Call 1300 529 624- Employee Share Schemes
An employee share scheme (ESS) lets your people receive or buy shares in the company at a discount. An employee share option plan (ESOP) is a subset of that, a promise to hand over shares later once conditions are met, rather than shares now. If you are turning over $3 million or more, running 15 or more staff, and stuck at the point where hiring another senior person costs more than the cash flow can bear, this is worth understanding properly. Equity is one retention lever among several, not a default answer to every staffing problem.
An ESS gives an employee shares (or the right to shares) in the company they work for, usually at a discount to market value. The ATO treats these discounts as assessable income unless specific concessions apply, and Moneysmart’s guide confirms the basic mechanic: you receive or buy shares in the company you work for, often below market rate, paid through salary sacrifice, dividends, or an upfront payment. An ESOP is narrower: instead of handing over shares today, the company grants an option, the right to acquire shares later once vesting conditions are met. Lawnch’s own guidance on structuring these plans frames the choice plainly: you can do this through either an Employee Share Plan Scheme (ESS) or an Employee Share Option Plan (ESOP), and the right structure depends on your cap table, timeline, and how much dilution you accept now versus later.
An ESS transfers ownership immediately, so tax and reporting obligations start from day one. An ESOP defers ownership behind a vesting schedule instead. Want employees thinking like owners today? ESS moves faster. Want a multi-year retention runway locked in before anyone holds actual equity? ESOP is the better fit.
Founders hitting the $10 to 12 million growth-cost ceiling are usually fighting the same battle: senior hires cost more than the business can absorb in cash, but losing them mid-scale costs more again in lost momentum. Equity offers genuine upside without inflating the fixed cost base every pay cycle, and protects your capital position: every dollar not paid as cash salary is a dollar kept for the next growth investment, whether that is a new market or the working capital a lender will accept as security.
The ATO’s start-up concession can reduce an employee’s taxable ESS discount to nil, but only if the company is unlisted, incorporated for less than 10 years, and has an aggregated turnover under $50 million. The discount on shares must be no more than 15 per cent of market value, and the employee generally has to hold the interests for at least three years. Most scale-ups at the $10 to 12 million mark still qualify on turnover, but the 10-year incorporation clock is worth checking against your actual founding date, not your rebrand date.
Once an employee holds ESS shares for more than 12 months, the standard capital gains tax discount can also apply on sale, cutting the taxable gain in half for individuals, in addition to the concessions above. If your company does not meet the start-up conditions, the standard ESS deferral regime applies instead: tax on the discount is deferred to a later “taxing point” (vesting, cessation of employment, or removal of forfeiture risk) rather than assessed upfront, though the discount is not reduced to nil. Check every threshold here against current ATO guidance before you set terms, since eligibility figures drift over time.
An ESOP with no vesting schedule is not a retention tool, it is a bonus with better tax treatment. Build in a cliff (commonly 12 months before any options vest) and a vesting period after that, so the plan does the retention job it is meant to do.
Handing out equity without updating your shareholders’ agreement is another common mistake. What happens if someone leaves before they vest, or on a sale event? Without clear terms, these questions are answered in a dispute rather than in a document. A share plan also does not fix a culture problem; if someone is leaving because of how they are managed, equity at best delays the departure.
Setting up an ESS or ESOP properly means getting the company constitution, the Corporations Act disclosure obligations, and the ATO reporting requirements aligned before you offer a single share or option, not after. Small-scale and disclosure exemptions exist for genuine employee incentive schemes, but they carry conditions of their own, and getting them wrong creates a compliance problem on top of the tax problem.
An ESS provides shares now, generally at a discount. An ESOP is an option, the right to acquire shares later once vesting conditions are met.
A longstanding reduction exists for smaller ESS discounts, though the exact figure and eligibility should be checked against current ATO guidance before you rely on it in a plan document.
Employers issue an ESS statement after the income year ends, and employees use it to report the discount (or, for a deferred taxing point, the later amount) in their tax return.
Yes. The eligibility tests are based on company age and turnover, not stage labels, so a qualifying scale-up can access the same start-up concession as a true early-stage company.
Equity is a retention and cash-conservation tool with real tax and governance complexity attached. Getting the structure right the first time avoids the two most expensive outcomes: a plan that fails to retain anyone, or one that creates a compliance problem the moment someone leaves. Book your free consultation and talk to Lawnch about structuring a share plan that works for your stage and your cap table.
