Are options for employees now an option?

Posted by Rachel White

Published on April 13, 2015 under Employee Share Schemes

What is an option? It’s a right to purchase shares at a pre-agreed price, at a future time based on future events, such as the passing of time, certain KPI’s being met, or an exit event. This is the mechanism used in much of the rest of the world to grant company ownership to staff in startups.

You can issue options today, that concept is not new. In Australia an option can create substantial tax liabilities for holders of the option (your employee) long before there’s any cash to pay the tax bill that goes with it.

The work around used up until now involves issuing shares up front, at “full market value”, otherwise you create tax hell for the staff member you’re trying to attract – they may or may not be aware of it when they start however they’ll be very unhappy once they find out!

There’s a long list of problems this situation creates, with workarounds. It’s very expensive for you to get right, it’s even more expensive if you get it wrong. If they leave, you need to buy some or all of the shares back, creating even more problems.

Under the new proposed rules, options give you and your staff member far more flexibility in terms of what happens if the staff member leaves, the value put on the options, the point at which they convert to shares, and the point at which there is a tax liability (ie: when they have the cash to pay for it). Come 1st July, they are worth a look.

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