Employee Share Option Plan

In today's economy, retaining exceptional talent requires more than competitive salaries. Providing team members the opportunity for equity ownership through share schemes is a powerful retention strategy that catalyses engagement and enduring loyalty.

Employee Share Option Plans (ESOPs) and Employee Share Schemes (ESSs) both offer pathways to ownership, with some distinct differences.

ESSs allow employees to purchase shares directly, often at a discounted price, delivering instant ownership and associated rights. ESOPs grant the future option to buy shares, aligning individual and company aspirations for the long haul.

The ESS startup concession also introduces a 'safe harbour' valuation method that can lower the purchase price for employees, making it more accessible and financially attractive. This method, particularly the 'net tangible assets' test, allows for a valuation that is often more favourable for employees, as many startups have minimal tangible assets compared to their intangible assets.

To tap into these concessions, companies and employees must meet specific criteria:

The company must not be publicly listed.
It should be incorporated within the last decade, with less than $50 million in aggregated turnover.
The company must be Australian, offering ordinary shares not preference shares.
ESS interests should be held for at least three years or until the cessation of employment.
Participation is capped for employees holding or controlling more than 10% of the company.
A fair market value payment is required for option schemes, while share schemes demand at least 85% of fair market value.
For share schemes, at least 75% of Australian permanent employees with three years of service must be offered shares.

Companies aiming to employ the 'net tangible assets' test for valuation also need to adhere to additional guidelines:

No anticipated change of control within six months post-valuation.
Capital raising should not exceed $10 million in the 12 months before valuation.
The company must have been incorporated for no more than 7 years or be a small business entity.
The company must produce a financial report that complies with the Corporations Act 2001 standards.

With smarter design, these schemes powerfully incentivise performance while avoiding unnecessary complexity. Our legal team has specialised expertise in crafting tailored plans compliant with tax provisions.

We tap intimate knowledge of commerce to ensure strategies drive growth for both employees and employers alike.

Realising the benefits does necessitate meeting specific criteria around company stage, size, turnover, and minimum ownership periods - but the rewards can be transformational.

Share ownership empowers teams to think and act like owners. Equity links individual prosperity to collective success, forging enduring loyalty even amidst the lures of the gig economy.

Let's connect to explore how an intuitive, legally sound share scheme could strengthen the foundations of your success for years to come.