Choosing to work for a start-up company is exciting. There's the opportunity to help build something successful from the beginning and the opportunity to get diverse experience as everyone jumps in with sleeves rolled up to get the job done. The trade-off is often a lower salary as the start-up can't afford to pay higher wages in the early stages. This is often balanced with the offer of an ownership interest through shares or share options. Not every start-up is going to become the next Facebook which, when it went public, produced a reported thousand millionaires.
More often than not, start-ups fizzle or exit for much smaller amounts and employees find out that their pot of gold is actually a pile of something else. In Australia there's been a further problem that the tax treatment of employee share schemes ESS has created a disincentive to start-ups and their potential employees.
Start-ups have been reluctant to offer employees equity because of the negative tax implications, making it difficult to compete for talent. Thankfully, changes to the tax treatment of share options that came into effect from July 1, , will go some way towards solving this problem. But it provides a whole other line of questions for employees, including whether you would actually make any money if your start-up eventually succeeds.
Under the new changes from July 1, , employees working for an eligible company will generally not be liable to pay up-front tax on those shares or options, making it much more appealing. Eligible businesses are creating ESSs to both attract and retain great employees and to align interests of the employees with the company.
Hogben says a start-up ESS can be put together quickly and simply to issue options or shares to employees before the end of the financial year. If you're not an employee in a qualifying start-up company, there are further changes which may still affect you. Understanding that an ESS won't affect you negatively at tax time is just the tip of the iceberg.
Once you're aware that equity can now be attractive to you in a start-up the question needs to be asked — should you still take it?
The answer is — it depends on your individual circumstances. Yes it's a meh answer but it's true. That's because you need to understand what your gap is.
It's also important to understand that just because you own 5 per cent of the company doesn't mean you'll receive 5 per cent of the sale proceeds. It depends on whether further capital raising has been completed, whether any preference shares have been granted and if the company has raised any debt funding. All of this can serve to dilute your original shares so that you may still own 5 per cent of a certain class of share but the debt and preference shares actually make your equity worth say 1 per cent.
Of course, if you're considering a role in a start-up, you've done your due diligence, sought legal advice and are happy with the consequences your commitment shouldn't stop there. Every time there is a significant round of financing you should feel compelled to ask your employer all the above questions again.
If you feel your employer is being evasive or non-committal then it's OK to feel wary. Home Business Money Tax. Get the latest news and updates emailed straight to your inbox. Info Save articles for later.
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