New carve-outs will allow "innovative businesses" to continue to access the existing 50 per cent capital gains tax discount, while eligibility for the existing 50 per cent active asset reduction for small businesses will be expanded.
Labor's May budget replaced the 50 per cent discount with an inflation indexation model and a minimum 30 per cent tax rate.
While sold as making the housing market fairer for first home buyers at the expense of property investors, the changes were extended to all assets, including shares and businesses.
Because startups often have a negligible initial cost base to index from, the proposed changes would double the maximum effective tax rate on capital gains to nearly 47 per cent, diminishing the incentive to take a risk and start a business.
It also makes it harder for startups to attract talent.
As they have less capital to spend on salaries than established firms, startups often rely on sweat equity - giving employees a share of the business with the promise that if the company's value takes off later, they will share in a bid payday.
One founder, who asked not to be named to speak freely, said startups in Australia were already playing on hard mode.
The flow of young talent in their 20s or 30s moving to the US would only accelerate, but even the UK and New Zealand were becoming more attractive, he told AAP.
"Every frontier lab is now chock-full of Australians working in the US," he said.
"You get paid way more, you get taxed less. You get a bit of an adventure."
Consultation on how the carve-out will operate is ongoing.
A snap two-day parliamentary inquiry into the tax changes is due to hand down its final report on Friday.
Geoff Wilson, chief investment officer at Wilson Asset Management, said the fact the government was rushing to protect startups was an admission that the original proposal was flawed.
"The fundamental problem remains unchanged," he said.
"This is still a tax on aspiration, entrepreneurship and productive Australian capital."
The carve-out was a welcome step in the right direction, but concerns remained about the impact the broader changes could have on investment, entrepreneurship and productivity, said Council of Small Business Organisations Australia chief executive Skye Cappuccio.
Shadow treasurer Tim Wilson said the concessions amounted to "polishing a turd".
By creating more carve-outs for small businesses rather than scrapping the tax entirely, the government was creating an explicitly two-tiered structure, Mr Wilson told the ABC.
Chartered Accountants ANZ welcomed the decision to lift the eligibility threshold for the active asset discount.
"These businesses are the lifeblood of our economy, and this change will make a real difference," said Susan Franks, the organisation's tax leader.
