Stock options common in offer packages

[Curious]

I am considering a new job offer, and found out that they aren't
providing stock options as part of the offer package. They sited a new
Australian tax law that makes it a huge tax event to pocket them.

Every job offer in the US includes stock, so I'm surprised it's not
here. Should I be expecting stock options with my offer package?

[Serdar Sahin]

Hi,

This is mostly a US culture and slowly adapted into the other cultures. It is also not as common in Europe as they are in the US, though there are thousands of companies.

If a startup doesn't offer stock options, I don't consider it a startup. This is just my point of view. It loses its spirit.  People care percentages too much. It has more meaning if you have a $10.000.000 company and own %20 of the company rather than owning %100 of $100.000 company. Stock options are one of the most important things that leads to success.

Serdar Sahin

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[Geoff Langdale]

Is there any recent news on the incredible mess that the Australian
government made of ESOP-type programs? Last thing I saw was from about
8 months ago in a post by David Jones, indicating that this is 'still
in the too-hard basket'. If there are government types who care about
this they are keeping awfully quiet.

Geoff.

On Feb 21, 4:37 pm, Serdar Sahin <ser...@hebux.com> wrote:
> Hi,
>
> This is mostly a US culture and slowly adapted into the other cultures. It
> is also not as common in Europe as they are in the US, though there are
> thousands of companies.
>
> If a startup doesn't offer stock options, I don't consider it a startup.
> This is just my point of view. It loses its spirit.  People care percentages
> too much. It has more meaning if you have a $10.000.000 company and own %20
> of the company rather than owning %100 of $100.000 company. Stock options
> are one of the most important things that leads to success.
>
> Serdar Sahin
>

> On Mon, Feb 21, 2011 at 4:12 PM, Curious <adamst...@gmail.com> wrote:
> > I am considering a new job offer, and found out that they aren't
> > providing stock options as part of the offer package. They sited a new
> > Australian tax law that makes it a huge tax event to pocket them.
>
> > Every job offer in the US includes stock, so I'm surprised it's not
> > here. Should I be expecting stock options with my offer package?
>
> > --
> > You received this message because you are subscribed to the Silicon Beach
> > Australia mailing list.
>
> > Guidelines on discussion:

> >http://groups.google.com/group/silicon-beach-australia/msg/351e183e13...

[Jeromy Evans]

Hi,
I receive cash salary + stock as part of my package in Australia.

As a result, I pay personal income tax on the valuation of the stock
at (approx) the time it is *issued* to me. That is, I pay tax now on a
benefit that may not be realized. This is due to a recent Australian
tax ruling (I forget the name) designed to prevent fat executives from
receiving outrageous stock options instead of taxable salary. A side-
effect is to disadvantage cash-strapped start-ups offering these
employee incentives/benefits.

There was a lot of media attention a year or two ago this and there
was some industry backlash, but focus has shifted now.

Fortunately cash-strapped startups have low valuations. However, the
hiring business is correct, in Australia at the moment it presents
significant complications to them to offer stock (options) that are
"earned".

Hope that helps,
Jeromy Evans

On Feb 21, 4:37 pm, Serdar Sahin <ser...@hebux.com> wrote:

> Hi,
>
> This is mostly a US culture and slowly adapted into the other cultures. It
> is also not as common in Europe as they are in the US, though there are
> thousands of companies.
>
> If a startup doesn't offer stock options, I don't consider it a startup.
> This is just my point of view. It loses its spirit.  People care percentages
> too much. It has more meaning if you have a $10.000.000 company and own %20
> of the company rather than owning %100 of $100.000 company. Stock options
> are one of the most important things that leads to success.
>
> Serdar Sahin
>
>
>
> On Mon, Feb 21, 2011 at 4:12 PM, Curious <adamst...@gmail.com> wrote:
> > I am considering a new job offer, and found out that they aren't
> > providing stock options as part of the offer package. They sited a new
> > Australian tax law that makes it a huge tax event to pocket them.
>
> > Every job offer in the US includes stock, so I'm surprised it's not
> > here. Should I be expecting stock options with my offer package?
>
> > --
> > You received this message because you are subscribed to the Silicon Beach
> > Australia mailing list.
>
> > Guidelines on discussion:

> >http://groups.google.com/group/silicon-beach-australia/msg/351e183e13...

