How an employee share scheme fuels growth for tech startups

The tech sector thrives on three key ingredients: innovation, capital and human talent. The challenge is getting the right balance.

If you’re an Australian startup, an employee share scheme (ESS) could be a great way to supplement your capital to attract human talent and inspire innovation. 

Despite the hype surrounding AI, offshore resourcing, and autonomous ‘agentic’ systems, people remain central to a company’s success. Skilled employees can make or break a tech startup. Automation can boost efficiency, but it can’t replace the human qualities that drive innovation. Your startup depends on individuals who can interpret data, make strategic decisions in uncertain conditions and inspire others to work towards a shared vision.

Recruiting and retaining skilled local talent is therefore essential. The problem is that most startups lack the cash to compete for top talent. Australia’s ESS startup concessions offer a way to level the playing field. They are among the few mechanisms that directly connect staff to a company’s long-term success. They help attract and retain key employees by aligning employee remuneration with the company’s growth. Equity participation gives staff a real sense of ownership and purpose while allowing founders to conserve cash in the early stages.

The wealth created by early employees of tech companies, such as Canva, demonstrates the power of well-designed share schemes in turning belief into tangible outcomes.

For Australian startups, this potential is reinforced by a favourable tax framework.

What are ESS startup concessions and how do they work?

With one in five new businesses closing within the first year (and half within four years), Australian startups operate in a highly competitive environment where every decision counts. The ESS startup concessional regime was introduced to foster innovation and encourage risk-taking in our local ecosystem. It helps early-stage companies attract and keep employees when cash flow is tight. The regime allows eligible early-stage businesses to offer equity to employees in a tax-effective way. So, why are these concessions considered tax-effective, and what does a company need to do to qualify?

Unlike the standard ESS rules, which can tax employees when their shares or options are issued or vested (and in certain cases, at deferred date), the startup concessional regime generally taxes at a liquidity event - usually, when the employee sells their shares. This means employees are taxed only once they have realised value, rather than on paper gains that may never materialise. Crucially, the startup regime enables employees to buy shares at up to a 15% discount to market value without triggering immediate tax. It also moves employees into CGT territory, so they are more likely to qualify for the 50% CGT discount when they eventually sell their shares.

These combined benefits make the regime very appealing for both employees and founders. Employees are motivated by genuine ownership and potential upside, as they already hold the shares or options from the outset, giving them a direct stake in the company’s future success. Founders can use equity strategically without putting pressure on early cash reserves.

While the concessions are generous, they also come with trade-offs. Employees become entitled to their shares or options at a fixed exercise price without needing to meet further conditions such as performance or tenure. Startups that prefer greater control or conditional vesting may instead consider the standard ESS regime, which can still benefit from deferred taxation if certain conditions are met.
 

Eligibility criteria for ESS startup concessions

To qualify for the startup concessions, both the company and the employee must satisfy certain key conditions, including but not limited to the following:

For the company: 

• It must be an Australian resident company that has been incorporated for less than 10 years.
• It must be unlisted and have aggregated turnover of less than $50m in the income year before the ESS offer is made.
• Neither the company nor any group entity can have shares or options quoted on a stock exchange at the time of the offer.
• The shares or options must relate to ordinary shares in the company.

For the employee: 

• The participant must be an employee receiving the offer in connection with their employment.
• The participant must not hold more than 10% of the shares or voting rights in the company after the ESS interests are issued.

Takeaways for tech start-ups

As always, careful consideration should be given to ensure the scheme is set up correctly to avoid headaches later on. 

In an environment where capital is tight and competition for skilled talent remains intense, an ESS can turn employees into genuine partners in growth, a defining factor for startups seeking to move from early-stage survival to lasting success.

With deep expertise across taxation, valuation, and governance, RSM supports startups in implementing ESS that satisfy regulatory conditions while maximising the benefits of the startup concessional regime.

To learn more about how RSM can help design and implement an ESS that supports your growth strategy, reach out to your local RSM adviser.
 

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To learn more about how RSM can help design and implement an ESS that supports your growth strategy, reach out to your local RSM adviser.