"Innovative businesses" will continue being allowed 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.
The government has faced significant blowback for what many businesses see as a tax hike, replacing the 50 per cent discount with an inflation indexation model and a minimum 30 per cent tax rate.
Jim Chalmers said the reforms were worthwhile but admitted Labor had suffered from a "big partisan political campaign" against them.
"I think we have lost some political paint, but it's worth it because we're doing the right thing here," he told ABC Radio National on Friday morning.
In a speech to business leaders on the NSW Central Coast, Dr Chalmers attempted to play down the impact of the overhaul, pointing to treasury analysis showing 60 per cent of all net capital gains were earned by just 0.2 per cent of taxpayers.
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.
The government has also walked away from plans to impose a 30 per cent minimum tax rate on new discretionary testamentary trusts after a fierce campaign labelling it a death tax.
The Tech Council, which represents Australia's technology industry including many startups, said the carve-outs were a "constructive response" to the sector's concerns.
But 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.
Opposition Leader Angus Taylor said the tax tweaks were "too little too late" and repeated his criticism of the reforms as an attack on aspiration.
"We'll keep fighting them every inch of the way," he told Nine's Today program.
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.
