Employee Share Schemes for Scaleups

So, your company's hitting the big leagues—congrats! The transition from startup concessions to a more mature ESS model isn't just a paperwork headache—it's a big deal for your team and their equity. But don't worry, we’ve got the cheat sheet right here!

About the Speakers

• Jack Qi: Partner, William Buck
• Brendan Stanton: Account Executive, Cake Equity
• Cal Davidson: Head of Partnerships, Cake Equity

What’s the Big Deal with ESS Startup Concessions?

In short, the startup concession is super generous. Employees only pay tax when they sell their shares or options (yep, that means no tax on grant, vesting, or exercise). Plus, if they hold the equity for at least 12 months, they could score a 50% discount on capital gains tax (CGT). Sweet, right?

"The startup concession is highly desirable because there is no tax upon grant, vesting, or exercise. Tax is only payable upon disposal of the shares or options, which is as late as you realistically can achieve." – Jack Qi, Partner at William Buck​

But here’s the catch—not every company can ride the concession train forever. You lose eligibility if:

• Your company (or group) is more than 10 years old.
• You cross the $50 million aggregated turnover mark.
• An employee owns more than 10% of the company (including founders through trusts).

If any of these sound familiar, it's time to think about your next move.

So, What Are Your Options After Startup Concessions?

"Founders often think they qualify for ESS concessions, only to face a rude shock when they exceed the 10% ownership threshold and lose eligibility." – Jack Qi​‍

When you no longer qualify for the startup concession, you have five main paths to choose from. Here’s the lowdown:

1. Taxed Upfront Employees pay tax on the value of shares or options right away. Not ideal—especially when those shares are as liquid as a brick. But if your share value is low, it might not be so bad.
2. Tax-Deferred Option Schemes Tax is delayed until one of these happens:
   
   • No risk of losing the shares (vesting complete).
   • Employee can sell the shares.
   • 15 years pass.
3. The perk? No immediate tax bill. The downside? No CGT discount—most gains are taxed at the employee’s full rate.
4. Limited Recourse Loan Plans Employees "buy" shares with a loan from the company. No tax upfront, plus they get CGT benefits. If the company flops, they simply lose the shares—no other financial risk. It's a bit more admin-heavy but popular for a reason.
5. Indeterminate Rights This fancy option lets employees receive either shares or cash (TBD later). Since the outcome is unclear, tax is deferred. It’s flexible but tricky to manage and usually best for senior execs.
6. Premium Priced Options Set the option exercise price high enough, and the ATO considers them worthless (for tax purposes). Employees won’t owe tax upfront, but they only win if the share price skyrockets.

“When you transition out of the startup concession, it's usually time to explore alternative structures. Most companies either amend the old plan or start fresh with a new one." – Brendan Stanton, Cake

Valuations Matter More Than You Think

Once you graduate from startup concessions, valuing your shares gets more complicated. Here are your options:

• Use your last funding round (Easy, but usually overvalues shares for employees.)
• Get an independent valuation (More work, but likely to set a lower share price—meaning lower tax for your team.)

For global teams, different countries have different rules (thanks, international tax laws!). Some, like New Zealand and Canada, might accept your Aussie valuation, while others (hello, U.S.) require their own formal assessments.

Practical Next Steps for Your ESS Transition

1. Choose Your New Plan: Work with tax and legal experts to select the best ESS structure for your situation.
2. Close the Old Plan: Keep existing grants under your legacy plan, but issue new ones through your fresh, non-startup ESS.
3. Go Global Smartly: If you’re expanding internationally, set up addendums or sub-plans to keep things compliant worldwide.

And if you need a hand? Cake has the tech, templates, and expert network to make this whole ESS transition thing a breeze.

So, whether you’re crossing the 10-year mark, scaling beyond $50M, or just planning ahead, staying ahead of ESS changes means happier employees and a smoother road to success.

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