[Elias Bizannes]

The story behind this is that the Rudd government -- likely reacting to public anger with senior executives making money during times of massive layoffs -- decided that if you were given stock options, you were taxed at that point (even if you never exercised the right to purchase stock with your options). It was basically making you pay tax in advance of a future taxable event. Cynically, I thought of this as the government trying to raise revenues ahead of time, during a time that needed creative ways to balance the budget. It's just plain stupid as it making you prepay for something that may never happen, at an unknown price.

The problem though was that it killed a major tool startups use for motivating talent. We raised this as an issue a year and a half ago with the lifeguard paper: http://www.siliconbeachaustralia.org/lifeguard/

That said, I was given a job offer by a high profile startup in Australia before this policy came out. And it was only cash and based on % revenues. I remember discussing my options with Venturehacks founder Naval Ravikant at the time and he remarked anyone that does this is simply selfish. 

Maybe selfish but more so I think the industry is naive about how this incentive system works. It might also be a cultural thing due to Australia having a retarded fundraising system, limited exit options, and a different attitude to how people in Silicon Valley think -- most people in Oz want a lifestyle business, not a build to flip.

Elias Bizannes
http://eliasbizannes.com

Do you have what it takes? Applications now open http://startupbus.com

Guidelines on discussion: http://groups.google.com/group/silicon-beach-australia/msg/351e183e1303508d?hl=en%3Fhl%3Den

[David Lyon]

Hi Geoff,

I was actually going to leave this thread alone but I detected you were
trying to secretly message me.

In Canberra, I discussed this recently with some Government Officials.

What they said went close to this "Well we did something like that for the
film Industry and the whole thing got rorted. So we don't want to do
that again."

That's not to say that this can't be reversed. But work would need to go
into it to make something happen.

That would include registering ourselves as lobbyists, donating to party
campaign funds.. all the normal things that all the other industry segments
in Australia do.

Since the "tech" industry has been somewhat slow to get into this gear,
we really can't expect for miracles to happen.

I'm all for the sensible discussion of the issues and working towards
better outcomes..

David

On Wed, Feb 23, 2011 at 9:42 AM, Geoff Langdale <geoff.l...@gmail.com> wrote:

It's a dumb move by the government. Not so much the issue of paying
taxes but forcing startup employees to pay taxes up front on assets
that might be worth 10x or 0x and are extremely hard to value. I don't
think the key issue is wanting to dodge or minimize tax here, it's not
to take a potential huge beating tax-wise for assets that may never
amount to anything, and having to deal with the complexity of valuing
a tiny, volatile, high-growth company well before the 'market has
spoken' (e.g. the moment of an acquisition). I can live with 'top
marginal rate'. I can't live with 'top marginal rate on a pile of
options that go to $0 because your company falls over'.

I think 'build to flip' vs. 'lifestyle' leaves a lot of territory open
in the middle. Not everyone is going to get a 6 month exit a la
Spreets or get out quick and pre-revenue like (to cite some Sensory
alumni's efforts) Omnisio. Some of us our building companies that may
take a while to hit an exit and may have highly contentious valuations
- potentially substantial ones - in the middle of the process, where
you might want to hand out options slowly. Heaven help the employees
vesting their options month-by-month... just how many valuations are
we meant to get done?

The Lifeguard paper is, in my opinion, an overly long laundry list of
issues that range from critical to trivial and positions on these
issues that range from highly contentious to uncontroversial. It's a
good grab-bag of stuff, but I find it hard to believe that anyone in
government would walk away from it with much of a sense that there's
any particular course of action that they should take. By contrast,
fixing the treatment of stock options for small startups seems like
it's (a) likely to be something nearly all of us would agree on and
(b) important and actionable.

Last time this came up, David Jones posted this:
http://www.smartcompany.com.au/tax/20100428-review-finds-employee-share-scheme-changes-are-hurting-start-ups-but-improvements-put-in-too-hard-basket.html

I thought the proposal to make the qualification the same as the R&D
tax credit qualification pretty reasonable. This may be self-serving
as we (Sensory) already do this. Others may have a better criteria
that includes small startups but doesn't open the door to rorting.
There is surely a way to simplify the treatment of stock options
without turning the whole thing into another loophole for the Big End
of Town. Thoughts*?

