IDEA: No upfront tax on options - A simple change to accelerate Australian innovation in startups

Collaboration should be at the heart of Australian innovation, not red tape, tax schemes and administrivia. When our Federal Government sets innovation policy they seem to create new programs that involve more public administration and require us to engage more accountants and lawyers. They really should be creating incentives for startups and the networks that support them. They could do this with far less money in a simpler and more effectively way. A simple 'Startup Options Policy' would achieve this.

It should be recognised that startups are worth nothing until they produce profit, and therefore should not attract upfront tax on options when they are issued regardless of valuations or prices. Options are the best thing that a startup can offer to gain the cooperation of others to help them build products and launch into global markets. Offering options to others buys commitment, knowledge, networks and market access. This should apply to anyone not just employees because the best startups have few employees but have many committed supporters. This is not to be confused with Employee Share Option Schemes (ESOPS) which are not for startups but for established businesses well beyond the startup phase.

A startup will want to offer options to their accountants and lawyers for their commitment and pro-bono work, to IP consultants, a chairperson or board members who will bring knowledge, access and strategy. It will want to engage volunteers, part-time students, consultants and engineers, social marketers, marketing specialists, channel partners and so on. None of these are employees, but all could be incentivised through options in the startup for their contributions.

It is a fallacy that capital alone can buy the type of collaboration needed to build new global businesses from startups. Anyone involved with startups knows that if it's a choice between money or collaboration, it's always collaboration because money alone can't buy commitment and passion, the real value creators in the startup economy. Capital is still required but deployed where it creates most value for the startup.

The mechanism for a new 'Startup Options Policy' could be simple. The external valuation of a startup can continue to attract capital investment and options may be issued at any value the startup wishes to engage the right people and resources. The value does not matter until they are disposed of. In a startup it is all hypothetical and meaningless until the value is realised, then tax can be paid.

Solution: Remove any upfront tax on options on startups. Tax them when they are sold or disposed and set the parameters to apply to bone-fide startups to avoid abuse.  This would make our Australian startup economy boom. It's really that simple.