Most people sign an option agreement without understanding what they’re signing. The company is exciting, the offer sounds good, and the equity section is written in terms that feel like they should make sense but don’t quite land. So you nod, sign, and hope it works out.

This guide covers what you’re actually agreeing to — in plain language, for the Australian market. Tax treatment is in Part 2. The maths on whether to take the equity at all is in Part 3.

Options are not shares

The most common form of startup equity in Australia is an option — not a share. The difference matters.

A share is direct ownership. You appear on the company’s share register, you have voting rights, and if dividends are ever paid, you get them. To receive shares directly, you typically have to pay at least 85% of their market value upfront. Most startups don’t issue shares to employees for this reason — the cash barrier is too high, and managing a large cap table of direct shareholders creates significant administrative overhead: every shareholder resolution requires signatures, and shareholder agreements become complex fast. Options keep the cap table clean until a real liquidity event.

An option is the right to buy one share at a fixed price (the exercise price, also called the strike price), at any point within the option’s life — usually 10 years from when it was granted. You pay nothing when the option is granted. You have no voting rights. You don’t appear on the share register. You simply hold the right to buy at a locked-in price.

The value of that right depends entirely on what happens to the company. If the company grows and shares become worth more than your exercise price, your options have real value. If it doesn’t, they’re worthless.

One other instrument worth knowing: RSUs (Restricted Stock Units), which some larger tech companies use. RSUs are a promise to give you shares outright when they vest — no exercise price. Simpler on paper, but the tax treatment differs from options: the market value of the shares at vesting is taxed as employment income at your full marginal rate. Any price growth after that vesting date is then treated as a capital gain — and qualifies for the 50% CGT discount if you hold for more than 12 months from vesting. If you’re offered RSUs by an Australian startup, understand this distinction before accepting.

The strike price is set early, for a reason

Your exercise price is fixed when the option is granted — it doesn’t change. Under Australian law, for the most common tax concession to apply, the exercise price must equal or exceed the market value of ordinary shares at the time of grant.

For a startup that’s 12 months old with $200K in the bank and no revenue, the market value of ordinary shares is often near zero — the NTA (net tangible assets) method, used by most early-stage Australian companies, values shares based on tangible assets minus liabilities, excluding IP and goodwill. A SaaS business with $50K in the bank has an NTA-based share value that might be $0.001 or $0.01 per share.

This is why joining early matters. An employee granted options at a $0.01 strike when the company is a seed-stage startup is in a very different position to someone who joins after a Series B, when a formal valuation requires a CFO or independent appraiser and might produce a strike price of $0.80 or $1.20.

The gap between your strike price and the eventual exit price per share is your gross gain. The lower the strike, the larger the potential upside.

Vesting: you earn it over time

Options don’t land all at once. They vest — meaning you earn the right to exercise them — over a schedule.

The Australian standard is a 4-year vest with a 1-year cliff:

  • Nothing vests for the first 12 months
  • On your 12-month anniversary, 25% vests all at once (the cliff)
  • The remaining 75% vests monthly over the following 36 months

If you leave before the cliff — for any reason, including redundancy — you receive nothing. Not a prorated portion. Zero. The 11-month contribution doesn’t count. This is industry standard and it applies to you.

The cliff in practice: Sign on 1 January, get made redundant on 15 December. You walk away with 0% of your equity. The clock resets entirely. Negotiate your start date, your cliff date, or a sign-on bonus to account for this risk — especially if you’re leaving vested equity behind at another company.

A less common variant worth knowing: milestone-based vesting, where some or all of your options vest when the company hits targets (ARR goals, product launches, headcount). This sounds appealing but introduces risk: if the milestones aren’t defined precisely in your grant letter, the board has discretion to decide whether they’ve been met.

What happens to your options when you leave

Unvested options always lapse when you leave — they go back into the pool. The only exception is accelerated vesting, which must be written explicitly into the plan.

Single-trigger acceleration: unvested options vest automatically on a company sale or IPO. Double-trigger: unvested options vest only if the company is acquired AND you are subsequently terminated without cause within 12–18 months. If neither is in your plan document, you have no acceleration — check before assuming.

For vested options, most plans give you a post-termination exercise window (PTEW) — typically 90 days — to either exercise or lose them permanently.

Ninety days is a problem. Exercising means paying the strike price in cash for shares you can’t sell. If you have 50,000 options at a $0.50 strike, you’re looking at $25,000 in cash for illiquid private company shares, with no guaranteed path to liquidity. Most employees in this position let the options lapse — and lose what they earned.

Progressive Australian startups are increasingly offering longer windows (2–5 years). This is a legitimate point to negotiate. Ask what the PTEW is before you sign.

Separate from the PTEW: all options expire 10 years from the grant date, regardless of whether you’re still at the company.

Dilution: your percentage shrinks with each round

When the company raises money, it issues new shares to investors. The total share count goes up. Your options stay the same in absolute number but represent a smaller percentage of the total.

An employee who joins at seed with 0.5% ownership might have 0.25–0.30% by the time the company reaches Series C — after two or three funding rounds, each diluting by 15–20%.

Option pools also cause dilution. Most Australian startups set aside 10–15% of fully diluted shares for employee options (the median across Australian and New Zealand startups is 12.6%). When investors come in, they often require a new pool top-up be created before (not after) their investment — meaning the dilution from the new pool falls on existing shareholders, not the incoming investors. This is called the option pool shuffle and it’s standard. It means your ownership percentage drops before the new money even lands.

Always ask for the fully diluted cap table — the number that includes all shares, all issued options, all reserved but unissued pool options, and any convertible instruments. Your percentage of that number is your real ownership, not the number the company might quote you from a simpler calculation.

Good leaver vs bad leaver

How your vested options are treated when you leave depends on whether the plan defines you as a good leaver or a bad leaver.

Good leaver (redundancy, serious illness, death, constructive dismissal): you keep your vested options and typically have an extended window to exercise them.

Bad leaver (misconduct, fraud, breach of employment terms): you may forfeit even vested options, or be forced to sell them back at a discount.

The catch: many plans define ordinary voluntary resignation as a bad leaver event — meaning leaving for a better job costs you vested equity. Check this before you sign.

One less obvious risk: even as a good leaver, some plans give the board the right to buy back your vested options at “fair market value” — and define that value using the NTA method. In an asset-light software company, that number can be near-zero even if the company is commercially healthy. The board can effectively buy out your vested options for pennies. Look for this clause.

Part 2 covers how Australia taxes startup equity — including the Division 83A start-up concession, the rules that mean you pay capital gains tax (not income tax) on your options, and the 2022 reform that removed a trap that used to hit employees when they left a company.

Part 3 covers whether you should actually take the equity at all: the expected value maths, liquidation preferences, and how to negotiate an offer.

If you’re evaluating an offer now and want a second opinion, talk to us.

This article is for general information only and does not constitute financial or legal advice. Seek independent advice before making decisions about equity compensation.