Sell down equity to a key employee
We will help you offer equity to a key employee in a way that is tax-effective, properly documented, and structured to retain the people your business depends on.
Offering equity to a key employee can align their interests with the long-term success of your business. Done poorly, it creates a co-owner who did not understand what they were buying, governance complications, and unexpected tax consequences for both parties. Getting the structure right from the outset is essential. We advise businesses on how to structure key employee equity arrangements in a way that is tax-effective and properly documented.
What is involved in offering equity to a key employee?
Selling equity to a key employee involves transferring a shareholding, unit trust interest, or other equity interest at a price that may or may not reflect full market value. Where equity is offered at a discount to market value, the employee may be subject to tax under the employee share scheme provisions in the Income Tax Assessment Act 1997 (Cth). The structure, offer price, and conditions attached all affect the tax treatment and the governance implications for both parties.
Will the employee pay tax when they receive equity in the business?
Whether the employee pays tax when they receive equity depends on the structure and offer price. Under the employee share scheme provisions in the Income Tax Assessment Act 1997 (Cth), equity offered at a discount to market value may give rise to taxable income in the year of acquisition, or the tax may be deferred depending on the structure. Tax advice should be obtained before the arrangement is implemented.
What conditions should I attach to the equity offered to a key employee?
What governance rights should the employee have as a co-owner?
Governance rights for a key employee co-owner should be carefully calibrated. A minority employee stake typically does not warrant the same information, meeting, and approval rights as an outside investor. It is important your shareholders or unit holders agreement addresses these matters, including exit mechanics if the employment relationship ends.
What happens to the employee's equity if they leave?
Structure that achieves the right tax outcome for both parties.
Conditions that incentivise without creating governance problems.
Documentation that protects the business if the employment relationship ends.
Offering equity to a key employee is a long-term commitment that requires the right structure from the outset.
Giving equity to a key employee is more complicated than it looks, and the details matter.
- We will advise on the appropriate structure.
- We will advise on the tax treatment for both the employee and the business.
- We will prepare the equity documentation, including a shareholders or unit holders agreement with vesting, transfer restriction, and leaver provisions.
- We will coordinate with your tax adviser to ensure the legal structure supports the tax outcome you are seeking.
You want to offer a key employee equity in your business, and you need the structure to be right.
What's included in your key employee equity service
- Equity structure advice (direct transfer, option, or loan-funded acquisition).
- Tax treatment advice for both the employee and the business.
- Employee share scheme compliance advice.
- Shareholders or unit holders agreement preparation with vesting, transfer restriction, and leaver provisions.
- Coordination with your tax adviser.
- Equity documentation and transfer completion.
What happens when key employee equity arrangements are poorly structured?
Here is how we structure a key employee equity arrangement that actually achieves your goals.
We start by understanding your commercial objectives — why you want to offer equity, what you want the arrangement to achieve, and how you want to manage the situation if the employee leaves.
We advise on the structure that achieves those objectives tax-effectively, prepare a shareholders or unit holders agreement with appropriate vesting, transfer restriction, and leaver provisions, and coordinate with your tax adviser. The result is an arrangement that gives the employee genuine alignment while protecting the business’s ability to manage the co-ownership if circumstances change.
Structure right, tax position confirmed, documentation complete.
Design the arrangement.
We advise on the structure (direct transfer, option, or loan-funded acquisition), the conditions to attach, and the tax treatment for both the employee and the business.
Document the terms.
We prepare the equity documentation and a shareholders or unit holders agreement that includes vesting conditions, transfer restrictions, leaver provisions, and governance rights appropriate for an employee co-owner.
Transfer and record.
We manage the transfer of the equity interest, ensure the company or trust records are updated, and confirm that all tax obligations arising from the transfer have been identified.
Commercial lawyers experienced in employee equity arrangements across a wide range of business structures and industries.
We understand you want to know the cost, before we get started.
We will map out our process, from beginning to end, so you know what the journey will look like before you get started.
We will provide you with a clear and detailed Work Proposal covering each step along the way.
Our fair fees are all-inclusive. No hidden costs for telephone calls, emails, photocopying, couriers, or coffee.
Our great lawyer guarantee
We want to be part of your team over the long term. We achieve this by adhering to these core principles:
Take the time
We listen carefully to understand what you want to achieve. Then we thoroughly explain our advice and step you through the documents. You can be sure you know the full consequences.
Share our knowledge
We will pass on as much knowledge as we can, so you can make your own informed decisions. We want to make you truly independent.
Stick to our knitting
We only do what we're good at. You can be confident that we know what we're doing and don't pass on the cost of our learning.
Work as one team
Someone will always be available to answer your questions, or point you in the right direction. You will also benefit from a range of perspectives and experience.
Fair pricing
For advice and documents, we provide a fixed or capped quote so you don't take price risk. If you're in a dispute, we map out the process and costs so you know what to expect.
It's your show
We're not in this for our egos. We're in it for a front row seat to witness your success.
