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Business Commentary Why devaluing stock options would be a disaster for startups

Kevin Sandhu is CEO and founder of Grow, a digital banking company.

The federal government is planning to roll out a new tax initiative that is designed to limit the tax deductibility of employee stock options.

The spirit of the initiative makes sense: The Liberals promised to target wealthy executives as part of a campaign platform that focused on strengthening the middle class. It's not hard to see that most of Canada's top-paid executives are inflating their salaries and circumventing current tax policy by receiving a significant portion of their salaries through company shares.

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Yet, while the spirit is noble, Canada's nascent startup community stands to bear the brunt of the collateral damage. For early stage companies, paying portions of employee compensation in equity in lieu of cash salary is a vital part of attracting premium talent. For young, cash-strapped businesses, it's often not possible to pay market-rate salaries. Attracting talented and capable people with the opportunity to earn equity in a business and participate in its success over time is a great way to ensure that Canadian startups remain competitive on a global scale.

But the Liberal tax proposal would reduce the value of an employee's stock options, thereby significantly reducing the incentive for working at a startup. It's simple logic in startup land: Building a world-class company requires world-class talent, and world-class talent demands world-class returns.

At my company, every member of our team owns a healthy equity position, which has been key in allowing us to hire world-class employees. My co-founder and chief technology officer elected to join me in lieu of many lucrative offers from Silicon Valley's largest companies. Our chief credit officer chose to join us after having previously managed hundreds of people at some of the world's largest banks.

Along with the rest of our team, both of these individuals took significant salary cuts to help build our company into one of Canada's fastest-growing startups, in part because of the equity allocated to them and the expectation that their investment in the company would pay off in the future. Their willingness to trade portions of their salary for stock options has allowed a small upstart to build innovative technology and shake up the old world of Canadian banking.

Joining a startup is an investment, no matter what your role. The time commitment is substantial, and employees take meaningful financial risks to help grow a company. Through stock options, an employee is buying into the future of a company, and has an increased commitment to the organization as both an employee and investor. But a punitive change to the tax treatment of stock options is going to reduce the likelihood of talented individuals leaving cash-rich corporate jobs, effectively stifling innovation by tech-forward startups.

With a struggling resource sector and an already weak dollar, Canada should be supporting high-tech startups more than ever. Homegrown successes like Shopify and Hootsuite have helped put Canada on the global technology map, but new winners may soon become few and far between if we don't continue to support domestic innovation and growth from within. At a time when this country needs all the help it can get to reignite its economy, the proposed tax changes could have disastrous and irreparable effects.

The other day, Prime Minister Justin Trudeau spoke to the world at Davos, Switzerland, saying that he wants the world "to know Canadians for our resourcefulness."

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There's nothing more resourceful than a group of people building something real and meaningful, starting with nothing more than a bright idea and a goal of future payoff. Eliminating this short-sighted initiative would be another sign that our Prime Minister is willing to stand behind that resourcefulness.

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