Equity incentive plans are one of the most effective ways for startups to attract, retain, and motivate key talent. They allow employees, founders, and contractors to share in the success of the business, aligning personal incentives with company growth.
Whether you are a founder structuring ownership, a key employee receiving equity, or a contractor being rewarded for significant contributions, a well-designed employee equity plan provides clarity, motivation, and legal protection.
This guide gives Australian startups a step-by-step approach to designing and implementing equity plans while staying compliant with local law, tax requirements, and corporate governance standards.
Step 1: Understand the Types of Equity Incentives
In Australia, equity incentives can take several forms, each with distinct advantages, legal implications, and tax consequences:
Employee Share Schemes (ESS) – direct ownership of shares in the company, often with tax concessions under Division 83A of the Income Tax Assessment Act 1997. ESS is popular for startups because it provides real ownership and potential long-term gains.
Options – rights to purchase shares at a predetermined price in the future. They are particularly common in early-stage startups where cash flow is limited, but future growth is expected.
Restricted Shares / Restricted Stock Units (RSUs) – shares issued upfront but subject to vesting conditions, such as continued employment or achievement of performance milestones.
Phantom shares / Performance Rights – non-equity financial rewards that mirror the value of company shares. These are useful when issuing real shares is impractical, e.g., in private companies with complex cap tables.
Tip: Each type of incentive has unique legal, tax, and governance implications. Consult a lawyer and tax advisor early to ensure your plan is compliant, enforceable, and aligns with company strategy.
Step 2: Identify Who Will Participate
Equity can be offered to:
- Founders – to reward initial risk, capital contributions, and strategic involvement.
- Employees – to retain talent, motivate performance, and build loyalty.
- Contractors or advisors – for significant contributions without immediate cash compensation.
Practical guidance:
- Define eligibility criteria clearly in your plan. Decide whether all staff are eligible or if only key contributors participate.
- Determine allocation percentages thoughtfully to balance dilution and motivation. Avoid over-allocating early, which could complicate future funding rounds.
Example: A startup might reserve 10–15% of equity for staff and advisors while founders hold the remaining equity, with vesting schedules applied to prevent immediate ownership before contributions are made.
Step 3: Decide on Vesting Schedules and Conditions
Vesting schedules protect the company by ensuring participants earn equity gradually:
- Cliff periods – a common 12-month cliff ensures that early departures do not immediately claim equity.
- Staggered vesting – monthly or quarterly vesting after the cliff encourages long-term commitment.
- Performance milestones – tie vesting to individual KPIs or company objectives, such as revenue targets or product launches.
- Good leaver / bad leaver clauses – define what happens if a participant leaves early, including forfeiture or buyback of unvested shares.
Tip: Proper vesting structures incentivise contributors while protecting the company from early exits or disputes over ownership.
Example: If a CTO leaves after 6 months in a 4-year vesting schedule with a 12-month cliff, they would not retain any equity—a safeguard to protect early-stage startups.
Step 4: Draft the Legal Documentation
Australian equity plans require formal legal documentation to ensure enforceability and clarity. Working with corporate lawyers at this stage helps ensure the plan is structured correctly, compliant with Australian regulations, and free from drafting risks that could cause disputes later.
- Plan rules/scheme deed – overarching terms governing the equity plan.
- Individual grant agreements – outline participant rights, vesting schedules, and exit conditions.
- Shareholder agreement updates – reflect new equity holders and their rights.
- Deeds of adherence – ensure participants agree to existing company agreements and obligations.
Tip: Professionally drafted agreements reduce the risk of disputes, clarify expectations, and make the plan legally enforceable.
Step 5: Consider Tax Implications
Tax is a key consideration for both participants and the company:
- Division 83A concessions – allow tax deferral until shares are sold, subject to conditions.
- Fringe Benefits Tax (FBT) – may apply to certain non-cash incentives.
- Employee obligations – employees may be taxed at the point of grant, vesting, or disposal, depending on the structure chosen.
Tip: Early consultation with a tax advisor ensures both the company and participants understand liabilities and can structure incentives optimally.
Step 6: Plan for Exits and Company Events
Equity plans must account for future scenarios:
- Acquisition or sale – define how unvested equity is treated and whether acceleration applies.
- Liquidation – clarify the rights of participants on company dissolution.
- Funding rounds – anticipate dilution and issue new shares strategically.
Tip: Include clear clauses for acceleration or buyouts to manage expectations and maintain fairness during major company events.
Step 7: Communicate Clearly with Participants
Transparency ensures participants understand the value and mechanics of their equity:
- Provide plain-language explanations of vesting schedules, rights, and obligations.
- Educate participants about tax implications and any conditions for exercising equity.
- Maintain thorough records of all grants, agreements, and communications.
Tip: Misunderstandings about equity value or vesting terms are a common source of disputes. Clear, ongoing communication mitigates this risk.
Step 8: Review and Audit Regularly
- Ensure plan compliance with ASIC regulations and corporate governance standards.
- Monitor allocations against the company’s cap table to avoid over-issuance or conflicts with investors.
- Adjust plans to accommodate new hires, promotions, or changing company circumstances.
Tip: Regular reviews prevent administrative errors, maintain participant confidence, and ensure compliance with evolving regulations.
Step 9: Foster a Culture Around Equity
Equity isn’t just a legal tool—it’s a motivational tool:
- Regularly educate staff on how equity works and why it’s valuable.
- Celebrate milestones tied to equity achievement, such as product launches or funding rounds.
- Align equity with long-term company vision and values to reinforce commitment.
Tip: Startups with a strong equity culture often see higher retention, engagement, and alignment with company goals.
Conclusion
A well-designed employee equity plan can transform a startup in several ways:
- Motivating founders, employees, and contractors
- Aligning personal incentives with company growth
- Minimising disputes and tax issues
- Protecting the company during exits or funding events
Key Takeaways:
- Equity plans are complex and require legal, tax, and commercial consideration.
- Early legal and tax advice is crucial to avoid pitfalls and maximise benefits.
- Clear communication, robust documentation, and regular review are critical to success.
Remember: Equity is not just a financial instrument—it is a strategic tool to align incentives, retain talent, and drive long-term growth. By implementing an effective plan, Australian startups can create a motivated team and a foundation for sustainable success.