You can’t outbid a bank or a big tech company on salary. Most early-stage founders know this by month two. What you can offer is equity, a genuine stake in something that might be worth a lot more in three years than it is today.
The problem used to be tax. Before 2022, an employee who received shares or options could be taxed on their value straight away, sometimes before they’d sold a single share or seen a dollar of actual cash. Worse, if they left the company, that departure itself could trigger a tax bill. Staff were being taxed on paper wealth they couldn’t touch, and it made offering equity a genuine risk for the people accepting it.
The rules changed from 1 July 2022. Cessation of employment stopped being a taxing point, and the ASIC disclosure cap that had limited how much equity a company could offer without formal disclosure documents jumped from $5,000 to $30,000 per employee per year. Both changes are still in force in 2026, and most founders we talk to either don’t know the concession exists or assume it’s more complicated than it actually is.
Equity only works as a hiring tool if the person accepting it isn’t quietly worried about a tax bill they can’t pay. That’s what this concession fixes.
What the ESS startup concession actually does
An Employee Share Scheme (ESS) is any arrangement where a company gives employees shares, or options over shares, as part of their pay. The ATO’s startup concession is a specific set of tax breaks for early-stage companies that use one.
If your company qualifies and the scheme is structured correctly, employees don’t pay tax upfront on the shares or options they receive. Tax is deferred until they actually sell, and at that point it’s taxed under capital gains rules rather than as income. Hold the shares for more than twelve months from grant and the 50% CGT discount applies too.
That’s the difference between an employee owing tax on a value they can’t access, and an employee only paying tax once they’ve actually made money.
Who qualifies
The concession is available to your company, not to individual employees, so eligibility is assessed at the entity level first. To qualify:
The company must be unlisted and an Australian resident.
It must have been incorporated for less than 10 years.
Aggregated annual turnover must be under $50 million.
Eligibility is checked at the time each grant is made, based on the turnover of the previous income year. If your company was under $50 million last year but has since grown past it, a new grant this year may miss out even though older grants stay protected. Growing fast is a good problem, but it changes what you can offer new hires.
Shares versus options, and where the limits sit
The concession treats shares and options slightly differently.
For shares, the discount to market value can’t exceed 15%. Give an employee shares worth more than a 15% discount and the concession doesn’t apply to the excess.
For options, the exercise price has to sit at or above the market value of an ordinary share on the day of grant. This is the more common structure for early-stage companies, because it lets you offer upside without handing over an asset that has to be valued and taxed today.
Either way, the scheme has to lock in a minimum three-year holding period before the shares or options can be sold or exercised. That holding period is the trade-off for the tax break. The ATO isn’t handing out deferral so an employee can cash out next month.
Two ways to get a valuation the ATO will accept
None of this works without a valuation, because the entire concession hinges on comparing what the employee paid (or the exercise price they were given) against genuine market value at grant date. Guess wrong and you either overtax the employee or lose the concession altogether.
The ATO publishes two approved safe harbour valuation methods under a legislative instrument, and using one gives you certainty the valuation will be accepted without argument later.
Method One, the comprehensive method, is the standard approach for most trading companies and factors in things like recent capital raises, revenue and comparable company data.
Method Two, the net tangible assets method, suits very early companies with few intangible assets and almost no revenue yet, essentially valuing the business on its balance sheet. It only applies where specific conditions are met, so it’s not available by default just because a company is young.
A business with real IP, a customer base, or a recent priced raise will usually need proper valuation advice on top of the safe harbour method rather than relying on it alone. Either way, get the valuation done before you set the exercise price, not after someone’s already signed an offer letter.
Where founders trip up
The most common mistake isn’t malicious, it’s timing. Founders hand out options during a busy hiring run and only get a valuation and formal scheme documents sorted months later. If the exercise price ends up below market value at the actual grant date, the concession can be lost retrospectively for that grant.
The second mistake is assuming a compliant valuation is optional. It isn’t, if you want the deferral to hold up under an ATO review. A defensible, contemporaneous valuation at grant date is what separates a scheme that works from one that becomes a liability the day someone leaves and asks their accountant what they actually owe.
The third is forgetting that eligibility is checked per grant. A company can have some ESS interests that qualify for the startup concession and others, granted after turnover crossed $50 million, that don’t. Track which is which.
How this sits alongside the R&D Tax Incentive
If you’re already claiming the R&D Tax Incentive, or thinking about it, paying staff partly in equity doesn’t reduce what you can claim on their wages.
The R&D Tax Incentive refunds up to 43.5% of eligible R&D expenditure for companies under $20 million turnover. Australian salary costs count towards that, provided the staff member is genuinely doing technical work where the outcome wasn’t known in advance, not routine maintenance. That’s true whether the person is on a full cash salary or a mix of cash and equity. The ESS side is about how you compensate people. The R&D side is about what work they actually did and what you paid them in dollars to do it.
Say you’re paying a senior engineer $140,000 a year in cash plus options under the startup concession, and 70% of their time is spent on eligible core R&D activities, the genuine technical uncertainty work, not routine maintenance. The equity side of their package sits outside the R&D claim entirely. But roughly $98,000 of their cash salary can still go into your R&D expenditure pool, and a company under $20 million turnover can get up to 43.5% of that back as a refundable offset. The two schemes don’t touch each other. One is about how you structure pay, the other is about what the work actually was.
For a pre-revenue or loss-making startup, that combination is deliberate: equity buys you talent you couldn’t otherwise afford on cash alone, and the R&D refund puts real money back in the business for the technical work that talent is doing. Founders sometimes treat these as separate conversations with separate advisers, one for the cap table and one for tax. They’re the same conversation, because both come out of the same payroll.
Don’t confuse this with ESIC
The startup concession for ESS is about how you pay your own staff. Early Stage Innovation Company (ESIC) status is a completely different thing, it’s a tax offset for outside investors who put capital into your company. Both can apply to the same startup at the same time, but they solve different problems: one helps you hire, the other helps you raise.
What to check before you offer equity
Confirm your company is unlisted, Australian, under 10 years old, and under $50 million turnover, right now, not at incorporation.
Work out which safe harbour valuation method actually fits your business, and get it documented before anyone signs an offer letter.
Put the scheme rules in writing, including the three-year holding period, as part of that same offer.
Decide upfront whether you’re offering shares (15% discount cap) or options (exercise price at or above market value), because the documentation differs.
If you’re claiming or planning to claim the R&D Tax Incentive, make sure whoever runs your ESS isn’t operating in isolation from whoever tracks your R&D wage spend. The same employee often shows up in both conversations.
Getting the ESS structure right is a legal and valuation exercise as much as a tax one. Getting the R&D Tax Incentive side right is what Granton does. If you’re paying developers, engineers or technical staff in a mix of cash and equity and haven’t checked whether their wages qualify for a refund, that’s a 30 minute conversation worth having before your next financial year closes. Book a quick eligibility call at granton.io/meet.
Are you ready to turn your funding aspirations into reality? At Granton, we specialize in helping individuals and businesses navigate the world of grants, offering expert guidance on grant applications and finding opportunities that best suit their needs. Whether you’re seeking funding for a startup, nonprofit, or a specific project, our team is here to assist you every step of the way. We take the guesswork out of Grant Applications, R&D Tax Incentives, and Accelerator Programs, making the process smoother and increasing your chances of success. Ready to take the next step? Book a free consultation with us today, and let’s explore how we can help you secure the grants you deserve. Visit our website at granton.io to learn more or use our contact form to get in touch. Your grant journey starts here!