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Set up an employee share or option scheme

We will design a scheme that gives your team real upside without handing them a tax bill they cannot pay.

Most employee share schemes have been intended for about a year before they exist. The reason for the delay is almost always the same. The tax treatment is the difficult part, and getting it wrong is worse than doing nothing. A scheme that qualifies for the start-up concession and one that does not are separated by a great deal of tax, across a team, over years. We design the structure first and draft the plan around it.

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The concession secured first

The company is tested against the eligibility conditions before any document is drafted.

Equity that returns to the company

Compulsory transfer terms stop former employees sitting on the register indefinitely.

A sale that cannot be blocked

Drag-along provisions mean a minority of participants cannot hold up a future transaction.

What is an employee share or option scheme?

It is a formal arrangement under which a company offers shares or options to its employees. The terms sit in a plan document rather than being negotiated individually. That is the distinction from a one-off equity grant. A plan lets you make offers repeatedly, on consistent terms, without renegotiating from scratch each time.

Employee share scheme arrangements are taxed under specific rules in the Income Tax Assessment Act 1997 (Cth) (the Tax Act). The default position taxes any discount to market value as income in the year it is received. Two sets of concessions can change that. A start-up concession is available to eligible young unlisted companies. Deferral rules can push the taxing point to a later event for schemes meeting specific conditions. Eligibility turns on the company’s circumstances and the design of the plan, which is why the structure comes before the drafting.

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What is the difference between an ESS and an ESOP?

In Australia the terms are used loosely and often interchangeably. An employee share scheme is the general concept and the term the tax rules use. An employee share option plan usually describes a scheme that grants options rather than shares outright. What matters for tax and for drafting is the instrument, not the label.

Should I issue shares or options?

Options suit a company that expects to grow in value. The employee is rewarded on the increase rather than the current worth, and there is no cost to them at grant. Shares give immediate ownership, with the voting and dividend rights that come with it, which is not always what you want. The tax treatment and its timing differ too.

Will my employees have to pay tax straight away?

Not if the scheme is designed to fit a concession. The default rule taxes the discount to market value as income in the year of receipt. The start-up concession and the deferral rules can move or remove that. Both depend on the company’s circumstances and on how the plan is drafted.

What happens to a participant's equity when they leave?

Whatever the plan rules say, which is why they are worth drafting carefully. A well-built plan distinguishes between a good leaver and a bad leaver, and provides for unvested equity to lapse. It also lets the company require vested equity back, at a price set by an agreed method.

Design the scheme around the tax, not the other way round

Tell us about the company and who you want to bring in. We will tell you which concession is realistically available and what the plan has to look like to keep it.

A poorly designed scheme is a tax bill dressed up as an incentive

You want your team to own something, and you want it to feel like a reward rather than an administrative exercise. What has stopped you is that every answer about the tax comes with conditions attached. You cannot tell which of them apply to your company.

The risk of getting it wrong falls mostly on the employees. Being handed an asset they cannot sell, and a tax bill they have to pay, is not an incentive. It is also very difficult to undo.

We will assess which employee share scheme concession your company qualifies for.
We will advise on whether shares or options better suit your objective.
We will draft the plan rules, including vesting, leaver and transfer provisions.
We will prepare the offer and disclosure documents for each participant.
We will align the plan with your constitution and shareholders agreement.

You want the team to own part of it and you have stalled

The business has grown to the point where a handful of people are genuinely building it with you. You have talked about equity, possibly more than once, and they are waiting. What has held it up is not generosity. It is that you do not want to hand someone a tax problem, and you are unsure what happens if they leave. Nobody has told you in plain terms which concession your company qualifies for.

What's included in your employee share scheme service

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Concession eligibility assessment, including the start-up rules.
Advice on shares against options, and on valuation.
Employee share scheme plan rules.
Vesting, good leaver and bad leaver provisions.
Compulsory transfer and drag-along terms.
Offer letters, disclosure documents and completion of the issue.

What goes wrong when a scheme is put together loosely

The most expensive failures are at the design stage, and they are invisible until the tax year closes. A company that would have qualified for the start-up concession issues at the wrong valuation. Or it has been incorporated a year too long, or has the wrong shareholding structure. The concession is then simply gone. The employees are then taxed on the discount immediately, on shares they cannot sell to pay the tax.

The plan documents fail differently. No vesting, so somebody who leaves in six months keeps everything. No leaver provisions, so a departing employee stays on the register indefinitely. No drag-along, so a minority of former staff can hold up a sale of the company years later. That last one is usually discovered during due diligence, at the point where it has the most negotiating value to the other side.

How we build a scheme that works as an incentive

We start with the company rather than the plan. Age, structure, turnover, shareholding and valuation determine which concession is available, and whether options or shares are the better instrument. Getting that order wrong is how most schemes lose their tax treatment before a single document is drafted.

Then we build the plan. Vesting over a period that reflects why you are doing this. Good leaver and bad leaver terms, so the treatment matches how somebody goes. Compulsory transfer and drag-along provisions, so equity returns to the company and a future sale cannot be blocked. A valuation method for buy-backs, agreed now. We prepare the offer documents and the disclosure the offers require. We also make sure the plan sits properly alongside the constitution and any shareholders agreement. Your team ends up with something they understand and can value.

How the scheme gets built

The concession is secured, the plan is drafted, and the offers go out.

Test the concession

We assess the company against the start-up and deferral conditions, and advise on shares against options.

Draft the plan

We prepare the plan rules, vesting, leaver terms and transfer provisions, aligned with the constitution.

Make the offers

We prepare the offer and disclosure documents, and complete the issue or grant.

Schemes designed around the concession the company can actually get

Founders usually arrive at this having decided the principle months ago. The delay is not reluctance to share. It is that the tax answer keeps arriving with conditions attached. Nobody wants to be the person who gave their best people a liability instead of a reward.

We have 2 Accredited Specialists in Business Law. We do the corporate and tax design on these schemes alongside the shareholders agreements they fit with. That combination matters. An employee share scheme is a tax structure, a set of company law documents and a retention tool, all at once. A plan drafted without all three in view usually fails on one of them.

Our great lawyer guarantee

Six principles we hold to, whatever you bring us and however long it takes.

Take the time

We listen carefully to understand what you want to achieve, then step you through the advice and the documents.

Share our knowledge

We pass on as much as we can, so you can make your own informed decisions.

Stick to our knitting

We only do what we are good at, so you never pay for our learning.

Work as one team

Someone is always available to answer your question or point you the right way.

Fair pricing

A fixed or capped quote for advice and documents, so you do not carry the price risk.

It is your show

We are in it for a front row seat to witness your success, not for our egos.

Give them equity that is worth having

Tell us about the company and who you want to include. We will tell you which concession is available, what instrument suits, and what the plan has to contain to keep the treatment.

Speak to a lawyer 1300 654 590