Incentive Deeds Explained: A Practical Guide For Australian Startups And Small Businesses

If you’re building a startup or scaling a small business, you’ll eventually face a familiar challenge: how do you attract and keep great people when cash needs to stay in the business?

That’s where an incentive deed can make a real difference. It’s a document that helps you set out a clear framework for incentives like performance bonuses, equity, phantom equity or other reward arrangements.

Done well, an incentive deed can align your team with growth, reduce misunderstandings, and help your business navigate change (like someone leaving, a restructure, or a capital raise). Done poorly, it can create disputes, tax surprises, or messy conversations with investors during due diligence.

Below, we’ll walk you through what an incentive deed is, when you might use one, what it typically includes, and how to set it up in a way that supports growth in Australia.

What Is An Incentive Deed (And Why Do Small Businesses Use One)?

An incentive deed is a legal document that records an incentive arrangement between your business and a participant (often an employee, contractor, executive, adviser, or sometimes a founder).

In plain English, it’s the “rules of the incentive” in writing.

Incentives can be cash-based (like a bonus), equity-based (like shares or options), or “equity-like” (like phantom equity). Whatever the incentive is, the deed helps you clearly define:

• who is eligible;
• what they can earn;
• what they need to do (and for how long) to earn it;
• what happens if they leave (good leaver/bad leaver outcomes);
• what happens if your company is sold or raises funds; and
• how disputes are handled.

For startups, an incentive deed is often part of a broader “people and equity” toolkit. Investors and sophisticated hires commonly expect your incentives to be documented properly and consistently.

Is An Incentive Deed The Same As An Employment Contract?

Not quite. Your employment contract sets out the core employment terms (salary, hours, leave, termination, confidentiality, etc.). An incentive deed usually sits alongside the employment contract and focuses on the incentive arrangement only.

If you’re hiring staff (or formalising terms for existing staff), it’s often a good idea to make sure your Employment Contract and your incentive deed don’t contradict each other.

Why Use A Deed Instead Of A Simple Letter?

Many businesses start with a quick “bonus letter” or a short clause in an offer letter. That can work for simple arrangements, but it tends to break down as soon as:

• the incentive has multiple conditions (KPIs, milestones, vesting);
• the incentive is equity or equity-like;
• you need “leaver” rules;
• there’s a change of control (sale of business); or
• you want the arrangement to be binding and workable for future fundraising and due diligence.

A properly drafted deed helps you avoid “we thought it meant X” disputes, and it gives you a clear document to refer to when decisions need to be made. That said, enforceability can still depend on your wider contract suite, how the arrangement is implemented, and whether the terms are consistent with applicable laws (including employment and corporations laws).

Common Types Of Incentives You Can Document In An Incentive Deed

There isn’t a single standard incentive deed. The right structure depends on what you’re offering, your business model, your growth stage, and your appetite for complexity.

Here are some common incentive types an incentive deed can cover.

1. Performance Bonuses (Cash Incentives)

This might be a quarterly or annual bonus based on:

• company performance (revenue/profit targets);
• team performance (delivery milestones); or
• individual performance (KPIs).

Your deed can specify how targets are set, when they’re measured, whether you have discretion to adjust them, and what happens if the person leaves mid-cycle.

2. Commission Or Revenue Share

For sales or business development roles, incentives often look like commission.

The deed can cover important details like what counts as a “sale”, when commission is earned versus paid, clawbacks (if a customer cancels), and any caps.

3. Equity Incentives (Shares Or Options)

Equity incentives can be powerful, but they come with extra moving parts: corporate approvals, shareholder arrangements, and (depending on the structure and the offer) Corporations Act considerations such as disclosure requirements and any employee share scheme relief.

In Australia, equity and options offered to employees may also fall within employee share scheme (ESS) rules for tax. Getting the structure and documentation aligned early can help avoid unexpected outcomes for both the company and the participant.

An incentive deed in this context commonly sets out vesting rules and what happens on exit, but you’ll often also need to make sure the broader company documents support it (for example, your Company Constitution and any shareholder arrangements).

