How to leverage ZEPOs as part of your ESS

Australian startups are increasingly turning towards equity as a primary lever for attracting world-class talent. However, traditional stock options often create an unexpected obstacle: employees must pay a strike price to convert their options into shares, creating a financial barrier at the very moment you need your team most committed. 

Zero Exercise Price Options (ZEPO) have emerged as the preferred vehicle for founders who want to offer immediate value to employees without the tax complications that typically come with discounted shares. Additionally, if your company has outgrown the Australian government’s startup concession (limited to eligible companies under 10 years old, with less than $50 million turnover), you can consider ZEPOs as part of your employee share scheme (ESS).

The anatomy of ZEPOs

ZEPOs are a type of ESS structure where options come with an exercise price of $0. Unlike a standard market price option, where an employee must pay the fair market value to convert their option into a share, a ZEPO allows the holder to acquire the underlying share for no out-of-pocket cost once vesting conditions are met.

Why ZEPOs matter

When founders grant traditional options, employees face a double bind. They are often obliged to pay thousands of dollars in cash to exercise their options at the exact moment they want to participate in the company’s upside. For them, this can feel like being asked to pay for the privilege of taking a risk on your startup.

By setting the exercise price to zero, founders eliminate this friction entirely. The value proposition becomes stronger, and the decision to exercise becomes purely strategic rather than a financial burden.

ZEPOs vs. market price options

While market price options (MPOs) are the traditional choice, they carry significant risk in volatile markets. If a company’s valuation dips, MPOs can fall underwater, rendering them worthless because the cost to exercise exceeds the share value.

ZEPOs, however, can never go underwater. Because the exercise price is zero, the option always represents the full current value of the underlying share. This makes ZEPOs an attractive retention tool, as employees hold something with real, tangible value rather than a speculative financial instrument that could expire.

Free ESS guide and checklist for Australian startups

See how you can structure and launch your ESS in Australia with this free guide and checklist.

Beating the ESS tax trap

The primary concern for any Australian ESS is the tax trap, where an employee is taxed on the paper value of their equity before they have the cash to pay the bill.

While many startups use the startup concession for traditional options, ZEPOs typically operate under tax deferral rules. To ensure employees are not taxed upfront on a ZEPO, the scheme must meet these specific criteria:

• Real risk of forfeiture: The options must be subject to vesting (for example, if the employee leaves within three years, they lose the options).

• Genuine disposal restrictions: The plan must legally prevent the employee from selling the resulting shares immediately. Most startups lock the shares until a liquidity event such as a secondary sale or IPO happens.

• 15-year limit: Tax can be deferred for a maximum of 15 years, or until the disposal restrictions are lifted.

By meeting these requirements, the income gained from receiving a ZEPO is generally not taxed at the time of grant or exercise, but when there is no longer a real risk of forfeiture and the scheme no longer genuinely restricts disposal.

Checklist: Getting ZEPOs right

Implementing ZEPOs is not a set-it-and-forget-it exercise. The tax benefits are real, but so are the ATO’s compliance expectations. Here’s a quick checklist:

• Establishing a defensible valuation: Even with a $0 exercise price, you must establish a market value at grant date. This sets the cost base for the employee. 

• Board endorsement: Ensure your board formally endorses the valuation and the real risk of forfeiture in writing via board minutes.

• 10% ownership cap: To qualify for tax-deferred status, the individual employee must hold less than 10% of the company’s total ownership or voting rights.

• Annual reporting: Founders must maintain an accurate audit and report grants to the ATO in an annual ESS statement (ESS statements must be issued to employees by July 14th each year).

Streamline your ESS with Carta

Australian companies can now manage their employee share schemes on Carta—all the way from issuing grants to preparing reports that can be filed with ATO. 

Carta’s ESS offering allows you to:

• Issue tax-advantaged ESS options (startup concessions, non-concessional, and ZEPOs) using familiar workflows

• Generate ATO-format ESS Annual Reports with one click

• Distribute pre-filled employee tax statements automatically

• Invite your accountant directly to the platform as an admin for real-time access to equity data

Your cap table will finally reflect real Australian equity structures—properly categorized, tax-advantaged where eligible, and ready for filing from day one. No more spreadsheet reconciliation during tax season, while potentially saving thousands on filing support.