Offering employee share options has become a go-to way for Australian companies - especially startups and scale-ups - to attract, motivate and retain great people.
By giving your team a real stake in the upside, you align incentives, stretch cash further, and build a culture that’s invested in long‑term success.
If you’re exploring an employee share option plan (ESOP), this guide breaks down how options work, the legal and tax framework in Australia, the documents you’ll need, and practical steps to roll out a compliant, well‑designed plan.
We’ll keep it clear and actionable, so you can get your ESOP set up the right way - and focus on building your business.
What Are Employee Share Options (ESOPs)?
An employee share option gives a team member the right (but not the obligation) to buy shares in your company at a set price (the “exercise price”) in the future.
If your company grows, the share price may rise above the exercise price. The employee can then exercise their options, acquire shares at the lower set price, and potentially realise value on an exit or permitted sale.
You’ll often see “ESOP” used for option plans, while “ESS” (employee share scheme) is a broader term covering options and direct share offers. Many Australian startups start with an option plan and evolve it as they grow.
Common ESOP Features
- Grant: You allocate a number of options to an employee, usually documented in the ESOP rules and an individual grant or Option Deed.
- Vesting: Options typically vest over 3–4 years, often with a 12‑month “cliff,” and then monthly or quarterly vesting after that.
- Exercise: Once vested, employees can choose to exercise and purchase shares at the exercise price (subject to plan rules and any liquidity restrictions).
- Leavers: Unvested options usually lapse when someone leaves. Vested options may be exercisable for a limited time, with “good leaver/bad leaver” rules set out in the plan.
Other Ways To Offer Employee Equity
- Share grants (ESAPs): Employees receive shares upfront (sometimes funded by a loan) that may be subject to vesting and buy‑back on departure.
- Phantom or cash‑settled plans: A bonus structure linked to equity value without issuing shares. This can be useful where actual equity isn’t practical; see our Phantom Share Option Plan.
Your choice depends on your stage, cap table, investor expectations, and culture. If you want a standard startup approach with clear alignment and a familiar structure for investors, an Employee Share Option Plan is often a great starting point.
How Do Employee Share Options Work?
1) Granting Options
Options are granted as part of a remuneration package (or as a retention/top‑up award). The grant size is usually a fixed number of options or a percentage of fully diluted share capital.
Set the exercise price, vesting schedule, and any performance hurdles in the plan and the individual grant. Your Employment Contract should refer to the ESOP to keep everything consistent.
2) Vesting Over Time
Vesting encourages retention and long‑term focus. Common patterns include a 12‑month cliff (nothing vests if the employee leaves before 12 months), then monthly or quarterly vesting over the remaining term.
3) Exercising Options
Once vested, the employee may exercise (buy shares at the exercise price), often subject to:
- Liquidity windows: For proprietary companies, exercises and transfers are typically allowed during certain windows or at exit.
- Company approvals: Board approval or company processes may be required for share issues.
4) What Happens On Exit (Sale/IPO)?
On a sale or other exit event, options commonly accelerate or become exercisable (as set out in the plan). For IPOs, employees often can exercise and hold shares, but be aware that escrow or selling restrictions can apply under ASX Listing Rules, underwriting arrangements, or your plan documents.
There’s no one‑size‑fits‑all rule here. Make sure your ESOP clearly explains how options convert or accelerate, and what restrictions apply to selling shares after an exit. This avoids surprises later.
5) If Someone Leaves
Most plans treat unvested options as lapsing on departure. For vested options, your rules should explain if and when they must be exercised, and whether “good leaver” cases (e.g. redundancy, ill‑health) are treated differently to “bad leavers”.
What Laws Apply To Employee Share Schemes In Australia?
Australia has a specific legal framework that supports employee equity while protecting participants. At a high level, consider the following areas.
Corporations Act ESS Regime
The Corporations Act includes an employee share scheme regime that provides exemptions and relief from the usual fundraising/disclosure rules if strict conditions are met. The rules differ for proprietary and public companies, and there are caps, eligibility, offer document content, and process requirements to follow.
In some cases you may also need to give participants an offer document and lodge notifications. The detail can be technical, so it’s wise to get advice to structure your plan within the available relief.
ASIC and Company Type
Relief conditions and practical steps vary by company type. Proprietary companies must also keep an eye on the rule that limits them to a maximum of 50 non‑employee shareholders. Your plan design should avoid accidentally breaching that cap (for example, by tightly controlling exercises and transfers).
