Angel News Australia
Volume 3, Issue 6, July 3, 2010
As reported in the Australian Financial Review on July 2nd, "the federal government's botched changes to the taxation of employee share plans" are still punishing start-up companies. This change was introduced as tax reform but, as reported by the AFR, "the Board of Taxation, charged with considering tax breaks for start-up companies amid concerns they would be disproportionately hit by the tax reforms, acknowledged the changes were "particularly onerous" for fledgling businesses. But the board concluded it was impossible to "ring-fence" tax concessions because of the difficulties in defining eligible companies."
One can't help but wonder at the Board's resourcefulness when it is the same board that administers the R&D Tax concessions which successfully address the issues of defining eligible companies in the start-up space. Or perhaps the Board could consider the many examples of defining eligible start-up companies implemented by the federal government innovation and commercialisation assistance programs. Or perhaps the Board could consider its own definitions as applied in the rules for the investments made by an Early-Stage Venture Capital Limited Partnership.
Still, it might be the case that none of these examples quite fit the bill for a "ring-fence" in this scenario. Both AVCAL and the AAAI are organisations that are well versed in the start-up space. Yet, it seems the Board either failed to consult with these bodies, or simply didn't like their proposals.
Young companies seeking to create new jobs and grow commercial prosperity for this country need to be able to use their equity to attract and retain key employees, directors and advisers at a stage in their growth when cash flow is very limited. The current arrangement of taxing options at the time of vesting has largely removed the distinction between options and shares. In the past, companies did not issue shares to employees because the Tax Office deemed those shares as immediately taxable as income in the hands of the employee.
The alternative was to grant unpaid options with vesting rights. This arrangement had several advantages. It allowed the company to create a longer-term incentive to attract and retain its employees. Employees could recognise that their efforts to grow the company were having a direct beneficial impact on their own returns for those efforts. Very often, employees exercised options only in association with a liquidity event which allowed them to sell the shares they obtain from exercising their options. This pattern of transaction kept everybody aligned on the common objectives of jobs growth, innovation success and commercial returns. It ensured that the employees would have the cash to meet the tax liabilities that arose from the exercise of the options and the sale of the shares.
Options as used to reward corporate executives are a very different beast and used in a very different way, not the least of which is that they generally have substantially more value at the time of vesting.
Angel Investors favour the use of options as a capital efficient means of attracting and retaining quality staff to the companies in which they invest. Options can also play a role in the rewards for the investors while minimising the dilution suffered by the founders - a mutually satisfactory alignment of interests. A reasonable tax treatment of options in young, high growth companies is a valuable contribution to the economic prosperity of the nation.
Sorry, not in Australia!!
However, Singapore SPRING recently announced the new Angel Investors Tax Deduction Scheme.
SPRING Singapore is the enterprise development agency for growing innovative companies and fostering a competitive SME sector. This remarkable island nation is forging ahead to develop one of the world's best-prepared economies for the information driven 21st century. Without the natural resource riches of our island nation, Singapore has already largely solved its water supply challenge and remains a linchpin in the global oil industry. Singaporeans enjoy a speed and convenience of Internet access that even our long awaited NBN may not equal.
Under the new tax scheme, approved Angel investors who make equity investments of at least SGD100,000 in eligible start-ups in a given year will qualify for a 50% tax deduction of the investment on their incomes at the end of a two-year holding period, subject to a cap of SGD500,000 of investments in each year of assessment. Clearly, one must consider the definitions of approved Angel investors and eligible start-ups.
Other requirements are that the Angel investor must a) make the investment at an individual level, b) demonstrate the ability to nurture investee companies, and c) take up a board seat/advisory role in the start-up for the entire holding period.
The AAAI has long argued for adding a new definition under the sophisticated investor rule that would recognise what the Singaporeans are calling an approved Angel investor. For an Australian implementation of this type of scheme, the AAAI recommends allowing for investors who syndicate through a unit trust and recognising that not every member of a syndicate can or should take up a board seat. Evolving best practice for the growth of Angel investment around the world builds on the central theme of an Angel group.
Angel investor groups vary in structure and deliver their primary benefits to members and portfolio companies through the "team effect". Groups usually have strict participation requirements that guide members' minimum investment activity and involvement with portfolio companies. Usually, Angel members make their own, personal decisions to invest in specific deals of interest.
By sharing the workload and contributing their diverse experience, expertise and networks Angel members enhance the quality of decision making within the group. The collective resources of time, knowledge and money enable members to achieve investments in a larger number of more diverse opportunities through better risk identification, assessment and management.
Portfolio companies benefit from those same elements as the proactive nature of Angel investing ensures that the investors are providing high quality assistance/guidance to the company focused on value growth and commercial success. Any incentive that encourages and supports Angel investment is a direct boost to the entrepreneurial community and the impact its success will have on the Australian economy.
A study released in the Journal of Finance by Professor Steven Kaplan from the University of Chicago Booth School of Business examines the question of whether it is the business, or the management that underpins success.
This is an interesting study published in February 2009 with some valuable data points. It does not even come close to answering the debate for an early-stage investor. Simple common sense and general knowledge informs us that it is the very rare exception that one person leads a venture from inception to listed success.
As was a repeated theme at all the Angel conferences this year (Australia, EBAN, WBAA, ACA), Angels are no longer expecting their investments to be picked up by VC and taken to IPO and beyond. So, if we are investing in early-stage and seeking rapid value growth to underpin a strategic value trade sale within five years, then our endeavours don't go beyond the first data point in this study!
