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How do I set a valuation for my Employee Share Scheme?

If you are implementing an Employee Share Scheme (ESS) or Employee Share Option Plan (ESOP) you will have set a valuation price for your employee shares/options.

For ESS’, the ATO has pretty strict guidelines about valuing unlisted shares.  In a nutshell, you can either:

Prepare and use a Net Tangible Asset (NTA) book valuation, if you meet the following criteria

  • your startup hasn't raised $10m in previous 12 months; and 
  • your startup is less than 7 years old or is a small business with less than $10m revenue; and
  • your startup prepares financial reports.

Otherwise, you will need to undertake an alternative method of valuation as accepted by your board that takes into account:

  • future cash flows;
  • similar businesses; and
  • illiquidity of unlisted companies.

Our Startup Valuation considers these aspects.

Options are issued via an Offer Letter, subject to the overall Employee Share Option Plan rules.  The Offer Letter sets out the exercise price (the amount the employee has to pay to convert their option into a share) based on the valuation.  ESOPs are typically earned (or vested) over 3-4 years until an employees full entitlement is reached.  The exercise price is fixed upfront and specified in the Offer Letter.  As future (rounds of) employees join the company, the valuation needs to be redone, at that time, to set the exercise price for the incoming employees.