Reading time: 4 minutes

In March 2022, the government announced reforms to make it easier for businesses to utilise employee share schemes (‘ESS’) and reduce the red tape so that employees at all levels can directly share in the business growth they help to generate. These changes include:

  • amending the disclosure rules, allowing unlisted companies to offer an unlimited number of shares, of an unlimited value, as long as the employee is not charged more than $30,000 a year for them (up from a $5,000 a year cap). Employees will also be able to accrue up to $150,000 over a five year period; and
  • for employee share schemes where there is no payment to participate, independent contractors will receive the same treatment and receive the same regulatory relief as employees and directors who are participants in the scheme.

Employee share schemes (ESS) are a great way of attracting, retaining and motivating employees without compromising your cash flow. They can form part of your overall people strategy as they reward employee performance and align participating employees’ interests with the interests of the company. But what are employee share schemes? How do they function and what are their benefits? What should you consider as a cash-strapped startup? This article will answer these questions about employee share schemes in more detail and highlight some key considerations when you are structuring one.

How Does an Employee Share Scheme Work?

ESS are a way to give your employees a certain number of shares in your company or an option to buy a certain number of shares in your startup. You issue shares ‘on paper’ which dilutes the ownership percentage of existing shareholders, but the company is not required to hand over cash (unlike with salary or a cash bonus). If appropriately structured, you should still retain control of how your startup operates.

Benefits of Employee Share Schemes

Cash Flow

ESS are an excellent way to attract and reward valuable staff without having a direct negative cash flow impact. As you are not required to hand over cash, it is very favourable for small startups.


ESS align the interests of the company with the interests of the employees. They help to keep the workforce focused on the startup’s well-being as a whole rather than on themselves or a particular group (i.e. reduces infighting and promotes harmonised goals and behaviours aligned to corporate objectives).

3. Retention and loyalty

A participant employee may lose its shares or options (as applicable) if it leaves the company within a specified period. In that regard, employees are likely to stay with the company for longer to ensure they get the full value of the ESS. Employees are also usually more likely to remain with the company, as they have an interest in seeing the company do well.

Things to Consider When Thinking About ESS

1. Your Overall Business Strategy

As ESS forms part of your people strategy, it is important that they are consistent with your business strategy. You should ask yourself: what are we trying to achieve? An ESS can be a helpful way to recruit and retain star employees (without having to pay huge base salaries) and to motivate employees to work hard.

2. Engagement with Employees

ESS will work to their full potential if you keep reminding employees of their interest in the company. For an ESS to be beneficial, employees must know what they need to do for the business to succeed and see their interest in the company grow. This means you should engage with your staff, keep them informed of the areas the company is thriving in and whether there are any performance hurdles that it faces that could impact its growth.

3. Legal and Compliance Obligations

You should make sure you receive legal and tax advice before implementing an ESS as they are heavily regulated. Getting it right is important to ensure the scheme is successful and of value to you and your employees.

4. Tax Consequences

Always take into consideration tax implications that may occur as a result of implementing an ESS for both the company and its employees. There are also tax concessions that are available to startups implementing ESS providing they meet certain criteria.


Are you a startup that needs more information about how an employee share scheme works? Need help implementing one? Get in touch with our startup lawyers on 1300 544 755.


New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer