Startup Accelerators: A Tax Accounting Guide for Founders

tax accounting guide for founders

At Fullstack we work with hundreds of founders working through or whom have progressed through a startup accelerator program. There are some interesting considerations here for tax purposes which we will cover for new founders below.

Startup Accelerator 101

Startup accelerators like Startmate, Antler or the classic example, Y Combinator, are built with the intention of providing new founders mentorship, training, some initial capital and networks.

If you are looking to raise capital but haven’t done so before, accelerators can be a great way to obtain support from experienced founders across product strategy, development and marketing. The format is often structured across 2 to 3 months and are often filled with 10-12 workshops run by seasoned mentors.

Entry into the accelerators is often competitive with Antler mentioning they are targeting only the top 3% of applicants.

Entry into an accelerator is also accompanied by some seed capital – this is often structured as an investment between 50k-200k at a $1m-1.5m valuation. Half of this is usually spent towards the accelerator towards the operation of the program. The remaining portion is usually spent towards the development of a minimum viable product.

The accelerator program culminates with a demo day where founders deliver a pitch of their product to an audience of investors, mentors and supporters. Many founders find success leaning into $300-$1m seed round not long after.

Corporate Structuring

A requisite for participating in an accelerator program is a company to receive investment from the accelerator often as preference shares. A popular corporate structure implemented is a dual company structure featuring a holding company to hold the intellectual property (IP) and trading company. The IP is held aside from the trading company to help mitigate business risk which can arise from hiring staff or contracting with suppliers or customers.

IP Considerations

Tech companies’ worth is often placed on the value of the intellectual property generated be it code or brand or internally generated systems. Where IP is generated through the work of staff or contracted parties it is most important that the IP is assigned to the holding company upon creation.

Moving IP between entities after the fact can lead to a tax event based on the value of the IP so it is ideal to have it vesting in the right entity beforehand. Some tech companies seek tax consolidation of both entities into one entity for tax purposes just to avoid the taxing event from this movement.

R&D Tax Incentive Considerations

The R&D Tax Incentive is often part of a tech founders outlook because it can provide up to 43.5% in funding based on eligible Australian-based R&D expenditure. Whilst the criteria for eligibility is quite detailed and requires a R&D Tax Consultant, it is also important to consider where the IP is placed and R&D expenditure is taken up.

In a dual company structure, the IP is held in the holding company and the bulk of the R&D expenditure is placed in the subsidiary company.

Since only AUS companies possessing the IP can claim the R&D Tax incentive, its important to have your cost and financing flow reviewed from the start. The other main exception to this is a simply having a single company for your operations, IP and investors initially.

Accelerator Fees

To coincide with the receipt of equity capital from the accelerator to the holding company, the fees charged by the accelerator is often charged to the holding company to be a potential R&D expense for R&D Tax Incentive purposes. It is important to apportion an appropriate percentage as all support may not relate to the development of experimental technology. It is important that the holding company is also registered for GST so the associated GST credits can be claimed in a future Business Activity Statement to be lodged.

Funding the operations

Since the operational expenses are based in the trading company, the holding company will need to extend a loan to the subsidiary trading company to fund operations. This loan is generally interest-free and doesn’t require formal documentation.

It is expected that the trading company would undertake hiring of employees, paying contractors, supplies and subscriptions and receive revenue.

Whilst the trading company would have a lot of expenses in the development phases of the venture it is important to also relay development expenses to the top entity for the R&D Tax Incentive if you are eligible. This could be achieved via quarterly invoices to the holding company for effective reimbursement.

ESIC considerations

Extra considerations must be made to help ensure the venture can secure ESIC status as the venture progresses.

The early stage test provides thresholds for activity which are easily met by most startups, alongside the 100 point test providing over 15% of the expenses in the holding company relate to eligible R&D expenditure.

Bank Setup Considerations

Oftentimes, a founder can run into difficulty when seeking to establish a bank account for the operating company with an accelerator listed as a stakeholder in the holding company. This is usually a result of a junior bank employee simply accepting the simplistic checkbox result from a bank’s internal benchmarking system. What is often required however is an email from the founder to the bank manager about the situation to escalate and provide additional discretion to the setup.

Fullstack works with founders undergoing startup accelerator programs on a very routine basis. Lean on our tech tax experience to best support your journey today.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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