How ESOPs power Australia’s startup ecosystem

This article was co-created by the Carta team and LUNA.

In a climate of stagnant wage growth and cautious investing, Australian startups are looking for new ways to reward and retain their most valuable asset: Their people. As many founders start to leverage employee share ownership plans (ESOPs) to attract and retain top talent, ownership has gone from a nice-to-have to a must-have benefit.

To appreciate the true value that ESOPs can offer, both founders and employees need a clear understanding of how they work.

Introducing ESOPs

An employee share ownership plan (also known as an” employee share option plan”) is a formal scheme that companies can use to offer equity, in the form of options or shares, to its employees and contractors. While share options represent the right to purchase shares at a predetermined price in the future, company shares give recipients immediate ownership in the business.

Many startups choose to grant options through an ESOP, which offers several advantages:

• Flexibility to decide which employees receive equity, how much, and when

• The possibility of reclaiming options if employment conditions are not met

• Access to potential tax benefits for companies and their employees

Fostering an ownership culture

Australia’s startup ecosystem is embracing equity like never before. According to recent Carta data, startup employees in Australia and New Zealand (ANZ) exercised their options at a rate of 51.8% in 2024 compared to 32.2% in the United States. The Carta report also revealed that founders in ANZ reserve a median of 12.6% fully diluted equity for employees, whereas founders in East and Southeast Asia (ESEA) and the Middle East and South Asia (MESA) set aside a slightly smaller portion of equity.

This data points to a pro-ownership culture in ANZ—one that sees equity as tangible rather than just symbolic. Increasingly, employees expect a well-structured ESOP as a standard part of their compensation package, giving them a stake in the businesses they’re helping to build.

This pro-equity culture can also benefit cash-strapped startups, allowing them to compete with larger, more established companies for tech talent by offering opportunities for ownership and long-term wealth creation.

Startup tax concessions

Historically, one of the biggest hurdles to meaningful employee ownership in Australia was tax treatment. Without certain conditions in place, employee equity holders would often face hefty tax burdens – either having to pay the full market value for their shares upfront, or being taxed as though they had already received the equivalent value in cash. For most early-stage hires, this created a huge barrier to reaping the full benefits of an ESOP.

To remedy this issue and help companies run more beneficial employee share schemes (ESS), the Australian government has introduced several equity tax concessions since 2015.

Under the government’s start-up concession, ESS participants are only taxed when they sell their shares, and not when they receive or exercise their options. In addition, shareholders can benefit from a 50% capital gains tax discount (as long as they held their shares for at least 12 months before the sale). Eligible companies may also have access to Australian Tax Office (ATO)-approved valuation methods, often resulting in a lower equity value that is more favourable from a tax perspective.

Eligibility criteria

To qualify for the start-up concession in Australia, a company and its equity holders must meet the following criteria:

Navigating disclosure and compliance

Under Chapter 6D of the Corporations Act 2001, companies generally need to provide participants with a disclosure document when issuing shares or options, unless they qualify for an exemption.

Fortunately, there are common exemptions for startups, including:

• Exemptions provided under section 708(1) and 708(12) of the Corporations Act 2001

• ESS-related relief in the Corporations Act and ASIC legislative instruments

While these exemptions can spare some early-stage companies the hassle and cost of preparing legal documentation, other compliance requirements—such as employee notifications and tax reporting—may still apply.

As a startup founder, working with legal and tax advisors can help to ensure your ESOP is both compliant and robust, so you can scale and hire with confidence.

How to implement an ESOP

When setting up an ESOP, it’s best practice to follow these steps:

1. Decide whether an ESOP fits your business goals and team needs

2. Check your eligibility for Australia’s various startup concessions to maximise tax savings for your employees

3. Prepare the necessary legal documentation and review it with your legal counsel

4. Obtain approvals from key stakeholders, such as your board of directors or investors

5. Determine the exercise price for options using an Australian Tax Office-approved methodology or a professional third-party valuation

6. Send offer letters to employees and issue equity grants on a secure platform like Carta

7. Maintain compliance through annual reporting and share plan management

Download an ESOP template

Ready to set up your ESOP? Carta has teamed up with Australian law firm LUNA to create an ESOP document template, which can be used to help you structure an employee equity scheme in Australia.

Fill out the form below to download the template for free. For additional legal support, contact the LUNA team or email hello@weareluna.co.