If you’re thinking about giving equity to an incoming co-founder or team member, you’re not alone – and it’s one of the most common conversations we have with founders. The instinct to reward people with ownership is a good one. But the way you structure that equity matters a lot, both for you and for the person receiving it.

Here’s what you need to understand about the difference between shares and share options before you put anything in writing.

Shares vs Share Options: What’s the Difference?

Shares give someone a fraction of ownership in your company immediately. A shareholder can vote at meetings and receive dividends as soon as they’re declared. If your employees hold shares, you’ll likely have an Employee Share Scheme (ESS) in place.

Share options are different. They give someone the right to buy or be awarded a share at a set price, before a set deadline – but they’re not obligated to act on that right. Option holders can’t vote at meetings and can only receive dividends if they convert their options into actual shares. If you issue share options, you’ll have an Employee Stock Ownership Plan (ESOP) in place.

Why the Distinction Matters

Especially in the early stages, it’s tempting to assume it doesn’t matter whether you give shares or share options. If the company isn’t worth much yet, what’s the difference?

Quite a bit, as it turns out. And the further you get down the road, the more it matters.

Tax Implications of Giving Away Shares

If you give someone free shares – particularly an employee – they may need to pay income tax on them in the year they receive them. If your company is already of meaningful value, that’s a significant tax bill on something they can’t yet sell or liquidate.

If you try to get around this by structuring it as a loan to fund the shares, the ATO’s Division 7A regulations can apply. In short, the loan will generally be treated as a dividend – and therefore subject to income tax – unless it’s repaid within the same financial year. It gets complicated quickly.

Even if your company isn’t worth much yet, shares involve more compliance overhead than options. Issuing shares means ASIC filings and ongoing annual obligations that simply don’t apply with options.

Tax Implications of Giving Shares at a Discount

If you make shares available at a discounted price, Division 83A can apply. Any discount beyond 15% of market value is treated as assessable income upfront, making it subject to personal income tax in the year the shares are received.

Many of the founders we work with include share options as part of a remuneration package – a base salary combined with options at a modest discount, subject to vesting conditions. Here’s how that typically plays out:

You want to hire Sal, a software developer. You offer her a base salary and share options at a 15% discount, on the condition she stays for at least three years. If Sal later converts her options to shares and sells them, she’s taxed on the gain – market value at sale minus the discounted option price. If the shares were originally worth $10,000, she paid $8,500. If she sells three years later for $50,000, her taxable gain is $41,500. That’s not a deterrent – it’s just something to plan for.

Tax Implications of Share Options

Share options are generally much simpler from a tax perspective. An option holder doesn’t pay any tax until they convert the option to a share and then sell it at a profit. No annual income tax obligations, no upfront liability on a speculative future value.

From your company’s perspective, there are generally no tax implications for issuing share options – which is another reason many founders prefer them over direct share grants.

The Upside of Share Options

Beyond the simpler tax position, there’s a more compelling reason why share options can be genuinely attractive for the people receiving them.

An option gives the holder the ability to buy a share later – when your startup’s shares are worth significantly more – for a low exercise price, and keep the difference. That potential upside, combined with a vesting schedule that rewards staying power, is often more motivating than shares granted upfront.

And if your startup qualifies as an early-stage innovation company (ESIC), Australian shareholders can access meaningful tax concessions – including no capital gains tax on the profit from selling shares held for at least three years and sold within ten years. That’s a significant sweetener worth understanding before you structure anything.

How Many Options Should You Give?

The right split between salary and options depends on your stage, your cash position and what the talent market looks like for the role you’re filling. There’s no universal formula. What matters is that you’ve modelled out the dilution scenarios, you understand the vesting structure and you’re comfortable with what the cap table looks like if everyone’s options vest in full.