5 Things Startups Need to Know About the Changes to Employee Share Option Plans (ESOP)

Guest post by Tom Willis, Digital Marketing Manager, LawPath

In a move that is being heralded as a win for the startup community, especially early stage startups, the Australian government have made significant changes to the way ESOPs are taxed. Effective from July 1 2015, employees who are offered equity by an employee under an Employee Share Scheme (ESS) will no longer be taxed upfront.

What’s an ESOP?
You may or may not be familiar with an ESOP is, but in case you don’t, here’s a quick summary. Put simply, an ESOP allows an employer (the  startup for our example) to give their employee the right to purchase a certain amount of shares in that company for a fixed price. The share options are attached to a vesting schedule so that the shares are offered over a period of time.

Heres an example : Joe’s Consulting Startup has granted 100 stock options today 25 July to employee Sally Citizen, 25% of the stock options will vest on 25 July each year for 3 years.  After 25 July each year John can purchase share options at pre-determined price. 

What are the changes?
Under the old laws, employees who were issued share options through an ESOP were taxed upfront on the amount of the options. In other words, employees were required to pay tax on shares that might not vest until years down the track. Unsurprisingly this was not very appealing to new employees. The new laws have removed this condition, meaning that employees won’t be taxed on the share options until they have vested.

Am I eligible?
Before you start issuing share options, make sure you meet the government’s criteria. To be eligible, your startup must have been incorporated for less than 10 years, have a turnover over of less than $50 million and be unlisted. Not a hard criteria for most startups, but it’s left a sour taste in some of Australia's more established tech companies.

How can I take advantage of these changes?
ESOPs can be a great way for startups to attract and retain new talent, particularly in the early days when cash-flow is limited. Startups can offer new employees a combination of shares and salary to be more competitive; incoming employees feel a sense of ownership over the company and are motivated to stay for the length of the vesting period.

LawPath’s Easy ESS makes it easy for startups to give equity to their employees. Our technology tells you whether your company meets the eligibility criteria and automates the ATO’s standardised documentation through a simplified interview process. Once complete, we help you create the offer letter so all you need to do is hand it to your employee.


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