A guide based on our recent webinar ‘ESOPs Demystified: Designing employee ownership plans that work.’
A big thank you to industry leaders, Adrian Pennino, KPMG Director, and Xavier Keary, Gilbert + Tobin Partner, for sharing their insights.
At KPMG High Growth Ventures, we help founders design and implement ESOPs that are fit-for-purpose. This means, balancing tax effectiveness, compliance, and founder control. Whether you're setting up your first plan or scaling an existing one, we support you through the complexities of valuation, vesting, and reporting, so you can focus on scaling with confidence.
What is an employee share option plan?
An Employee Share Option Plan, or ESOP, is an incentive scheme that gives an employee the right to acquire equity in a company. Options generally have an agreed exercise price, which the employee must pay to acquire the underlying shares. The options usually vest over time, meaning the employee gradually earns the right to exercise them subject to the plan’s conditions.
For startups, an ESOP can support several commercial objectives. It may help attract and retain talent, align the interests of employees and shareholders, and provide a non-cash component of remuneration. Where the relevant requirements are met, an ESOP may also provide concessional tax treatment.
What is the best ESOP structure for an Australian startup?
There is no single ESOP structure that works for every Australian startup.
The right approach depends on the company’s stage, workforce, hiring plans, available resources and broader commercial objectives. Early-stage companies may need a relatively standardised structure, while a later-stage or internationally expanding business may require a plan capable of supporting a larger workforce, different jurisdictions and more complex governance.
The starting point is to be clear about what the plan is intended to achieve. That includes who will participate, how the ESOP will support recruitment and retention, how much equity may be allocated, and how the plan will interact with the company’s cap table, shareholder arrangements and employment documentation.
Why ESOPs matter when scaling your business
For early-stage founders, building a strong team is one of the most critical challenges. With limited capital and high expectations, you need to offer more than just a salary to attract top talent.
That’s where ESOPs come in.
They allow you to offer equity to your team, giving them a stake in your company’s future and aligning their success with yours.
But while ESOPs are a powerful tool, they’re often misunderstood. Many founders assume they can set one up quickly using a template or skip the legal and tax advice to save money. Unfortunately, this can lead to costly mistakes. Getting the basics right from the beginning is essential, not just for compliance, but for building trust and transparency within your team.
There's no one-size-fits-all ESOP
Startups come in all shapes and sizes, and so do ESOPs.
A common misconception is that there is a standard blueprint every founder can follow. In reality, the right ESOP depends on factors such as company stage, hiring plans, available resources and long-term strategy.
For very early-stage businesses, a relatively standardised approach may be appropriate. As the company grows, raises capital, expands internationally or builds larger teams, additional considerations may arise around governance, tax, administration and employee communication. The most effective ESOPs are designed around the specific needs of the business, rather than forcing the business to fit a generic structure.
Unlocking ESOP benefits means:
- Winning the talent war: In a market where top talent is scarce and expensive, ESOPs can give you a competitive edge. Equity offers a compelling value proposition, especially when cash is tight, helping you attract high-calibre candidates who are motivated by ownership and upside.
- Build a culture that sticks: Ownership fuels commitment. When your team has skin in the game, they’re more likely to stay and champion your mission. ESOPs help you build a culture of loyalty and shared success.
- Drive performance through alignment: Turning employees into shared owners creates a mindset shift which can lead to higher engagement and a team that thinks like founders.
- Enable strategic, long-term thinking: With equity on the table, your team is incentivised to think beyond the next sprint. ESOPs foster a long-term view, encouraging decisions that support sustainable growth and value creation.
- Plan your exit without the panic: Whether you're eyeing an acquisition, IPO, or simply planning ahead, ESOPs offer a founder-friendly path to succession. They create internal continuity and can be a powerful tool for transitioning ownership on your terms.
A well-structured ESOP can help you attract the right people and retain them through the ups and downs of start-up life, all while motivating them to go the extra mile right alongside you. It’s not just about equity, but about creating a culture of ownership and shared success.
What should I speak with my team about when communicating ESOPS?
One of the most overlooked aspects of ESOPs is communication. Employees may not understand what they’re being offered or how it works, and how it may impact them further down the line from a tax, legal or otherwise perspective. This can lead to confusion or even mistrust later if expectations are misaligned.
Founders should take the time to explain the ESOP during onboarding and provide clear, accessible documentation. Hosting a town hall or Q&A session can help demystify the plan and reinforce your commitment to fairness and transparency. It’s also a great opportunity to align your team around your long-term, strategic vision.
Remember, you’re not just offering equity, you’re inviting your team to become co-owners in your mission. That’s a powerful message, and it deserves thoughtful communication.
What ESOP pitfalls should I avoid?
Avoid these common mistakes when setting up your ESOP:
- Outdated or incorrect valuations: Using the wrong valuation can disqualify your plan from start-up tax concessions - costly and avoidable.
- ATO reporting slip-ups: ESS reporting and payroll tax obligations are critical to get right to avoid pain.
- Burying ESOP terms in employment contracts: This can create a misleading impression of a guaranteed benefit and lead to future disputes. Keep your ESOP docs clean and separate.
- Ignoring securities law: Yes, even start-up ESOPs are considered securities. You still need to comply with the key legal requirements.
Getting your ESOP right from the start sets the tone for your company’s culture and growth. It’s not just a legal or financial tool, but a strategic asset that can help you build a world-class team. With the right advice, clear communication, and a long-term mindset, your ESOP can be one of the most valuable investments you make in your startup’s future.
Looking to put together an ESOP without getting buried in complexity? Contact the KPMG High Growth Ventures team today to see how we can help your business.
If you'd like to catch the full webinar to hear more from our specialists, find the full recording on our events page here.
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FAQs
When should a startup establish an ESOP?
Many founders begin considering an ESOP when making early key hires or following an initial capital raise. The right timing depends on your hiring plans, growth strategy and workforce requirements.
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How big should an ESOP pool be?
There is no universal answer. During our webinar, the panel noted that many investors expect an ESOP pool to be established as part of a funding round, however the appropriate size depends on the company, its hiring needs and future growth plans. A 10% ESOP pool is often used as a starting point, but it is not a rule.
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Can advisors and consultants participate in an ESOP?
Yes. ESOP participation is not limited to employees. Depending on the structure, advisors, consultants and directors may also participate.
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What startup tax concessions are available for ESOPs?
As discussed during the webinar, eligible start-ups may be able to access concessional tax treatment where certain conditions are met, including company age, turnover and share valuation requirements.
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Do ESOPs only benefit employees?
No. A well-structured ESOP can help founders attract and retain talent, align employee and shareholder interests, reduce pressure on cash remuneration and support long-term growth objectives.
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Can a startup use an ESOP when expanding internationally?
Yes, however additional legal and tax considerations may apply depending on where employees are located. Founders should obtain advice before extending an ESOP into overseas jurisdictions.
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Last updated October 2026
Looking to strengthen your financial operations but not sure where to start? Contact the KPMG High Growth Ventures team today to see how we can help your business.