Geoff.

* And by "Thoughts?", I mean, "does anyone have any relevant thoughts
on the Australian Federal Government's taxation regime of options and
its reform", not "please share everything that's ever gone through
your head about computers, research, IT and their relationship with
any and all levels of Governement". You know who you are...

On Feb 21, 5:24 pm, Elias Bizannes <elias.bizan...@gmail.com> wrote:
> The story behind this is that the Rudd government -- likely reacting to
> public anger with senior executives making money during times of massive
> layoffs -- decided that if you were given stock options, you were taxed at
> that point (even if you never exercised the right to purchase stock with
> your options). It was basically making you pay tax in advance of a future
> taxable event. Cynically, I thought of this as the government trying to
> raise revenues ahead of time, during a time that needed creative ways to
> balance the budget. It's just plain stupid as it making you prepay for
> something that may never happen, at an unknown price.
>
> The problem though was that it killed a major tool startups use for
> motivating talent. We raised this as an issue a year and a half ago with the
> lifeguard paper:http://www.siliconbeachaustralia.org/lifeguard/
>
> That said, I was given a job offer by a high profile startup in Australia
> before this policy came out. And it was only cash and based on % revenues. I
> remember discussing my options with Venturehacks founder Naval Ravikant at
> the time and he remarked anyone that does this is simply selfish.
>
> Maybe selfish but more so I think the industry is naive about how this
> incentive system works. It might also be a cultural thing due to Australia
> having a retarded fundraising system, limited exit options, and a
> different attitude to how people in Silicon Valley think -- most people in
> Oz want a lifestyle business, not a build to flip.
>

> Elias Bizanneshttp://eliasbizannes.com
>
> Do you have what it takes? Applications now openhttp://startupbus.com

>
> On Sun, Feb 20, 2011 at 10:02 PM, Geoff Langdale

> <geoff.langd...@gmail.com>wrote:

[Geoff Langdale]

> The story behind this is that the Rudd government -- likely reacting to
> public anger with senior executives making money during times of massive
> layoffs -- decided that if you were given stock options, you were taxed at
> that point (even if you never exercised the right to purchase stock with
> your options). It was basically making you pay tax in advance of a future
> taxable event. Cynically, I thought of this as the government trying to
> raise revenues ahead of time, during a time that needed creative ways to
> balance the budget. It's just plain stupid as it making you prepay for
> something that may never happen, at an unknown price.
>
> The problem though was that it killed a major tool startups use for
> motivating talent. We raised this as an issue a year and a half ago with the
> lifeguard paper:http://www.siliconbeachaustralia.org/lifeguard/
>
> That said, I was given a job offer by a high profile startup in Australia
> before this policy came out. And it was only cash and based on % revenues. I
> remember discussing my options with Venturehacks founder Naval Ravikant at
> the time and he remarked anyone that does this is simply selfish.
>
> Maybe selfish but more so I think the industry is naive about how this
> incentive system works. It might also be a cultural thing due to Australia
> having a retarded fundraising system, limited exit options, and a
> different attitude to how people in Silicon Valley think -- most people in
> Oz want a lifestyle business, not a build to flip.
>

> Elias Bizanneshttp://eliasbizannes.com
>
> Do you have what it takes? Applications now openhttp://startupbus.com

>
> On Sun, Feb 20, 2011 at 10:02 PM, Geoff Langdale

> <geoff.langd...@gmail.com>wrote:

[David Lyon]

On Wed, Feb 23, 2011 at 11:27 AM, Geoff Langdale <geoff.l...@gmail.com> wrote:

Frankly I don't want to subsidize either (or both?) of the major
parties after having our interests so comprehensively ignored. A lot
of us will just vote with our feet (see also the exodus to San
Fransisco) or find ways to work around the problem (there are, of
course, other ways to handle compensation). The idea of registering as
lobbyists and making contributions is disgusting; we want a fair go
(I'd settle for being treated half as well as real estate speculators
are) and to make stock options a viable way to reward employees, not
to reinvent ourselves in the business of 'farming the government'. We
don't have time or attention to spare on that. Well, I don't.

Well the facts are that it's a democracy here and there is a prescribed
process for accomplishing what you are asking. We can call the process
disgusting or whatever you like but its the same process as they have
in San Fransisco anyway.

