The pitch that built Australia’s software industry was simple, and it worked.
Join us early. Take less salary than you could earn at a multinational. If the company wins, you win too. Two founders in Sydney, bootstrapped, burning through their savings, offering a deal that required people to believe in something that did not yet exist. Not a great pitch, on paper. And yet, somehow, people said yes. Again and again and again.
That deal, backed by a capital gains tax framework that made the eventual upside real, produced some of the most consequential enterprise software companies to emerge outside the United States. The 2026 Federal Budget is about to dismantle it.
The proposed changes scrap the 50% CGT discount for future equity grants, replacing it with inflation indexation. Startup employees holding sweat equity find that distinction decisive. An employee with a zero-cost base gets no inflation relief. There is nothing to index. Rather than a roughly 23.5% effective tax rate on exit, they face the full 47% top marginal rate. The after-tax return on a meaningful equity stake roughly halves.
The government has committed to consulting on how the changes interact with employee share schemes and early-stage investment. That consultation matters enormously, because the policy currently applies equally to startup equity and residential property. That is a category error of some magnificence, and it carries consequences that will outlast any single budget cycle.
Not a Sweet Deal
The equity model in Australian tech has never been a concession. It has been the mechanism through which founders could recruit engineers, product leaders, and senior operators who had other options, often rather better-paying ones.
“When Bradley and I started Dovetail in Sydney, our pitch was to take a lower-than-market salary in exchange for equity as we couldn’t compete with the big boys on cash,” said Benjamin Humphrey, CEO and co-founder of Dovetail Software. “We told our team that if Dovetail wins, they’d win too.”
People took that bet. The companies that succeeded produced something beyond their own returns: experienced operators who understood how to build at scale, angel capital that recycled into the next generation of founders, and a growing body of institutional knowledge that a country cannot manufacture through policy alone. Knowledge earned the hard way, in small offices, at below-market salaries, on the glorious and slightly terrifying promise of equity that might one day be worth something.
That ecosystem took decades to assemble. In 2025, Australian startup funding hit $5.4 billion across 390 deals, the third-largest funding year on record, with AI and enterprise software among the highest-conviction sectors. Venture analysts attributed part of that momentum to the quality of technical talent willing to back Australian-founded companies over established alternatives. The CGT changes arrive into that momentum as a direct headwind. A rather poorly timed one, it must be said.
Capital Pains
A top-tier engineer in Australia in 2026 has genuinely global options. Remote roles at hyperscalers, well-funded US product companies, and a deepening pool of European tech employers are all within reach. The salary differential between those options and an early-stage Australian scaleup is significant.
The equity premium is what has historically closed that gap. The arithmetic Humphrey lays out is concrete: an early employee holding 1% equity in a company acquired for roughly $200 million holds around $2 million in gains. Under the current CGT framework, they pay approximately $470,000 in tax, taking home $1.53 million. Under the proposed regime, with a zero cost base and no meaningful indexation relief, the tax bill nearly doubles to $940,000. That extra $470,000 does not disappear; it transfers from the engineer who backed an Australian company at its riskiest point to consolidated revenue.
The line between “worth it” and “not worth it” has just moved considerably. Engineers are very good at finding lines.
Industry analysts now project that domestic venture investment could contract between 15% and 20% over the next two fiscal cycles if the changes proceed without startup-specific protections. That is not a projection about investor mood. It is a projection about the deals that do not get done because the people who would have made them possible chose a different path. A better-paid, less risky, thoroughly sensible path. Good for them. Terrible for everyone else.
Engineers vote with their feet. The traffic between Australian scaleups and offshore alternatives is already measurable, and tipping the financial case further against local equity will accelerate a decision many senior engineers are already quietly working through over their morning coffee.
Taxed Out of Austrlia
The government’s stated goal is a sovereign technology capability, a domestic industry able to build globally competitive products. That ambition is coherent. The policy tension, though, is rather spectacular.
Building a globally competitive software company from Sydney requires two things the equity model has historically delivered: the ability to recruit talent that could work anywhere, and the ability to retain them through periods of below-market cash compensation. Remove the financial case for the second, and the first becomes structurally harder. Not impossible. Just noticeably, depressingly harder.
Dovetail Software is a concrete example of what that model produces at its finest. Founded in Sydney, it now serves 20% of the Fortune 500, employs over 100 people locally, and brings tens of millions of dollars in revenue into the Australian economy each year. That did not happen because its founders had access to the same capital as their American counterparts. It happened because the equity proposition was credible enough, and financially attractive enough, that skilled people accepted the tradeoff.
“We cannot talk about a ‘Future Made in Australia’ while writing policy that penalises the startups and innovative companies required to build it,” Humphrey wrote in response to the proposed changes.
The downstream consequences of getting this wrong extend far beyond the companies caught in the first round. The angel capital that successful exits generate, the mentorship networks they create, the willingness of the next generation of founders to believe the risk is worth taking: all of it compounds from the same starting condition. The return on early-stage risk has to be proportionate, in some delectable and meaningful way, to the risk itself.
Index This
The government acknowledged in supplementary budget materials that the tech and startup sector has unique characteristics warranting specific consideration. That acknowledgment is the right instinct. Whether the consultation produces a durable carve-out or a softer version of the same problem remains, at time of writing, an open and rather pressing question.
The minimum required outcome is legible. Employee equity granted in lieu of market-rate compensation cannot be taxed identically to passive property investment. One involves accepting personal risk, lower cash returns, longer hours, and a 90% chance of company failure in exchange for a potential future payout. The other is a capital allocation decision made from a position of financial comfort. Treating them at the same effective rate is a policy design error, and the ecosystem will price that error into every hiring conversation from July 2027 onward.
A functional carve-out for early-stage employee share schemes, preserving something close to the current effective rate for equity earned through below-market compensation, is what the sector needs from consultation. Not a symbolic acknowledgment of complexity.
Australia generates more unicorns per venture dollar than anywhere else in the world. That record was not built on favourable geography or abundant capital. It was built on conditions that made early-stage risk worth taking: a room full of people who looked at an uncertain future, did the maths, and said yes anyway. The consultation’s job is to make sure the maths still adds up.
