Employee number four at a Melbourne SaaS startup resigns after four and a half years. She joined pre-seed on a below-market salary and 120,000 options, now fully vested, with a strike of $0.12. The company’s last priced round values the underlying ordinary shares at $3.40. Her option certificate — generated from the same plan template most Australian startups use — gives her 90 days from her last day of employment to exercise, after which every vested option lapses. Exercising costs $14,400 in strike price. Because her grant predated the company’s eligibility for the startup concession, exercise is also — assuming, as is common for leavers, no genuine restriction on disposing of the resulting shares — a deferred taxing point: roughly $393,000 of paper gain taxed at her marginal rate, on shares with no market to sell into. She does not have a spare couple of hundred thousand dollars for tax on illiquid scrip. On day 91, the equity she spent four and a half years earning goes back into the pool.
Nothing in that outcome was required by Australian law. The 90-day window is a US tax rule, imported by template, operating in a jurisdiction where the rule it was built for does not exist. It is worth understanding where it came from, what Division 83A of the Income Tax Assessment Act 1997 (Cth) actually does when a leaver exercises, and why the default deserves more scrutiny than it gets.
Where 90 Days Actually Comes From
In the United States, section 422(a)(2) of the Internal Revenue Code conditions the favourable tax treatment of an incentive stock option (ISO) on the option being exercised no later than three months after employment ends. Exercise later than that and the ISO converts to a non-qualified option with a worse tax outcome. US plans therefore terminate vested options 90 days after departure — not because anyone decided 90 days was fair, but because keeping them alive longer bought the employee nothing under US tax law.
Australia has no ISOs and no section 422. There is no provision of Division 83A, the Corporations Act 2001 (Cth) ESS disclosure regime, or anything else in Australian law that requires — or rewards — a 90-day post-termination exercise period. The term arrived in Australian ESOP templates the way most of our venture documentation arrived: copied from Silicon Valley precedents, with the US tax rationale stripped out and the employee-unfriendly mechanics left in. Even in the US, the convention is under pressure — a well-known cohort of companies has moved to extended windows of five to ten years, accepting the ISO-to-NSO conversion as the price. In Australia, there is no conversion cost to accept. The 90-day term survives here on inertia alone.
What Division 83A Actually Does to a Departing Option Holder
For options granted under a tax-deferred scheme (Subdivision 83A-C — the default for most non-startup-concession ESOPs), the deferred taxing point for a right is, under section 83A-120, the earliest of: the time there is no real risk of forfeiting the option itself and no genuine restriction on disposing of it (rarely triggered in practice, because plan rules almost always make unexercised options non-transferable); the time the employee exercises the option, provided there is then no real risk of forfeiting the resulting share and no genuine restriction on disposing of it; and 15 years from acquisition. At the taxing point the discount is included in the employee’s assessable income under section 83A-110 and taxed at marginal rates — not as a capital gain.
Two features of the current law matter for leavers:
- Ceasing employment is no longer a taxing point. For ESS interests that had not already hit a taxing point, the Corporate Collective Investment Vehicle Framework and Other Measures Act 2022 (Cth) removed cessation of employment as a deferred taxing point for employment ceasing on or after 1 July 2022. Before that change, walking out the door could itself trigger tax on unexercised options. Parliament removed the trigger precisely because taxing people on illiquid paper at the moment they lose their salary was recognised as bad policy.
- The 30-day rule only helps if you can sell. Under section 83A-120(3), if the employee disposes of the share within 30 days of the deferred taxing point, the taxing point moves to the disposal — aligning the tax with actual cash. In a private company with no secondary market and no buyer, that door is usually closed.
- “Genuine disposal restrictions” cut both ways. Exercise only triggers the taxing point if the scheme no longer genuinely restricts disposal of the resulting share. Where plan rules or the constitution impose a restriction the ATO accepts as genuine under Taxation Determination TD 2022/4 — a fact-specific question about real, enforced consequences, not boilerplate — the taxing point defers until the restriction lifts. A leaver therefore cannot assume the tax lands at exercise, or that it does not: the position turns on the actual scheme terms, and it needs to be worked out before the 90-day window closes, not after.
