Bringing good quality management into new technology businesses is never easy. It can be hard to lure someone who has strong experience into a sector where typically the salaries aren’t that good. The main financial incentive to offer is an equity-based deal where the individual will hopefully get a good pay-out once they sell their stake. However, it is high risk and so there has to be the potential for a significant pay-out in order to attract the high quality managers that entrepreneurs need.

 

This is why I am very concerned about yesterday’s pre-Budget report and the decision to raise capital gains tax to 18%. The chancellor appears to be lumping all private equity activity together. He doesn’t take into account the high risk nature of technology-based businesses. I was hoping that the government might be a lot more sympathetic to the VC end of the market. But unfortunately what has been done is something which appears to be in contradiction with the government’s other efforts to encourage investment such as EIS schemes and Enterprise Capital Funds.

 

I think that the effect of this might be that some companies are going to leave the UK when they get to the growth stage. This is the worst of both worlds, as companies in the early stage don’t typically generated that much profit or employ that many people. We could see them relocate to places where the tax regime is more favourable, after they have been through the low revenue development stages here. Also, investors like to see the risk being shared when they look to invest and aren't keen on people gaining their rewards through high salaries during the early phases. This is why the chancellor's decision could have a considerable negative impact on new technology businesses in the UK. 

 

Andrew Stevenson is the chief executive of e-Synergy