Employee Stock Options Glossary Australia

Welcome to our Employee Stock Options Glossary for the Australian market. This comprehensive resource is designed to help founders, their teams, and other stakeholders better understand the key terms and concepts associated with employee stock options and Employee Stock Option Plan (ESOP) management. As you navigate through the world of equity compensation plans, having a solid grasp of these terms is essential for making informed decisions that align with your business goals and objectives.


Our glossary covers a range of topics, including key terms and concepts, taxation and regulatory aspects, alternative equity-based compensation plans, and additional related terms. Whether you are a founder looking to implement an ESOP or an employee trying to understand your stock options, our glossary aims to provide clarity and guidance.

We encourage you to explore the glossary and familiarize yourself with the terms listed below. By gaining a deeper understanding of these concepts, you’ll be better equipped to make the most of the opportunities offered by employee stock options and ESOP management in Australia.

Please note that while we have made every effort to provide accurate and up-to-date information, this glossary should not be considered legal, financial, or tax advice. We recommend consulting with a professional advisor for specific guidance tailored to your situation.

Employee Stock Option (ESO)

Employee Stock Option (ESO): A contract that grants employees the right to buy a specific number of shares of the company’s stock at a predetermined price (exercise price) during a specified time period.

Employee Stock Option Plan (ESOP)

Employee Stock Option Plan (ESOP): A formal plan established by a company to offer stock options to its employees, as a part of their compensation package.

Employee Share Scheme (ESS)

Employee Share Scheme (ESS): A broad term for any plan that allows employees to acquire company shares, including employee stock options, restricted stock units, and other equity-based compensation plans.

Exercise Price (or Strike Price)

Exercise Price (or Strike Price): The price at which an employee can purchase company shares under a stock option plan.

Vesting Period

Vesting Period: The period during which an employee must work for the company to earn the right to exercise their stock options.

Cliff Vesting

Cliff Vesting: A type of vesting schedule where an employee becomes fully vested after a specific period of time, rather than gradually.

Graded Vesting

Graded Vesting: A type of vesting schedule where an employee becomes incrementally vested over a set period of time.

Expiration Date

Expiration Date: The last date on which an employee can exercise their stock options before they expire and become worthless.

In-the-money (ITM)

In-the-money (ITM): A term used when the market price of the company’s stock is higher than the exercise price of the stock options.

Out-of-the-money (OTM)

Out-of-the-money (OTM): A term used when the market price of the company’s stock is lower than the exercise price of the stock options.


Exercise: The act of purchasing company shares at the exercise price, as specified in the stock option agreement.

Taxation and Regulatory Bodies

Taxation of Employee Stock Options

Taxation of Employee Stock Options: The tax implications associated with exercising employee stock options in Australia, including capital gains tax and income tax considerations.

Australian Securities Exchange (ASX)

Australian Securities Exchange (ASX): The primary stock exchange in Australia where company shares are traded.

Corporations Act 2001 (Cth)

Corporations Act 2001 (Cth): The primary legislation governing corporations, including the issuance of stock options, in Australia.

Australian Securities and Investments Commission (ASIC)

Australian Securities and Investments Commission (ASIC): The Australian government regulatory body responsible for administering the Corporations Act 2001 and ensuring compliance with the relevant laws and regulations.

Australian Taxation Office (ATO)

Australian Taxation Office (ATO): The Australian government agency responsible for administering the taxation system, including the taxation of employee stock options.

Alternative Equity-based Compensation Plans

Share Appreciation Rights (SARs)

Share Appreciation Rights (SARs): A type of employee compensation linked to the increase in the value of company shares over a specified period.

Performance Rights Plan (PRP)

Performance Rights Plan (PRP): A type of equity-based compensation plan where employees are granted rights to receive company shares based on the achievement of specific performance milestones.

Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs): A form of equity-based compensation where employees are granted company shares that are subject to vesting and may be subject to certain restrictions, such as a requirement to remain employed with the company for a certain period.

Dividend Equivalents

Dividend Equivalents: Payments made to employees who hold stock options or other equity awards, based on the dividends paid to shareholders.

Non-qualified Stock Option (NSO)

Non-qualified Stock Option (NSO): A type of employee stock option that does not meet the specific requirements to receive preferential tax treatment, as compared to Incentive Stock Options (ISOs). In Australia, most employee stock options are treated as NSOs for tax purposes.

Phantom Stock

Phantom Stock: A type of employee compensation plan that provides the benefits of owning company shares without actually issuing shares to employees. Employees receive cash payments or additional shares based on the increase in the value of company shares over a specified period.

Additional Terms

Option Grant Date

Option Grant Date: The date when an employee is granted stock options under the employee stock option plan.

Option Agreement

Option Agreement: A legal document outlining the terms and conditions of an employee’s stock options, including the grant date, exercise price, vesting schedule, and expiration date.


Dilution: The decrease in existing shareholders’ ownership percentage as a result of the issuance of new shares, such as through employee stock options or other equity-based compensation plans.

Fair Market Value (FMV)

Fair Market Value (FMV): The current market value of a company’s shares, used to determine the exercise price of stock options or the value of equity awards.

Early Exercise

Early Exercise: The ability to exercise stock options before they are fully vested, which may have tax advantages in certain circumstances.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT): A tax on the profit realized when an asset, such as company shares, is sold for a higher price than it was purchased. CGT may apply to employee stock options when they are exercised and later sold.

Option Pool

Option Pool: A reserve of company shares set aside for issuance to employees through stock option grants or other equity-based compensation plans.