Put those together and the irony is sharp: the tax law was amended so that leaving a startup no longer forces a tax event — and the standard plan document reinstates the forced event by contract. A 90-day window compels the departing employee to fund the strike — and, unless a genuine disposal restriction defers the taxing point, a dry tax bill at marginal rates — or abandon the options. An option that simply lapses unexercised generally never produces a Division 83A inclusion at all — which is why, faced with the maths, most early employees walk away and the “employee ownership” the ESOP was supposed to create quietly evaporates.
For grants that qualified for the startup concession under section 83A-33 — discussed in our earlier post on Division 83A-33 — the position is better but not painless: exercise is not a taxing point, and everything runs through the CGT system on eventual sale. The dry tax problem disappears, but the leaver must still fund the full strike price within the window for shares that may not see liquidity for years, if ever.
Why Companies Keep the Short Window — and What It Is Really Worth
The arguments for 90 days are real, but weaker than their ubiquity suggests. Pool recycling: lapsed options return to the pool for new hires — but options forfeited by the people who built the early product are a strange source of hiring budget. Cap table hygiene: nobody wants dozens of small ex-employee holders — but an unexercised option holder is not a shareholder; they hold no votes, no information rights, and only crystallise on the register if they exercise. Retention: a short window makes leaving expensive — which is precisely the objection. Equity that punishes departure operates less like ownership and more like handcuffs, and sophisticated candidates increasingly price it that way. Investor expectation: term sheets rarely mandate any particular PTEP; investors care about total pool size and vesting, and a longer window changes neither.
The Alternatives
Founders designing or refreshing a plan have a spectrum of options, none of which Australian tax law penalises:
- A longer fixed window — 12 months, or a tenure-scaled window (for example, three months per year of service) — at least gives leavers a realistic chance to plan the funding.
- Exercise-to-expiry for good leavers. Vested options simply survive until the option’s ordinary expiry (commonly 10 years from grant) or an exit event, with the short window reserved for bad leavers. The employee exercises when there is liquidity to fund it — often via an exit, where exercise and sale can occur within the 30-day rule so tax lands only when cash does.
- Cashless or net exercise mechanics in the plan, so that at an exit the strike price is netted off against sale proceeds and the leaver never has to write a cheque.
- Board discretion done properly. Most plans already let the board extend a leaver’s window case by case. Discretion exercised ad hoc, after the resignation letter, is a governance and consistency risk; a stated policy is better than a series of favours.
One genuine caution: changing the terms of already-granted options is not a casual amendment. A variation that fundamentally changes a right can have its own tax and legal consequences, and the analysis differs for startup-concession grants where eligibility was priced at the acquisition time. Extending windows prospectively in the plan for new grants is clean; retrofitting existing grants needs specific advice.
The Bottom Line
The 90-day post-termination exercise window is the least examined term in the Australian startup equity stack: a compliance artefact of a US tax provision that has never applied here, preserved by template inertia, and doing real damage to the people startup equity is supposed to reward. Australian law now goes out of its way not to tax employees at the moment they leave — a 90-day PTEP re-creates the forced choice by contract, converting vested equity into a lapse-by-default for anyone without spare cash for the strike and, outside the startup concession, potentially a six-figure dry tax bill. Founders do not have to accept the default. Decide deliberately who your plan’s leaver terms are for — the pool, or the people — and draft accordingly.
Viridian Lawyers advises Australian startups on employee share scheme design and administration, including leaver provisions, post-termination exercise mechanics, Division 83A tax treatment and startup-concession qualification. If your ESOP still carries a template 90-day window — or a departing team member has just discovered theirs does — get in touch.