Are you aware that SF has a lot of tech lobbyists ? more than here. :-)

Notice how things are done there and learn...

With regard to real estate, their contributions to political parties give them
considerable say in what happens. You can't expect half as good treatment
if there's no peanuts being fed to the monkeys.

I'm with you on the cynicism.. but importing what works for other tech
industries seems to be the solution for here also..

David

[Clifford Heath]

> * And by "Thoughts?", I mean, "does anyone have any relevant thoughts
> on the Australian Federal Government's taxation regime of options and
> its reform"

I received options in a startup we did in the 90's, and the rules then
depended
on the vesting price. I.e. if your company's shares were currently
valued at
$20, and the options has the same exercise price, there was no tax on
option
issuance. You paid tax on any growth of course, which I think was the
difference
between current valuation and exercise price at the time of exercise.

Some options I received were at a "nominal" exercise price and some at
the
current estimated valuation. Obviously the latter were preferred, as
the former
incurred tax just on receiving options, whether you ever exercise them
or not.
Obviously if they later get revalued at $nil (as happened), you have a
tax
rebate, but it's all bookwork.

At some prior time, I believe the rules were even more liberal; you
just paid
CGT when you sold the shares, and the cost base was just the exercise
price.
There was no tax on issuance or on exercise.

The trouble with all this of course is how do you value the company?
If you
exercise options in an unlisted company, there's no market to
establish the
value. But apart from that, I thought the rules were quite reasonable,
and
employee options schemes were worthwhile.

Anyhow, that was the situation before the last round of changes. In
this context,
can someone clarify what the changes were, and when tax is payable?

Clifford Heath.

[Geoff Langdale]

David: yes, I'm subtle like that. Our messages crossed for some
reason, so don't think my previous message in this thread is in
response to yours.

Thanks for the (on-topic) contribution. I think the fear of rorting is
the major problem but this won't be the first or last part of the tax
code that has this problem. The R&D tax credit has a fairly extensive
review process if your number comes up. Of course, there are other
startups that aren't really traditional R&D so the net would have to
be cast more broadly to encompass some of the Web 2.0-style startups
that are popular here. Not a dig at this style of startup, just
recognizing that there are a different set of tests of legitimacy of a
Web 2.0 startup vs. a R&D one - either way we want some criteria that
these aren't just shell companies or 'instruments' for avoiding tax.

Frankly I don't want to subsidize either (or both?) of the major
parties after having our interests so comprehensively ignored. A lot
of us will just vote with our feet (see also the exodus to San
Fransisco) or find ways to work around the problem (there are, of
course, other ways to handle compensation). The idea of registering as
lobbyists and making contributions is disgusting; we want a fair go
(I'd settle for being treated half as well as real estate speculators
are) and to make stock options a viable way to reward employees, not
to reinvent ourselves in the business of 'farming the government'. We
don't have time or attention to spare on that. Well, I don't.

Geoff.

On Feb 23, 10:05 am, David Lyon <david.lyon.preissh...@gmail.com>
wrote:

> Hi Geoff,
>
> I was actually going to leave this thread alone but I detected you were
> trying to secretly message me.
>
> In Canberra, I discussed this recently with some Government Officials.
>
> What they said went close to this "Well we did something like that for the
> film Industry and the whole thing got rorted. So we don't want to do
> that again."
>
> That's not to say that this can't be reversed. But work would need to go
> into it to make something happen.
>
> That would include registering ourselves as lobbyists, donating to party
> campaign funds.. all the normal things that all the other industry segments
> in Australia do.
>
> Since the "tech" industry has been somewhat slow to get into this gear,
> we really can't expect for miracles to happen.
>
> I'm all for the sensible discussion of the issues and working towards
> better outcomes..
>
> David
>

> >http://www.smartcompany.com.au/tax/20100428-review-finds-employee-sha...

[Jeromy Evans]

On Feb 23, 11:51 am, Clifford Heath <clifford.he...@gmail.com> wrote:
...

