Employees get a share in biotech

Cash-strapped biotech startups are increasingly rewarding their staff with shares in the company.

Listed and private biotechs say the scheme enables them to give key staff a sense of ownership of their work, without having to deplete scarce cash reserves through bonuses.

But according to accountants KPMG, participation rates in such programs would be far greater if certain tax and corporate law changes were introduced at a federal level.

Disclosure requirements, rules over the number of staff obliged to receive shares and delays on the realisation of capital gains are working against small companies considering share and option plans, they say.

KPMG corporate tax partner and biotech specialist Daniela Chiew said companies were looking for non-cash ways of retaining and motivating employees in less-liquid times.

Chiew said share and option plans tended to be more prevalent among listed companies where it was simple to determine market value of the shares at any point in time.

But for a private company, she said, it needed to get valuations and go through the process of creating a prospectus as well as the additional concern that founding shareholders would have their interests diluted.

"The message that comes across strongly from the sector is that it's a very popular way to remunerate employees," Chiew said.

"Notwithstanding that, the government could do things to improve the incentive...because the more the government can do to make it easier, the greater will be the take-up."

Employee tax schemes partner Martin Morrow said that under Australian rules, companies could gives shares to their employees free or at a discount, with the tax deferred for up to 10 years, so long as shares are issued to three in four staff members.

"Companies might not want to give shares to 75 per cent of staff because it will dilute their own holdings or they might want to use the shares as an incentive to key staff or researchers," Morrow said.

He said an alternative was to give share options, which could be offered free with the option to exercise them at the current prevailing price.

"That's attractive, especially if the company is likely to go to a listing and they're looking at the potential upside," he said.

He said the taxation benefits of the share or option plans were that they attracted the capital gains tax rate of 24.25 per cent instead of the standard income tax rate.

But a further problem lay in the fact that shares were taxed on the exercise of options or lifting of sale restrictions rather than on the sale of the shares.

"The current regulatory environment is not conducive to these programs because we have very complex corporate and tax laws that are not lined up with the benefits that can come with share or option schemes," Morrow said.

"We and others are currently lobbying the Federal government for changes to bring us more into line with overseas, because people don't want to have to sell their shares to meet their tax bill."

He said he was concerned at Federal Treasurer Peter Costello's recent comments suggesting budgetary pressures would mean no tax changes in this year's Budget.

"With the government addressing changes we would see wider participation through start-ups because it would be easier for them to understand and implement," Morrow said.

The managing director of listed drug development company Metabolic Pharmaceuticals, Dr Chris Belyea, said that apart from the financial rewards, share options gave employees a sense of participation.

He said staff shares accounted for about four per cent of the company, with all employees offered options within three months of joining Metabolic.

"I think it gives you a sense of ownership in the company, especially if the share price goes up and you had something to do with it," Belyea said.

"Everyone in the company should have a share, even the person at the door." He said that while cash bonuses were more powerful in the short term, share options were a good initiative over a longer time frame.

"In big companies like BHP is becomes quite meaningless, but in a little company it is potentially quite valuable."

A sense of ownership' Dr Chris Belyea, managing director of listed drug development company Metabolic Pharmaceuticals, said staff shares accounted for about four per cent of the company. Apart from the financial rewards, share options gave employees a sense of participation. He said all employees were offered options within three months of joining Metabolic.

"I think it gives you a sense of ownership in the company, especially if the share price goes up and you had something to do with it," Belyea said.

"Everyone in the company should have a share, even the person at the door." He said that while cash bonuses were more powerful in the short term, share options were a good initiative over a longer time frame.

"In big companies like BHP is becomes quite meaningless, but in a little company it is potentially quite valuable."

But for a private company like Kinacia (formerly Thrombogenix), where staff members are unable to immediately determine share value, the worth of the incentive had to be taken on faith. Chief executive officer Dr Ross Murdoch said shares were given to staff "when the opportunity arises" such as when funds were being raised.

"We think it's a good incentive for most people," Murdoch said.

"But being at the stage where no one has been able to access them it is questionable as to how you rate the benefit."