It is time to show leadership in Ireland’s share options farce

11 Apr 2016

Irish start-ups can't really compete in the talent wars against Silicon Valley counterparts until the absurd tax situation for entrepreneurs is resolved

If Irish start-ups are to have any fighting chance in the war for talent, then the enduring farce over share options and capital gains tax needs to end, writes John Kennedy.

On a recent guided tour of a newly-arrived San Francisco tech player that chose to make its international home in Dublin, I made all the appropriate sounds and gestures as I noted the Irish bar at the centre of the room, the old Telecom Eireann phone boxes in the corners for private calls and all the treats and beers in the well-stocked break-out room. As I pondered my packed lunch back at my own desk my stomach rumbled, but I covered it all up by chiming enthusiastically about how amazing it all looked.

But what arrested me for a moment was the sight of a familiar face across the room of electronic tables that would rise and fall at the press of a button.

In mere microseconds, my mood shifted to regret, or remorse or compassion, or whatever. You see, that face belonged to someone who only a month previously worked at a local start-up that I came to know. I decided in an instant that the multinational’s gain was the start-up’s loss.

There’s nothing odd in any of this, it’s a normal thing in business for people to move around. Maybe the pay was better, there were generous benefits and share options. Maybe that familiar face needed a new challenge or no longer got on well with his former colleagues. Worse, what if the start-up petered out, I worried. It hadn’t. The truth actually lay somewhere in between new challenges and better pay.

But in all of this, you can’t help feel that the Irish start-up is fighting a war for talent with one arm tied. And the critical weakness is share options and how we tax them.

‘You’d have to laugh if it wasn’t so serious’

There are more than 700,000 IT job vacancies in Europe, according to the European Commission. The reason Ireland attracts so much investment from Silicon Valley companies is that, despite our small population, the country natively fuels the talent demand and is also a hub for talent from all across Europe to coalesce and fuel the dreams of the next unicorn. If you are a 20-something from sun-kissed southern Europe and you are staring long-term youth unemployment in the face, an hour or two’s flight to Dublin or Cork, a rewarding career and travel beckons. What’s a little rain when you can have so much craic?

But caught between a rock and a hard place are homegrown start-ups that are also competing for talent against better-funded, higher-profile Bay companies that can attract talent with lavish offices, wax lyrical about culture and offer even more lavish salaries.

Between a rock and hard place

My shot of recognition across a sea of rising tables brought two quotes to mind. One by Austin Ryan of AMCS, who pointed out Limerick has an advantage over Dublin when it comes to attracting and retaining talent. He said: “A lot of indigenous companies wake up and hear the news that Google or Facebook are creating 200 new jobs and they just sigh.”

Another quote came to mind by Marvin Liao of 500 Startups in San Francisco: “How we think about risk is different in the Valley – if you fail, you get a job at Google. I admire entrepreneurs, particularly those from overseas, who start businesses and don’t have this robust ecosystem.”

For start-ups in Dublin, where there is not only a skills shortage but an office space shortage too, the problem is being compounded by the inability to match US companies in terms of benefits and pay.

A year’s salary at a tech giant for a talented engineer could eat well into an entire seed funding round of a new start-up. So how on earth does a young company pay an engineer to build technology?

The problem is only exacerbated for bigger indigenous companies with bigger payrolls that still can’t offer incentives to match their international rivals or reward the loyalty and commitment of colleagues who stayed the journey.

The problem is not being helped by the continued failure by government after government to change the discriminatory tax regime that fails to support start-ups.

Missed opportunities

It came as a shock to many last October that, despite numerous lobbying campaigns and a highly successful Startup Week that brought thousands of people to hundreds of start-up events nationwide, a golden opportunity was missed.

“You’d have to laugh if it wasn’t so serious,” were the bitter words of Brian Caulfield, a successful tech founder and chairman of the Irish Venture Capital Association (IVCA).

While Finance Minister Michael Noonan reduced capital gains tax from 30pc to 20pc and increased company limits of BES/EIIS, it still isn’t enough.

As Caulfield pointed out, even a new €550 tax credit for entrepreneurial owners of firms is still only a third of the overall PAYE tax credit and the 20pc capital gains tax is restricted to the first €1m made from a sale of a company.