> Anyhow, that was the situation before the last round of changes. In  
> this context,
> can someone clarify what the changes were, and when tax is payable?
>

Division 83A introduced the new rules for shares or rights acquired by
employees after 1 July 2009. The details are here:
http://www.ato.gov.au/individuals/content.asp?doc=/content/24703.htm

In my specific circumstances (sweat equity), the stock issued to me
was assessed as personal income in my personal tax assessment 2009 and
2010.

[Andrew Bruno]

I am curious. 

Person A owns a company A Pty Ltd.
They also work for an employer ABC pty ltd.

ABC decides to sell part their company.  What's wrong with person A buying part of company's ABC Pty Ltd via their investment company A pty ltd just like they may buy anything else? shares, property, cars, etc.

Isn't the value of what an item is worth really what one is prepared to buy it for?

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[Jeromy Evans]

On Feb 24, 3:03 am, Andrew Bruno <andrew.br...@gmail.com> wrote:

> Isn't the value of what an item is worth really what one is prepared to buy
> it for?
>

That's right, but employee share ownership has a different purpose.
It's to provide an incentive (motivation) to employees and can be an
instrument to retain employees. These are effective when employees
directly impact the performance of the company, or if you need to
compete for talent in an industry/area.

In my case, I was on a part-time contract when the company was
founded. When the founders wanted to bring me in, it was in their
interest to put me on crap base salary plus shares/rights vested in
the future plus bonus based on company performance. That way if I
leave early I don't get to keep the shares/rights and if the company
doesn't perform all I get is the crap salary. That's a different
motivation and retention profile compared to me simply investing cash
in the company.

The challenge with the new law is:
- if you're a start up you have to come up with a valuation of those
shares/rights; or
- if you're a company with real value, it's a disincentive that your
employee has to be pay income tax on that right before it's realized
as a gain (or loss). ie. we're offering you what we estimate is $10k
worth of shares/options today, that will be vested in 2 years time if
you stay with us that long, but, sorry, you have to pay an extra $4k
income tax in cash on that right this tax year.

[Clifford Heath]

On 24/02/2011, at 10:48 AM, Jeromy Evans wrote:
> - if you're a company with real value, it's a disincentive that your
> employee has to be pay income tax on that right before it's realized
> as a gain (or loss). ie. we're offering you what we estimate is $10k
> worth of shares/options today, that will be vested in 2 years time if
> you stay with us that long, but, sorry, you have to pay an extra $4k
> income tax in cash on that right this tax year.

You only pay tax on the discount. If you're given options which can
be exercised in two years, but at the current share price, then there's
no discount until you exercise them. That was the case before, and I
don't think it's changed, based on my reading of ato.gov.au. If it's
still
the case, then it's still an incentive to improve the company valuation.

At one point, you didn't pay tax even then. Instead, you had a CGT
liability when you eventually sold the shares. That has gone.

Clifford Heath.

[Mick Liubinskas (Pollenizer)]

To get around Australian option laws tax issues we've used a multi
class system where shares change class after a certain milestone (time
or goal based). Then you combine that with a non interest loan and you
get a pretty good working system.

We've got documentation for a system like this that I'm happy to
share. Ping me.

Mick "Loves Paperwork" Liubinskas

[Mick Liubinskas (Pollenizer)]

I've had a few requests for this, let me make sure the documents are
clean and I'll post a Dropbox link.

Mick "Admin is my co-pilot" Liubinskas

On Feb 24, 10:04 pm, "Mick Liubinskas (Pollenizer)"

[Humphrey]

Hi Mick, Any chance you could share the Dropbox link agian? Thanks

On Feb 28, 11:13 am, "Mick Liubinskas (Pollenizer)"

[Mick Liubinskas (Pollenizer)]

Hi all, sorry for the delay. We've removed all of the specific info
and are just getting the docs double checked. I'll get them out
shortly.

[Humphrey]

Thanks Mick. Perfect timing! :)

On Mar 10, 9:46 pm, "Mick Liubinskas (Pollenizer)" <bigm...@gmail.com>

[Mick Liubinskas (Pollenizer)]

Hi everyone, sorry this is so late. Took a while to scrub it clean. It
may not be the simplest thing to work out but blame the govt for not
making options work.

Read the summary first.

