Employee Share Options

Attracting and retaining key people with share options, phantom shares and ESOPs.

For startups and growing companies, equity can be a powerful way to attract and retain talent when cash is limited. The right structure aligns your team with the company’s success, while protecting founders and remaining tax-efficient.

Common structures

  • Share options: the right to acquire shares in future at a set price.
  • Restricted shares: shares issued upfront, subject to vesting and forfeiture.
  • Phantom shares: cash bonuses linked to share value, without issuing actual shares.
  • ESOP trusts: a trust holding shares for the benefit of participating employees.

Vesting and leavers

Vesting schedules, often over three to four years with a one-year cliff, encourage employees to stay. Good leaver and bad leaver provisions determine what happens to equity when someone leaves.

Tax treatment

Gains on equity instruments acquired because of employment are generally taxed as income under section 8C of the Income Tax Act when the instruments vest. Structuring affects when and how tax arises.

Who we help

We advise:

  • Startups setting up their first option pool.
  • Growing companies formalising informal equity promises.
  • Investors reviewing a company’s option arrangements.
  • Companies preparing for a funding round or exit.
  • Employers considering phantom share schemes.
  • Businesses combining ESOPs with B-BBEE ownership.

How we set up a scheme

Four steps to an effective plan.

  1. Design
    We agree the type of scheme, pool size, eligibility, vesting and leaver terms.
  2. Documents
    We prepare the scheme rules, option or award letters and any trust deed.
  3. Approvals
    We attend to board and shareholder approvals and any MOI changes.
  4. Administration
    We help you implement and administer grants, exercises and leavers.

Equity schemes should be coordinated with your shareholders’ agreement and investor rights, so that grants do not breach existing approvals or anti-dilution protections.

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What to prepare

Information for designing your scheme.

  • Your current cap table and MOI.
  • Existing shareholders’ agreements and investor terms.
  • A list of intended participants and roles.
  • Any informal equity promises made to staff.
  • Your plans for future funding rounds or an exit.

Common Questions

Many startups reserve around 10% to 15% of their share capital for employees, but the right size depends on the stage of the company and hiring plans.
Under section 8C, gains on equity instruments acquired by employees are generally taxed when the instrument vests, based on the market value at that time less any amount paid.
It depends on the scheme rules. Good leavers often keep vested options, while bad leavers may forfeit them or have to sell shares at a lower price.
Phantom shares avoid dilution and shareholder rights, but they are a cash liability for the company. The right choice depends on your goals and cash flow.
Usually, yes. Issuing shares or options under an employee scheme generally requires board approval and, depending on the MOI and the Companies Act, shareholder approval.

WANT TO REWARD YOUR TEAM WITH EQUITY?

We design and document employee equity schemes that attract talent, protect founders and work with your funding plans.

Read more: Employee share schemes · 4 points to consider when setting up an ESOP

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This page is general information and not legal advice.

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