Employee Stock Option Plan [incl. Optional Choice of Australian Tax-Deferred Schemes]

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Choice of Optional Australian Tax-Deferred Schemes

Our high-tech Employee Stock Option Plan has been carefully designed to provide your company with the option to establish an Australian Tax-Deferred Scheme regardless of whether or not the ‘Start Up’ tax concessions apply.

1️⃣ ATO-Approved Template for the "Start Up" Tax Concession

Modelled upon the ATO-approved documentation for the ‘Start Up’ tax concession, our expert team has significantly tightened up the drafting and taken the document to the next level.

Limitations for 'Start Up' Tax Concessions

Deferred taxing point

If the 'Start Up' tax concessions apply, the taxing point for the employees will be deferred until the eventual sale of the options, or sale of the shares issued upon exercise of the options, upon an exit event.

Otherwise, the taxing point will be deferred until the earliest of:

⚖️ When the options have been exercised and there is no risk of forfeiting the resulting shares and no restriction on disposal of those shares;

⚖️ Cessation of employment; and

⚖️ 15 years after the date on which the options were granted.

Exercise price needs to be market value

However, in order for the 'Start Up' tax concessions to apply, the exercise price (ie, price paid to purchase the shares upon exercise of the options) needs to be at least equal to the market value of the shares at the time of grant of the options.

This means that (unless the market value at the time of grant is zero) the employees will need to pay for the shares and can't receive the shares for free.

2️⃣ General Tax-Deferred Scheme ➲ including provision for Options with a Nil Exercise Price

Additionally, you can also create a tax-deferred scheme that is not subject to the ‘Start Up’ tax concession limitations, including the ability to issue options with a nil exercise price.

You may not be aware of the fact that, for the ‘Start Up’ tax concession to apply, the scheme can permit options over ordinary shares only, and the exercise price needs to be the “fair market value” of an ordinary share as at the date on which the options were granted.

These limitations actually make the ‘Start Up’ tax concession documentation untenable for most startup companies that need to issue options with a nil exercise price.

Australian Tax-Deferred Scheme ➲ Comparison Table

'Start Up' versus General Employee Option Australian Tax-Deferred Scheme ➲ Comparison Table

Our Employee Stock Option Plan Features

Our automated Employee Stock Option Plan includes the following:

1️⃣ Good Leaver/Bad Leaver provisions;

2️⃣ Detailed time-based (from 1-5 years) vesting criteria;

3️⃣ Ability to specify performance-based targets/vesting conditions; and the

4️⃣ Ability for the employer company to be a subsidiary of the parent company issuing the shares/options.

Good Leaver v. Bad Leaver Provisions

If the Employee ceases employment and the Employee is a:

❌ 'Bad Leaver' ➲ your company can force all of the employee's vested and unvested options to lapse; or

✅ 'Good Leaver' ➲ your company can force all unvested options to lapse, but options that have already vested will remain.

The Employee will be a Good Leaver if he/she:

⚖️ Ceases employment because of death or disability; or

⚖️ Is terminated or made redundant by the company without cause in the absence of any wrongdoing by the employee.

Optional: Good Leaver Status for Maternity

If desired, you can also optionally make a female employee a Good Leaver if she leaves employment to have a baby.

Sample Employee Option ➲ Vesting Timetable

The following sample vesting timetable is for Employee Options that will vest annually in arrears ➲ eg, with a 4-year vesting timetable:

Sample: Employee Option Vesting Timetable

Bonus: Automated Employee Offer Letters

As an added bonus, you can also automatically generate one generic template [with placeholders in square brackets for the employee-specific details (i.e., name, address, number of options, exercise price, etc)] or up to 5 fully-customised Employee Stock Offer Letters for making Grants of Stock Options under the Employee Stock Option Plan.

Alternatively, our dedicated Employee Stock Offer Letters process allows you to generate up to 10 fully-customised Employee Stock Offer Letters for making Grants of Stock Options under the Employee Stock Option Plan.

Are Formal Disclosure Documents Required for each Grant of Stock Options?

In respect of each separate Grant of Stock Options made pursuant to your Employee Stock Option Plan, you need to ensure that your company is able to issue the options without requiring a Formal Disclosure Document (eg, a Prospectus or Offer Information Statement) under the Corporations Act 2001 (Cth) (Corporations Act).

By default, a Formal Disclosure Document is required unless an exception applies.

Does an Exception Apply?

Please consider whether any of the following exceptions may apply:

Senior Managers  

⭐️ Offer to a senior manager of the company/employer or their spouse, parent, child, brother or sister or a body corporate controlled by any of them ➲ s 708(12) of the Corporations Act;

Nil Exercise Price  

⭐️ No consideration is payable for the grant of the options and the exercise price is nil ➲ s 708(15) of the Corporations Act.

Note that this exception can only be available if the plan is not subject to the "Start Up" limitations; and/or

Small Scale Offering

⭐️ The offer of the Options will breach neither the "20 investors ceiling" nor the "$2 million ceiling" under ➲ ss 708(1)-(7) of the Corporations Act.

Simpler Offer Document under ASIC ESS Regime Instrument 2022/1021

⭐️ If none of the above exceptions apply, consider whether a Simpler Offer Document under ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 may be applicable.

The ESS Regime provisions in Part 7.12 of the Corporations Act commenced on 1 October 2022 and ASIC’s relief seeks to remove unintended technical issues that stakeholders said will cause difficulties in practice.

This follows a consultation ASIC undertook earlier in the year.  

The ESS Regime Legislative Instrument provides:

⚖️ A broader exemption for secondary sales of financial products that are quoted on a financial market;

⚖️ More options for the financial information that foreign companies can provide ESS participants;

⚖️ The ability to provide an expert valuation of ESS interests that are not ordinary shares (in addition to the other valuation methods set out in s1100X(3));

⚖️ Technical relief so that salary sacrificing arrangements can comply with the requirements for contribution plans; and

⚖️ Clarification that financial products offered outside this jurisdiction do not need to be included when calculating the issue cap in s1100V.

ESS Regime replaces previous ASIC Class Orders

The ESS Regime is intended to replace ASIC’s existing relief for employee incentive schemes in Class Order [CO 14/1000] Employee Incentive Schemes: Listed bodies and Class Order [CO 14/1001] Employee Incentive Schemes: Unlisted bodies.

Since 1 March 2023 entities are unable to make new offers under these prior ASIC Class Orders.

Further reading:

MEDIA RELEASE (22-370MR) published 20 December 2022

ASIC provides legislative relief to facilitate employee share schemes

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This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.