The whole thing is inadequate and ineffectual and it is no wonder Irish start-ups are setting up offices in the UK to avail of more visionary EIS/EIIS schemes in order to provide share options and take advantage of a 10pc capital gains tax.

Last year, the tax treatment of entrepreneurs in Ireland was labelled ‘absurd’ by the president of the Certified Public Accountants in Ireland (CPAI), Brian Purcell.

Politicians are like buses

The harsh treatment of start-ups in Ireland points to a long-standing tradition of treating anyone with an entrepreneurial bent in Ireland as a chancer.

Every journey begins with risk but where is the logic in punishing people who are trying to create jobs?

Currently, Ireland is in political limbo, with an indecisive election outcome that has created possible alliances you could only sum up as strange bedfellows indeed. We currently have no Government.

That may change in the coming days, but it doesn’t matter. We have no Government.

The epic comedy Yes Minister, is closer to the reality of what really goes on.

Ministers do what civil servants tell them to do and changes to tax laws to benefit entrepreneurs begin in the corridors of the Department of Finance, not in the select chambers of Dáil Éireann, no matter how much last-minute lobbying takes place in the run-up to a budget.

Often politicians inherit policies that are already long devised and take the credit, while behind the scenes the real wheels are being turned.

A few years ago, a senior civil servant I know walked me across the courtyard at Leinster House towards Merrion Square and, with a flourish of his hand around the elegant fountain, said: “John, it doesn’t matter who is Minister; one bus of politicians leaves and another one arrives.”

Whoever is the next Minister for Finance in Ireland needs to come into the role with vim and commitment for making changes to the entrepreneurial landscape. And whomever is blocking vital changes to share options and capital gains tax in Ireland needs to remove their head from their backside.

It is no surprise that capital gains tax in this country is still weighted towards the defunct construction industry, while technology entrepreneurs languish, lose talent, and opportunities to create jobs disappear.

Arms race or bubble?

Graduates, in particular, are attracted to multinationals that are household names. Ireland should count itself fortunate to be the location of choice for giants like Facebook, Dropbox, Google, Intel and Microsoft, to name a few.

Against this, all start-ups want is a fighting chance.

Other than the lavish offices and pay scales, at least the ability to offer employees who stay the journey a stake in the start-up’s future success is worth something. It’s certainly better than nothing.

While Silicon Valley may seem to be all about the youth and attracting graduates, another vital seam of talent is being ignored: people with experience in their 30s, 40s and even 50s. And the share options farce again fuels this.

It always surprised me how so many Irish people can work and grow up through their working lives in some of the biggest companies in the world and yet how little of this management talent, experience and knowledge translates into brand new start-ups.

You would be forgiven for thinking that starting up is only for people in their 20s. That’s not true. LinkedIn founder Reed Hoffman is 48. Elon Musk of Tesla and SpaceX is 44.

Promising Irish tech companies like AMCS and NVMdurance were founded by former Analog Devices managers with many years of experience. We recently reported how 20pc of patents held by tech giant Analog were written by Irish-based engineers. A great achievement, but is it not haunting to imagine that some of those creations could have been a homegrown but global household brand name by now? Perhaps, if the incentives existed to be brave and start up.

In all the debate about diversity in Silicon Valley, you could be forgiven for thinking it is all about sexism, but what about ageism too?

Silicon Valley journalist Dan Lyons is causing uproar with his book Disrupted, in which he appears to attack what he perceives as ageism among the unicorns. I haven’t yet read the book and can’t say I agree with Lyons’ assertions. But one thing he did say that made sense was his assertion in a post about how it is nonsense to think that a 50-year-old engineer can’t learn a new programming language. He also points out that, in fact, over time, people actually get better and better at what they do.

The sad reality is the companies caught up in the talent wars are ignoring a vital seam of rich, experienced talent.

The lack of share options and rewards won’t encourage experienced talent away from the safety net of a corporate giant.

As NVMdurance CEO Pearse Coyle pointed out in a recent conversation, people who start companies in their 20s and 30s are free to do so, because they can be braver. That all changes when people have families and mortgages. They are less likely to leave a well-paying job at a multinational and start a new company or miss a chance to vest their options. Why would they take the risk?

And this is precisely why we need to end the farce around inadequate, punitive tax measures for entrepreneurs.

If we want people to take the risk, create jobs and possibly create future global brand names, we’ve got to stop punishing them before they even begin.

Main image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years