As a way of quick explanation, instead of options you issue a two
classes of shares/units. B class shares which have value now, and C
class shares which turn into B class shares in the future (time or KPI
based). You issue an interest free loan to buy the shares if there is
ever a return on them. So you've got the right to the shares, but no
value, so you don't have to pay tax. I told you it was fun! This whole
thing cost us a bunch but it has worked out for us so far.

http://dl.dropbox.com/u/6517949/Startup%20Multi%20Class%20Share%20Plan%20Docs.zip

If you have any questions, as me here and I'll get back to you asap.

Cheers,

Mick "options make great wallpaper" Liubinskas

On Mar 11, 12:39 am, Humphrey <humphre...@gmail.com> wrote:
> Thanks Mick. Perfect timing! :)
>

> On Mar 10, 9:46 pm, "MickLiubinskas(Pollenizer)" <bigm...@gmail.com>

[Robert Yearsley]

Hey Mick -

Thanks so much for sharing these docs, handing over bundles of green
to tax lawyers to find a way though this debacle of short sighted tax
policy must have been somewhat maddening.

Looking at the complexities involved in making share options work for
startups, it seems the administrative burden for a tax law aimed at
large corp 'fat cat' ceo's has landed in the laps of the people with
the least resources to deal with it. Startups.

Anyway - in the spirit of working with what we've got (well
intentioned but hideous tax law), here's a couple of questions that I
am sure others and myself considering using your approach would likely
have:

1. How does your approach compare to the old - 'Pre Rudd' option
schemes in terms of flexibility, beyond negating the up front tax
liability?

2. Have you had the opportunity to run your approach past the those
(aside the startup in questions) who would care most about the finer
points of securities used in your approach ie VC's (AVCAL) in the
context of major structural changes of a high growth startup, and a
relevant tax lawyer association - ie the types would be called on to
defend your approach if the ATO took a disliking to how you've made
your approach work in place of a viable options scheme.

Thanks again for sharing your solution with the SB community.

Cheers,

Rob.



On Mar 17, 8:43 am, "Mick Liubinskas (Pollenizer)" <bigm...@gmail.com>
wrote:

> Hi everyone, sorry this is so late. Took a while to scrub it clean. It
> may not be the simplest thing to work out but blame the govt for not
> making options work.
>
> Read the summary first.
>
> As a way of quick explanation, instead of options you issue a two
> classes of shares/units. B class shares which have value now, and C
> class shares which turn into B class shares in the future (time or KPI
> based). You issue an interest free loan to buy the shares if there is
> ever a return on them. So you've got the right to the shares, but no
> value, so you don't have to pay tax. I told you it was fun! This whole
> thing cost us a bunch but it has worked out for us so far.
>

> http://dl.dropbox.com/u/6517949/Startup%20Multi%20Class%20Share%20Pla...

[Michael Fox]

Mick,

Thanks so much for sharing these docs, very generous of you and it looks like a very good solution. Would you be happy to share the details of your contact at http://www.mk.com.au/ who put these together for you? Would love to have a chat to them as we're going through exactly this at the moment.

Thanks again,

--
Michael Fox
www.shoesofprey.com
Phone: +61402 846 289

Blog: www.22michaels.com

Twitter: @mmmichaelfox

LinkedIn

Online Retail Industry Awards Winner:
Best New Online Retailer

Most Innovative Online Retailer
Best Online Retail Marketing Initiative

[Tristan]

Thanks for sharing Mick, excellent work getting around that.

If there is one thing politicians must understand, it's that innovation in the private sector can circumvent ('game') nearly any legislation.  They need to start considering this truth.

I think the cultural barrier is the bigger issue here though.  As somebody else posted, many people in Australia would rather have 100% of $10,000 than 10% of $10,000,000.

Tristan

[Ryszard]

thanks for this mick, its pretty cool that you share it with us.

[Kev]

Mick, thanks for sharing, could be very useful. I will be having a
chat with an accountant re these docs and provide any useful feedback
- one thing my accountant did point out in an initial chat is that
there apparently are small business concessions (tax I assume) that
kick on on a sale of a small business, and apparently issuing
different classes of shares could impact access to these concessions
should you ever want to sell the business. Thought this may be useful
to some of you. Not sure what the thresholds etc are though.

Kev
twitter.com/ke_ga

[Matthieu Stone]

Kev,

Did your accountant point out any small business concessions that may be effect by class of shares?

Thanks for these Mick.

rgds,

- matt.