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How to Attract and Retain Talent with an Employee Share Scheme

23 September 2019 3 minute readShare

Promoted by LegalVision.

As a startup founder, you want the best person for the job, in the job. But, unless you have raised plenty of capital, it is unlikely that you can pay top dollar for your team members. An Employee Share Scheme (ESS) is one way to attract and incentivise talent by offering a tax-efficient ownership interest in your company.

Under an ESS, you can offer employees shares, or options, to buy shares in your company. In our experience, most businesses structure their ESS as an Employee Share Option Plan (ESOP) because it is easier to grant options and buy-back unvested options if an employee leaves. Below, we set out the benefits of an ESS for your business, including the tax concessions, as well as some potential pitfalls of implementing an ESS too late.


What are the Benefits of an ESS?

Offering shares or options in the business can help employees feel like they have a real ownership stake in the business. As the company grows, so too does the value of their interest. An ESS also offers the following benefits:

  • Helps a company grow with quality team members
  • Attracts key talent even when the company cannot afford to pay market salaries
  • Aligns the company’s interests with the employee’s interests

An ESS can also help incentivise employees to stay with your business through vesting. Vesting is the process through which your employee earns their shares or options. Most commonly, the shares or options are earned over time, but you can also set performance-based milestones.


A four-year vesting period with a one-year cliff is a common time-based vesting provision for employees. Practically, an employee will receive nothing if they leave the company before the first year has passed. At the one year mark, 25% of the shares or options will vest and then, from that point onwards, the remaining 75% will vest annually, quarterly or monthly. If an employee left after two years, they could keep 50% of the shares or options, and must then sell their non-vesting shares/options back to the company for a nominal value (often $1).

Tax Treatment of an ESS  

A key reason why ESSs are so popular with businesses, particularly startups, is the special tax concessions that are available to the employees of eligible startups.

If your business meets the eligibility criteria, your employees will be taxed only when they make a financial gain (i.e. profit) from their ESS interests.  In other words, your employee will not have to pay any tax when they receive their shares or options, when their shares or options vest or when they exercise their options (i.e. buy shares).

Company Criteria for Startup Tax Concessions

Shares Cannot Be Listed on a Stock Exchange



Your company’s shares, and the shares of any group company, are not listed on a stock exchange.

Company Incorporation

Your company, and all group companies, was incorporated in the last ten years.

Aggregated Turnover

In the previous income year, the aggregated turnover of your company, and all group companies, was less than $50 million.

Australian Residency

The employing company was incorporated in Australia.

Company’s Predominant Business

The company’s main business is not investing in other shares or investments (e.g. an investment bank).

Eligibility Criteria for Employees

Employees cannot be granted more than 10% ownership or voting rights in the company in which the ESS interests are being granted, otherwise the tax concessions will not apply.

Common Pitfalls for Business Owners

  1. A company that is too old: Your employees will only benefit from the tax concessions if your company (and every company in the group) is less than ten years old. Startups should avoid ‘repurposing’ older companies to run their new business.
  2. Giving away too much: It can be difficult for new founders to decide how many shares or options to give an employee. Many startups give away too much of the company too early, and there isn’t enough left to incentivise future hires. Plan ahead and consider how many employees you might want to incentivise in the long term. Remember you can always grant an employee more shares or options in the future.
  3. Forgetting vesting: Always ensure that an employee has to earn their shares or options over time (through vesting). You don’t want them to leave and take the shares or options with them before they’ve made a meaningful contribution to the business.

Key Takeaways

When starting out, you may not have the ability to pay competitive salaries to attract quality candidates. Under an ESS, business owners and startup founders can offer their employees shares or options to buy shares in the company. Offering team members shares or options in a business can also help bridge the gap between their salary and an equivalent corporate salary.

LegalVision’s startup lawyers have assisted thousands of startups and businesses around Australia. The team recently published an Employee Share Schemes Guide that covers all the essential information around the benefits of an ESS, tax eligibility criteria and key documents that are needed for an ESS. Our startup team can establish your employee share scheme and advise you on how to meet your ESS obligations in order to offer your employees a financially attractive incentive. If you have any questions, contact LegalVision on 1300 544 755.

How to Attract and Retain Talent with an Employee Share Scheme
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