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Sell a stake to a key employee

We will help you bring a key employee into ownership in a way that is tax-effective and can be unwound if it has to be.

You want to keep someone. Equity is the strongest tool you have, and the hardest one to take back. An employee who becomes a co-owner gains rights that do not end when the employment does, unless the documents say otherwise. There is also a tax event the moment equity changes hands, and it usually lands on the employee. We structure these arrangements so the incentive works and the exit is already written.

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Equity that is earned

Vesting conditions mean the shares are kept only if the employee stays and performs.

A tax bill nobody is surprised by

The employee is told what the arrangement costs them, and when, before they accept it.

Equity that comes back

Compulsory transfer terms return the shares to the business when the employment ends.

What is involved in giving a key employee equity?

There is more than one way to put equity in an employee’s hands. A direct transfer or issue makes them an owner immediately. An option gives them the right to acquire equity later, usually on conditions. A loan-funded acquisition lets them buy at market value with money the business lends them. Each has a different tax result.

Tax is the part that catches people out. Where equity is provided at a discount to market value, the employee share scheme rules apply. They sit in the Income Tax Assessment Act 1997 (Cth) (the Tax Act). They can tax the discount as income in the year the employee receives it, which means a bill for something they cannot sell. Concessions and deferral rules exist for eligible start-ups and for schemes meeting specific conditions. That is why the structure is chosen before anything is offered.

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Will the employee pay tax when they receive equity?

Usually yes, if the equity is provided for less than market value. The discount can be taxed as income in the year it is received, which means a tax bill on something they cannot sell. Deferral and start-up concessions exist, but they depend on the scheme meeting specific conditions.

What conditions should I attach to the equity?

Vesting over several years, so it is earned rather than given. Good leaver and bad leaver terms, so the treatment reflects how and why they go. The compulsory transfer clause is the important one, because it is what stops a former employee remaining an owner.

What say will they have in the business?

Whatever the constitution and shareholders agreement give them, plus the rights a shareholder always has. At a minimum they can see the financial accounts. Voting and board rights can be limited by using a separate class of shares, which is worth considering for a small holding.

What happens to the equity if they leave?

Only what the documents provide for. With a compulsory transfer clause, the business or the other owners can require the shares back at a price set by the agreed method. Without one, they keep the shares and you have a shareholder who no longer works for you.

Decide how it ends before you decide how it starts

Tell us who you want to bring in and what you are trying to achieve. We will tell you which structure suits, what it costs the employee in tax, and what happens if they leave.

An employee who becomes an owner stops being only an employee

You want to reward the person the business depends on and make sure they stay. What you have not worked out is how much, on what conditions, and what it costs them in tax the day they receive it.

The larger question sits behind that one. Ownership is not a bonus. It carries rights to information, a say in decisions, and a claim on the business that survives the employment relationship.

We will advise on whether a transfer, an option or a loan-funded purchase suits your objective.
We will confirm the tax treatment for the employee and for the business.
We will draft the vesting, leaver and compulsory transfer provisions.
We will prepare the shareholders or unitholders agreement that governs the new owner.
We will complete the transfer and put the reporting obligations in place.

There is someone you cannot afford to lose

You have a manager or a senior tradesperson who effectively runs part of the business. They have been approached before, or you suspect they will be. A pay rise has stopped feeling like the answer, and you have started thinking about giving them a share. What you have not thought about is what happens to that share when they retire, resign, or fall out with you.

What's included in your key employee equity service

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Equity structure advice, covering transfer, option and loan-funded acquisition.
Employee share scheme tax and compliance advice.
Vesting, good leaver and bad leaver provisions.
Compulsory transfer and buy-back valuation terms.
Shareholders or unitholders agreement preparation.
Transfer completion, register update and reporting.

What happens when equity is handed over informally

The failures here are rarely about generosity. They are about documents that were never written. An employee given shares with no vesting conditions owns them outright from day one, so they can leave six months later and keep them. With no compulsory transfer clause, the business now has a shareholder who does not work there and cannot be bought out.

Tax does its own damage. An employee taxed on a discount they did not know about receives a bill for an asset they cannot sell. The gesture then becomes a grievance. Then the ordinary consequences of co-ownership arrive. They can see the accounts. They will form a view about your salary. They will expect to be consulted on decisions you used to make alone.

How we make the incentive work both ways

We start with what you want it to do. Retention, succession and genuine partnership are three different objectives, and they lead to three different structures. An option that vests over four years does a different job from a transfer of shares today.

Then we build the conditions. Vesting, so the equity is earned rather than given. Good leaver and bad leaver provisions, so somebody who resigns early is treated differently from somebody who retires. A compulsory transfer clause, so equity does not stay with a former employee. A valuation method for the buy-back, agreed now rather than argued later. We work with your accountant on the tax treatment before anything is offered, so the employee knows what they will owe and when. The result rewards the person you wanted to keep, and returns the equity if they go.

How the arrangement gets built

They earn the equity, and the business gets it back if they leave.

Choose the vehicle

We advise on a direct transfer, an option or a loan-funded purchase, and confirm the tax result for both of you.

Write the conditions

We draft vesting, leaver and compulsory transfer terms, and the shareholders or unitholders agreement that carries them.

Issue and record

We complete the transfer or grant, update the register, and put the reporting obligations in place.

Lawyers who write the leaver clause before the equity changes hands

Owners usually arrive at this decision having already made it emotionally. The person deserves it and the business would struggle without them. There is then a reluctance to hedge the gesture with conditions, in case it reads as distrust. Conditions are what make the gesture safe to give, and a good employee understands that.

We have 2 Accredited Specialists in Business Law. We have set up employee equity in companies, unit trusts and family businesses, and we have unwound arrangements that were done on a handshake. The second exercise is the expensive one. We will tell you what the equity should cost the employee, what it should require of them, and what happens the day they leave.

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 a stake, and a set of rules

Tell us who you want to bring in, what share you have in mind, and what you want it to achieve. We will tell you which structure does that and what the tax bill looks like for them. We will also tell you what the business gets back if they leave.

Speak to a lawyer 1300 654 590