Employee Share Schemes: Turning Equity into a Competitive Advantage

Employee share schemes, including employee share option plans, are increasingly used by Australian start‑ups and growth companies to attract, motivate and retain key talent — particularly where cash remuneration is limited.

When structured correctly, an employee share scheme can deliver meaningful tax advantages and align employees with the long‑term success of the business. When poorly designed, however, these arrangements can create legal, tax and compliance risks. Careful planning and professional advice are essential.

What is an employee share scheme?

An employee share scheme (ESS) allows employees to acquire an equity interest in the company they work for. Rather than receiving cash remuneration alone, participants are offered a stake in the company’s future growth.

A common form of ESS is an employee share option plan(ESOP). Under an ESOP, eligible employees or contractors are granted a right (but not an obligation) to acquire shares in the company at a later date, typically subject to vesting conditions.

Why businesses use equity incentives

Equity incentives are commonly used to:

Retain key employees long‑term
Equity is often subject to vesting conditions — such as remaining employed for a set period — which encourages employees to stay with the business and realise the full value of their equity.

Incentivise performance and growth
As the value of the business increases, so does the potential value of the employee’s equity interest.

Preserve cash flow
For start‑ups and growth companies, equity incentives can help attract talent without increasing fixed salary costs.

Common equity incentive structures

The most common equity incentive structures include:

Share options
The core ESOP instrument, giving the holder the right to acquire shares in the future.

Restricted shares
Shares issued upfront but subject to restrictions, such as forfeiture if vesting conditions are not met.

Performance rights
Rights to receive shares once specified performance targets or service milestones are achieved.

Phantom equity
Cash‑based incentives linked to the value of company equity, without issuing actual shares. This can be useful where issuing shares is impractical or dilution is a concern.

Each structure carries different legal and tax consequences, making early structuring decisions critical.

ESS start‑up concession: key tax benefits

Eligible companies may access the Australian Government’s ESS start‑up concession, which can provide significant tax advantages to participants, including:

• no tax on the grant or exercise of options;
• tax generally deferred until a later taxing point; and
• access to the 50% capital gains tax discount if ESS interests are held for at least 12 months.

Eligible companies may also rely on the Australian Taxation Office’s safe harbour valuation methods, which can result in a lower equity value for tax purposes.

Who is eligible for the start‑up concession?

To qualify, a company must:

• be a ‘start-up company’, i.e. less than 10 years old;
• be unlisted;
• have annual turnover of less than $50 million; and
• be an Australian resident taxpayer.

Participants must:

• be currently employed or contracted by the company; and
• hold no more than 10% of equity interests or voting rights after acquiring the ESS interest.

The equity itself must meet specific requirements, including:

• being ordinary shares or options over ordinary shares;
• for options, an exercise price at or above market value;
• for shares, an issue price at market value or a discount of no more than 15%; and
• a minimum holding period of three years, or until the participant exits the business.

Legal and compliance considerations

Interests issued under an ESS are regulated financial products. Under Chapter 6D of the Corporations Act 2001 (Cth) (Act), a disclosure document is generally required when making an offer of equity, unless an exemption applies.

Common exemptions include:

• small‑scale offerings under section 708(1) of the Act;
• offers to senior managers under section 708(12) of the Act; and
• relief under section 5 of the ASIC Corporations (Employee Incentive Schemes – Ongoing Relief) Instrument 2025/169.

Even where an exemption applies, other obligations may remain, including employee notifications, tax reporting and proper scheme documentation.

Key issues to get right

A compliant employee share scheme should clearly address:

• vesting and performance conditions;
• leaver provisions (how equity is treated when someone exits); and
• shareholder approvals and dilution management.

These are frequent sources of disputes if not carefully documented.

Summary

A well‑designed employee share scheme can be a powerful tool for Australian businesses to attract talent and support long‑term growth. A rushed or poorly structured scheme, however, can quickly become a liability.

Early advice helps ensure your ESS is compliant, tax‑effective and aligned with where your business is heading. The corporate team at Groom Kennedy can assist with structuring an employee share scheme that supports your commercial objectives.

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This article includes general information only and is not specific to your situation. If you require assistance in relation to anything contained within this article, please contact us.