What’s been happening?

The federal government has recently passed Employee Share Scheme legislation. This is great news for startups. It will enable pre-money startups to offer equity to employees in lieu of pay. This makes sense, but previous legislation had an unforeseen effect. The legislationÂ designed to stop wealthy executives avoiding tax madeÂ employee share schemes unusable for startups.

You also may have heard that the Victorian government has announced that it will invest up to $60m of funding to encourage entrepreneurship and have been talking with the community on how to do it.

Something that has been waiting to step onto the main stage, which I am excited about is Crowd Sourced Equity Funding, CSEF. This is where a startup can sell equity to anyone who wants to buy some. You can see what the government thoughts are so far over at Treasury. Sebastien Eckersley-Maslin from BlueChilli has had some interesting and informative thoughts on the topic in his blog. During a hashtag event today (check out #ESSAU), Small Business Minister Bruce Billson revealed the following about CSEF:

The government are ensuring appropriate checks and balances are in place for the legislation to make sure the new Employee Share Scheme is compatible with a future CSEF.
CSEF is due to be introduced in the Spring sitting of Parliament.
The government are hoping to release discussion paper on CSEF ASAP.

Support the ecosystem, not individuals

It sounds good but what does that even mean? There are lots of suggestions going around, some good ones and some not so good ones.

CSEF is good because it would benefit startups and the broader community. It could provide startups with investment they need to develop and grow. It would also give everyday investors the opportunity to get involved in and benefit from an exciting high growth area. This is also a high risk area, which is why a considered approach which helps reduce the risk of charlatans and rewards investors with tax breaks would help.

I’d like to see a program like the UK Seed Enterprise Investment Scheme or SEIS. SEIS works by providing significant tax breaks to individual investors who invest in startup innovation. I was exposed to it while living in London and was amazed that we didn’t have a similar scheme in a country as innovative as Australia.

The idea is to encourage people who wouldn’t normally invest, to invest into a sector they wouldn’t normally invest into. It wouldn’t cost the government – sure it would forego taxes – but it’s tax on investment that wouldn’t have existed anyway.

Bottom up as well as top down support

The other side of this coin is the ICT skills shortage. Governments are clamouring to present training and education policies to fix this. Remember the old saying, you can lead a horse to water but you can’t make it drink. Skills and exposure is part of the problem, desire is the other. PeopleÂ have to want to work in the industry, they don’t just want a job anymore.

By spreading the wealth to small investors, children can get positive exposure through their family’s or family friend’s investment. All of a sudden parents will be talking about tech companies and their achievements at the dinner table instead of the negative gearing, sharemarket or bluechips. Children will be encouraged into ICT, not just actively by their family but via osmosis because of the benefits the investments have given to their family.

Conclusion

A program like the UK SEIS would help foster innovation, growth and the decentralisation of high growth wealth – allowing more people to share in the prosperity of successful startups.There is a fourfold benefit to a program such as this.

The startup can get significant investment – up to $2M if Ed Husic has his way. This investment would be from multiple investors, meaning less dilution of power for the startup.
Something many people don’t consider: it decentralisesÂ the wealth. Spreading the spoils of success with a broader base of investors. It means that everyday Australians can benefit from the tech boom, not just a small group of already wealthy investors.
The successful startups create jobs and pay taxes.
With more people literally invested in the ecosystem, hopefully we’ll see more talk and encouragement of children/grandchildren of investors to enter the tech field and see a bottom up increase in the ICT skills we need.
I’ll call this 4.5, this is left field and something I’m unqualified to talk about. But maybe this could become an alternative to the negative gearing tax breaks. We all know housing investment is unsustainable and doesn’t encourage innovation, lets encourage a shift from dumb investment in property to smart investment in startups. – if you are qualified or knowledgeable on this, I’d love to read your comments below.

As many others have said recently, we are at a threshold where we can, as a society, grab hold of this tech boom and continue Australia’s prosperity. There’ll be other booms in the future, but this is today’s one, we can see it and know it is there to exploit. It would be a shame to miss the ride.

Action

If you want to see the government take action to improve the startup ecosystem, don’t just whinge to your startup friends. Contact you local MP and tell them.