Employment Law
Options often form part of total remuneration, so make sure your Employment Contract and policies are consistent with the ESOP. Consider award/enterprise agreement interactions for eligible staff and ensure offers are explained clearly so they aren’t misleading.
Tax (ATO) - Get Specialist Advice
Australia’s employee share scheme tax rules can be complex. Timing of tax, valuation, “real risk of forfeiture,” and startup concessions are all important considerations. Employees may be taxed on a discount at grant, at vesting, or at another taxing point depending on how your plan is structured.
Because tax treatment depends on your plan design and each participant’s circumstances, it’s important to obtain tax advice alongside your legal setup. Clear communication to employees about potential tax outcomes is essential.
Governance And Documentation
Adopting an ESOP typically requires board and shareholder approvals, and sometimes amendments to your Company Constitution and Shareholders Agreement so the ESOP aligns with your broader governance framework.
Plan rules should also work cohesively with any drag/tag rights, pre‑emptive rights, and transfer restrictions in your shareholders agreement and constitution.
How To Set Up An Employee Share Option Plan (Step‑By‑Step)
1) Define Your Objectives And Pool
Decide who’s eligible (all employees, key hires, advisors) and the size of your option pool (many startups reserve 10–20% on a fully diluted basis). Align the pool with your hiring roadmap and investor expectations.
2) Choose The Right Structure
Decide whether an option plan, direct share grants, or a cash‑settled phantom plan is the best fit for your stage, cap table, and cash flow. If you’re not sure, start with a straightforward Employee Share Option Plan and evolve over time.
3) Draft ESOP Rules And Offer Documents
Tailor plan rules to your business. Key items include eligibility, vesting, exercise price, treatment on exit and leavers, valuation approach, lapsing, buy‑back, and board discretions. Prepare an individual grant document (often an Option Deed) for each participant.
4) Align Your Core Company Documents
Update your Shareholders Agreement and Company Constitution so they work seamlessly with the ESOP (for example, on transfer restrictions, buy‑backs, and decision‑making).
5) Approvals And Records
Have your board and (if required) your shareholders approve the plan and specific grants. Keep clean records of resolutions and plan adoption. If you need a simple board paper, a Directors Resolution Template can help document approvals neatly.
6) Comply With ESS Relief Requirements
Check you meet Corporations Act ESS relief conditions for your company type and offer structure. Prepare any required offer documents and lodge any notifications that apply to your plan.
7) Communicate Clearly With Your Team
Explain vesting, exercise, tax timing, and what happens on exit or departure. Clear, plain‑English communications build trust and help your ESOP achieve its goal - alignment.
8) Maintain Registers And Review Annually
Track grants, vesting, lapses and exercises accurately. Revisit the plan before funding rounds or exits, and consider an ESOP Review as your business scales or laws change.
What Legal Documents Will You Need?
- ESOP Rules: The core document that sets the framework for eligibility, vesting, exercise, lapsing and exits.
- Option Deed / Grant Letter: An individual grant document that confirms the number of options, exercise price, vesting schedule and any special conditions.
- Employment Contract: Your Employment Contract should reference the ESOP and make clear that options are separate from base salary and benefits.
- Shareholders Agreement: Ensures option exercises and future share transfers fit within the rules on pre‑emptive rights, drag/tag and restrictions; see Shareholders Agreement.
- Company Constitution: May need updates for buy‑backs, share issues on exercise and transfers; see Company Constitution.
- Board/Member Resolutions: Formal approvals to adopt the plan and approve grants (a Directors Resolution Template can help).
- Execution Support: When executing plan documents, ensure you follow your company’s signing requirements and the Corporations Act - see guidance on signing under section 127.
Depending on your structure, you might also need ancillary policies, valuation summaries, or specific tax communications for participants.
Key Takeaways
- Employee share options can power hiring, retention and alignment by giving your team a genuine stake in your company’s success.
- A compliant ESOP in Australia must fit within the Corporations Act employee share scheme regime, your company type, and any shareholder limits for proprietary companies.
- Design the plan carefully: set clear vesting, exercise and leaver rules, and explain how options behave on sale or IPO (including any escrow or selling restrictions).
- Get the paperwork right - ESOP rules, individual Option Deeds, updates to your Shareholders Agreement and Company Constitution, and proper approvals and records.
- Tax outcomes depend on plan design and personal circumstances, so build tax advice and clear employee communications into your rollout.
- Review and refine your ESOP as you raise capital and scale - the right structure evolves with your business.
If you’d like a consultation on setting up an employee share option plan for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