Now, if someone could do a study that detailed performance from inception to Angel investment and from Angel investment to strategic value exit, then that would be worth something to our community. Any Australian or other academic researchers eager to pursue such a study can count on cooperation from the AAAI.
For an early-stage venture, the risk is almost all in execution and that is about people. Betting on a jockey with no horse makes no sense. Betting on a horse with no jockey makes no sense. Clearly, one needs both but, the jockey can make the horse jump in the steeplechase while, left to itself, the horse would just turn away from the challenge.
We all vary in which aspect we assess/judge first but, only a fool ignores the other aspects of the venture. People make the difference and if the founders aren't the right people when we invest then we have probably made a mistake but, they almost certainly won't be the right people at some time after we have invested. The right jockey for the horse and the course is the answer.
Enterprize is a national business planning competition organised by University of Queensland (UQ) Business School to showcase innovative products and business models amongst potential investors.
Now in its tenth year, Enterprize is responsible for launching dozens of successful businesses including CoolMe, Bilexys and Codesion.
Academic Dean and Head of UQ Business School, Professor Iain Watson, said the University is proud to support the promotion of Australia's most exciting and innovative ideas.
"Enterprize captures the ingenuity and innovation of Australian entrepreneurs and rewards the best with $100,000 towards its commercialisation.
A panel of dedicated judges from the innovation sector will support entrants throughout the submission process culminating in a formal presentation process where entrants will have their business plan reviewed by potential investors", said Professor Watson.
Last year's Enterprize winner GRW Industries developed the CoolMe Vest, a revolutionary personal cooling vest that significantly reduces heat stress and recovery times for workers in extreme heat conditions.
Team member George Adamson said winning Enterprize had helped to significantly raise the profile of the business.
"As a start up company, Enterprize provided us with a forum to clearly define and articulate our goals. It also provided us with the opportunity to realise the potential our company had to a wider audience.
Winning one of the most lucrative business competitions in Australia has allowed us to take the next steps in reaching our market and the awareness has helped to identify investment opportunities and commercial business partners", he said.
Professor Watson said that UQ Business School is looking forward to receiving applications from throughout Australia in 2010.
Aspiring entrepreneurs are required to submit a concept plan online by Friday July 16th with finalists announced on Monday August 2nd.
For more information, entry requirements, or to enter Enterprize please visit www.enterprize.uq.edu.au.
The first item of speaking for entrepreneurs seeking funding for their ideas is to be credible, which means people must quickly believe that you are being straight with them, that you are telling them the truth as you know it, that you are using your speaking to reveal rather than conceal your true motives, intentions and values. In a word, you've got to be real. In all speaking situations, you are the message: you command attention and respect, you inspire others, you make the impact. If people do not believe you, they will not believe what you say.
In public speaking, a lack of confidence will always undermine our credibility. No one wants to listen to a timid, tentative speaker. There are two kinds of confidence: one is earned, one is innate. Earned confidence comes from education and training, or from years of experience. Innate confidence is an attitude of mind, a choice to be fearlessly expressive independent of other factors. Innate confidence is a self-blessing to speak our truth at all times because I am entitled to speak and to be heard.
When people lose the cabin pressure of confidence and begin to spin out of control with anxiety, fear and self-doubt, it is because they have forgotten to choose confidence. Why? Fear of judgment.
Here's is a simple and fool-proof way to instantly dissolve fear of judgment and restore our confidence. All our fear of judgment comes from ordering people on a vertical, hierarchical axis. For example, we might order people according to income or net worth, looks, weight, organizational position and so on. Our fear of judgment comes when we rank people above us on our self-created vertical axis. Their opinion is more important than mine! If they don't approve of me ... .
However, if we turn the vertical pole on its side so it becomes horizontal, suddenly everyone's judgment becomes just an opinion, ordered equally on the same plane. Suddenly, judgment becomes opinion. Ours is as valid as another's. We all have our opinions, all are equally valid and true as an opinion.
It seems simple enough, but you might still wonder, "How does one get into this 'horizontal' state of mind?" First, realize that the vertical axis is supported by a single thought, or belief: "I am not good enough." There are any number of back stories to this single thought, each one a reason or justification to elevate others above us, because "I am not good enough." Where does this thought come from? It comes from a decision we make about our worthiness and goodness in the wake of an awkward, embarrassing, or hurtful experience. First, we have an experience, about which we make a decision, which becomes a belief, or a self-fulfilling prophecy of our own inadequacy.
Understand that all the "reasons" one gives oneself to justify elevating the opinions of others above us are made up by us, are given life by us and are authorized to keep us in the prison of self-suppression and doubt by us! We simply must choose confidence and with this confidence we can dis-create our own creation. Choose self-confidence, just as you chose self-doubt.
Try it. It works! Here's what one of my workshop participants said, "Oh my God! My whole life, I've believed that what other people told me about me was truer than what I told me about me! I thought because they were older, or smarter, or more experienced, they knew better. I get it! All of I have to do now is say 'Thank you for your opinion.' They are not the boss of me, or my thoughts. I can be as confident as I want, as a choice. Only I can cause me to lose confidence!"
Turn judgment to opinion and never lose the cabin pressure of confidence again! The people you're pitching may have more money than you, but they do not have more right to speak than you! Confidence is a choice.
Remember: YOU are the message!
During the past 25 years, Robert has created an international reputation as a skilled and inspirational keynote speaker, leadership adviser and self-awareness teacher. Robert is also a respected public speaking guru and communication strategist who is the creator and managing director of RealTime Speaking, a dynamic style of public speaking and communicating based on integrity, vulnerability and authentic connection. For further information about Robert and his work, please visit his website.
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