Employee share scheme (ESS) valuation
An employee share scheme needs a defensible market value for the shares or options at the grant date, prepared at the time and documented. The value must be per share on a fully diluted basis, which means the cap table does as much work as the company valuation.
Founders routinely value the company and then divide by the shares on issue. That figure is wrong in almost every case with an option pool, a convertible note or preference shares — and it is the per-share number, not the enterprise value, that the scheme depends on.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
Your tax adviser and your board now; the ATO potentially years later, when the shares are sold or the deferred taxing point arrives.
Market value at the grant date, on a per-share basis for the class actually being issued.
The grant date. A valuation prepared afterwards to fit a grant already made is materially weaker.
What the report must contain for this purpose
- The company value, with the method and evidence stated
- The fully diluted capital structure, worked through explicitly
- The specific class of share or option being valued
- The effect of preference terms, liquidation preferences and conversion caps
- Any discount for lack of marketability, with reasoning
- A signed valuer declaration and the date of preparation
Sequence
How an ESS valuation runs
The company valuation is half the exercise. The capital structure is the other half, and it is where the surprises are.
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01
Establish the company value
Earnings-based where there is profit; Berkus, Scorecard, VC method or risk-adjusted DCF where there is not. The method is chosen for the stage and stated.
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02
Build the fully diluted cap table
Ordinary shares, preference shares, the option pool issued and unissued, convertible notes and SAFEs with their discounts and caps.
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03
Allocate value across classes
Preference terms sit above ordinary shares in a waterfall. Ignoring that overstates the value of the ordinary shares employees receive.
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04
Apply marketability considerations
A minority holding in a private company with no ready market is not worth its proportionate share of enterprise value, and the report explains why.
Where it goes wrong
What goes wrong with ESS valuations
These errors surface years later, at the deferred taxing point, when they are expensive to unwind.
Why the per-share number matters so much
The ESS value sets the employee’s tax position, potentially for years. An overstated value creates a tax liability on value the employee never received; an unsupported value invites adjustment. Neither outcome is what an equity incentive is meant to achieve.
- Dividing enterprise value by shares on issue Ignores the option pool, notes and preference terms. The resulting per-share figure is usually too high, which costs employees at the taxing point.
- Using the last round price A round price reflects preference terms, strategic interest and negotiation. Ordinary shares issued to employees sit below preference shares in the waterfall and are worth less.
- Valuing after the grant A valuation reconstructed to support a grant already made is far weaker than one prepared at the time. The date on the report matters.
- Ignoring convertible instruments A note with a discount and a cap can convert at a price well below the round, diluting everyone. Modelling only issued shares misses it entirely.
- No documentation retained The valuation may be examined many years after the grant. If the working, evidence and assumptions are not in the report, they are gone.
What we need
Documents for this engagement
The cap table is the document that matters most, and it is the one most often out of date.
Open the standard checklist →- Capitalisation table Fully diluted, including options, notes, SAFEs and preference terms
- Financial statements and management accounts Whatever exists, including current-year trading
- Financial model or forecast It does not need to be polished; it needs to be honest
- Prior round documents Term sheets, subscription agreements and note terms
- Scheme documents The plan rules and the proposed grant terms
- Constitution and shareholders’ agreement Rights attaching to each class of share
Generally yes, if you want a defensible market value for the shares or options being issued. The ATO expects a documented basis for the value used, and a valuation prepared at the grant date is far easier to rely on than one reconstructed later. Your tax adviser will confirm which concessions and reporting obligations apply to your scheme.
Not directly. A round price reflects preference terms, investor rights, strategic interest and negotiation. Employees usually receive ordinary shares, which sit below preference shares in the waterfall and are typically worth less. The valuation allocates value across classes rather than applying one headline number to all of them.
Substantially. An unissued option pool dilutes existing holders; a note with a discount and a valuation cap can convert well below the round price. We work the fully diluted position explicitly rather than quoting an enterprise value and leaving you to divide by a share count.
Yes, using early-stage methods — Berkus, Scorecard, the Venture Capital method or a risk-adjusted DCF — which assess the company against comparable funded startups and produce a documented range rather than false precision. Our startup valuation page sets out how those methods work.
At each grant round, and whenever something material changes — a funding round, a major contract, a significant change in revenue. Using a two-year-old valuation for a new grant is one of the more common weaknesses we see.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
Last reviewed
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