Is a 15-year-old company with a $30 billion market capitalization and more than 3,000 employees a “large, long-established, mature firm”?
That’s the question the federal government will have to decide about Ottawa-based e-commerce powerhouse Shopify Inc. as it implements the more restrictive tax treatment of stock options it proposed in the 2019 budget.
As it stands now, income from stock options are effectively taxed at half the rate of regular income, but under the new proposal, after an exemption for the first $200,000 in stock options, such income will be taxed at an individual’s full rate.
For tech sector companies, which often lose money and see stock options as the lifeblood of recruiting, that would be a huge problem; that’s why the government specifically carved out “start-ups and rapidly growing Canadian businesses” from the new policy.
But just where that leaves Shopify, which while still growing quickly has been publicly traded for more than four years and is at the vanguard of the Canadian tech sector, is unclear.
“Further details will be released before the summer of 2019,” a Department of Finance spokesperson said in an email in response to a question about the company’s status.
“Any changes to the tax treatment of employee stock options would apply on a go-forward basis only and would not apply to options granted prior to the announcement of legislative proposals to implement any new regime.”
The market is super tight, we are all fighting for talent, and I’m looking for the same talent as Shopify is or Amazon is, or Google is
Mike Serbinis, CEO of League
Shopify did not respond to requests for comment for this story, but their financial filings shed some light on how significant stock-based compensation is for the company.
“We believe compensation should be structured to ensure that a significant portion of an executive’s compensation opportunity will be related to factors that influence shareholder value,” Shopify said in the company’s 2018 management information circular.
When the company went public in 2015 the board set aside around 3.7 million shares for equity-based compensation, and that amount is annually increased by five per cent.
Stock grants and options make for valuable compensation at Shopify; fuelled by rapidly growing revenue, Shopify’s stock has shot up in the past few years from an IPO price of US$17 on the New York Stock Exchange to around US$200 per share today.
At the beginning of 2018 (the most recent year available) Shopify had 10,740,971 shares earmarked for equity-based compensation, which at the time had a value of approximately $1.4 billion.
Founder and chief executive Tobi Lutke received a salary of CAD$600,000 in 2017, but his option-based awards were valued at more than US$4.5 million. Lutke has more than US$44 million in “unexercised in-the-money” stock options, according to the company’s financial filings.
Other senior executives also received significantly more in share-and option-based awards than outright salary. For example, Jean-Michel Lemieux, senior vice-president of engineering, received a CAD$450,000 salary in 2017, but in that year he was awarded options-based compensation valued at US$761,500.
The question of whether Shopify will meet the federal government’s definition of a mature, long-established firm is not clear-cut. They are widely recognized as the biggest, strongest firm in the Canadian technology sector, but is a company “mature” when it’s rapidly scaling up, with employee count growing by more than 50 per cent between 2017 and 2018 and year-over-year revenue growing by 59 per cent?
After the budget was released, the Council of Canadian Innovators, which represents more than 100 CEOs of tech companies, argued that Canada doesn’t have any mature tech companies at all.
“It would be untrue and imprudent to categorize any Canadian technology company as “mature” for purposes of stock option tax treatment,” CCI executive director Ben Bergen said in an emailed statement.
“We appreciate that Canada has a revenue problem but our concern is that domestic scale-ups represent the country’s best chance to grow new revenues and ensure continued and growing prosperity in the 21st century.”
If the tax changes are applied to big tech companies, they would make it harder to recruit executive talent, according to Mike Serbinis, CEO of League, a Toronto-based tech firm aiming to reinvent how employee benefits are delivered.
“The market is super tight, we are all fighting for talent, and I’m looking for the same talent as Shopify is or Amazon is, or Google is,” Serbinis said.
“A lot of the people you want, for example at Shopify, they work at Amazon and they work at Square, and they’re used to getting options with a certain kind of treatment, and it’s now going to look different. Your options in Canada will look different, meaning they’re not as valuable.”
Serbinis said based on his reading of the budget, he’s fairly sure Shopify would not be exempt from the tax hike. He said depending on the exact new rules for stock options taxation, it could have far reaching effects in the tech sector, with knock-on effects for how companies raise venture capital money and how they think about cash flow.
He said it’s hard to overstate how pervasive stock options are in the technology world.
“I couldn’t give you an exact number, but I would say in general across emerging tech companies, it’s nearly 100 per cent,” he said.
“It’s just going to cost those companies more money. They’re going to have to give more options, or more compensation, to offset the taxation.”