4. Phantom Equity / Phantom Share Arrangements

Phantom equity (sometimes called “phantom shares”) can give someone a reward linked to company value growth without issuing actual shares.

This can be attractive where you want to:

• avoid changing your cap table;
• avoid giving voting rights;
• keep admin simpler than issuing equity (depending on the structure); or
• offer a “value uplift” reward tied to an exit event.

A phantom arrangement still needs careful drafting so the incentive is defined properly and you’re clear about when and how it’s paid (including what “value” means, and whether any taxes are withheld).

5. Milestone-Based Incentives For Contractors Or Advisers

If you’re engaging consultants, developers, or advisers, you might want to reward delivery or outcomes (for example, product launch, successful tender, or enterprise deal).

In that case, your incentive deed should also “talk to” your underlying services agreement so there’s no ambiguity about scope, deliverables and payments.

What Should An Incentive Deed Include? (A Practical Checklist)

While the content will vary, most incentive deed arrangements for startups and small businesses in Australia should consider the following clauses.

Parties And Definitions

This sounds simple, but it matters. Make sure the deed correctly identifies:

• the legal entity granting the incentive (e.g. your company, not a trading name);
• the participant’s correct name; and
• key definitions (e.g. “Vesting Date”, “Performance Period”, “Exit Event”, “Good Leaver”).

Clear definitions reduce disputes later, especially when your business evolves.

Incentive Details: What Is Being Offered?

Your deed should clearly set out:

• the type of incentive (cash bonus, commission, shares, options, phantom units);
• the quantum (amount, percentage, number of units, or formula);
• the measurement method (how you calculate it); and
• the payment or delivery method (when and how it is paid or issued).

If it’s equity or options, you may also need to specify any exercise price or issue price, whether shareholder approvals are required, and any conditions that apply under your constitution, shareholders agreement, or any ESS plan rules.

Vesting, Conditions And Milestones

This is usually the heart of an incentive deed.

Common approaches include:

• time-based vesting (e.g. monthly over 4 years, with a 12-month cliff);
• milestone vesting (e.g. delivery of product milestones);
• performance vesting (e.g. revenue targets);
• hybrid (mix of the above).

You’ll also want to think about how discretionary decisions are handled (for example, whether the board has discretion to confirm whether conditions are met, and how that discretion is exercised and communicated).

Leaver Provisions (Good Leaver / Bad Leaver)

This is one of the most important “risk management” sections for your business.

Your deed can set out what happens to unvested and vested incentives if the person leaves due to:

• resignation;
• termination for cause (serious misconduct);
• redundancy;
• illness or incapacity; or
• mutual separation.

These rules are essential for protecting your cap table (for equity incentives) and for avoiding unexpected payouts (for cash incentives). They also help keep outcomes consistent and defensible across the team.

What Happens On A Business Sale Or Investment Round?

If you’re building for growth, you should assume your business will change shape over time. An incentive deed commonly deals with “exit” scenarios like:

• sale of shares or assets;
• merger;
• IPO (less common for small businesses, but possible for high-growth startups);
• capital raise that changes control; and
• internal restructure (e.g. new holding company).

For example, you may want acceleration (some or all incentives vest early on exit), or you may want incentives to roll over into the new structure. If you’re offering equity or options, you’ll also want to ensure these outcomes are consistent with your constitution, shareholder arrangements and any ESS plan rules.

Discretion, Adjustments And Board/Management Powers

Many incentive schemes need flexibility. For example, targets might need adjustment if the market changes, or if your product roadmap changes.

But discretion needs to be handled carefully. Too much discretion can make the incentive feel meaningless to the participant, and it can increase dispute risk.

Clear drafting can help balance business flexibility with transparency.

Confidentiality And IP Protection

Incentives are often tied to valuable business knowledge and strategy.

Your deed may include confidentiality clauses and, depending on the arrangement, may also reinforce intellectual property (IP) protections.

That said, these obligations are often better housed in your employment contract or contractor agreement (and aligned across documents).

How Do You Set Up An Incentive Deed The “Right” Way For A Growing Business?

If you’re offering incentives, it’s rarely just a legal exercise. It’s also a strategy decision, and it affects your culture, growth plans, and investor-readiness.

Here’s a practical approach that works well for many Australian startups and small businesses.

Step 1: Get Clear On The Commercial Goal

Ask yourself:

• What behaviour are we trying to reward (retention, performance, delivery, sales, leadership)?
• Do we want a short-term outcome (this quarter) or long-term alignment (3–4 years)?
• Do we want to pay cash, offer equity, or offer an equity-like reward?

If you’re not clear on the outcome, it’s easy to build an incentive that creates confusion or costs more than you expect.

Step 2: Check Your Business Structure And Governance Documents

Before you grant equity-based incentives, make sure your underlying structure supports it. For example, if you’re operating through a company, your constitution and shareholder arrangements may need to allow for issuing shares or options, and setting transfer rules.

If you have (or will have) multiple owners, it’s common to align incentives with a Shareholders Agreement so everyone is on the same page about ownership, decision-making, and what happens if someone leaves.

Step 3: Consider Corporations Act And Tax Early (Especially For Equity/Options)

In Australia, equity and option incentives can raise Corporations Act issues (including whether disclosure is required and whether employee share scheme relief applies) as well as tax considerations (including ESS tax treatment and reporting).

From a legal perspective, your documents should be drafted in a way that matches the intended commercial outcome and the way the incentive will actually be granted. From a practical perspective, it’s wise to involve your accountant or tax adviser early so you understand what the incentive could mean for your business and the participant.

This article is general information only and isn’t tax, legal or financial advice. Get advice specific to your situation before implementing an incentive plan.

Step 4: Make Sure Your Employment/Contractor Documents Match

Your incentive deed should not float in isolation. It should align with:

• the employment contract (especially termination, restraints, confidentiality);
• any workplace policies; and
• any contractor agreement (where applicable).

If you’re dealing with staff conditions like notice periods or termination payments, it can also be helpful to understand how payment in lieu of notice works so your exit processes are consistent and compliant.

Step 5: Use A Consistent Template (But Tailor The Deal Terms)

Many businesses want a “standard” deed and then adjust commercial terms for each hire.

This can work well as long as you’re careful about:

• not accidentally promising different things to different people;
• ensuring the deed matches the current plan design; and
• keeping older versions from circulating internally.

Consistency reduces admin burden and helps your business look organised during due diligence.

Common Mistakes With Incentive Deeds (And How To Avoid Them)

Incentives are meant to motivate and retain. But if the paperwork doesn’t match the business reality, incentives can become a source of frustration or disputes.

Here are common pitfalls we see when businesses try to move quickly without a clear framework.

1. Vague Targets Or Undefined KPIs

“You’ll get a bonus if we hit growth targets” sounds fine until you need to define:

• which metric counts (revenue vs profit vs cash collected);
• what period applies; and
• whether targets can be adjusted.

Specific drafting (and a simple calculation method) is your best friend here.

2. No Clear Leaver Rules

Without leaver provisions, you can end up negotiating exits case-by-case, which is time-consuming and inconsistent (and can feel unfair to your team).

Leaver rules don’t need to be harsh. They just need to be clear.

3. Forgetting About Confidentiality And Business Protection

Incentives often go to people who have access to sensitive commercial information.

If the participant is leaving, you’ll want confidence that your business is protected. This is where having the right contracts and policies in place matters (in addition to the incentive deed itself).

4. Not Aligning Incentives With Compliance And Risk

If your incentive is tied to sales growth, make sure your sales practices and scripts still align with the Australian Consumer Law (ACL). Incentives can accidentally drive risky behaviour (overpromising, misrepresenting, hiding fees).

It’s worth ensuring your customer-facing terms, refund processes and marketing claims are compliant, including key concepts like misleading or deceptive conduct and warranties.

5. Overcomplicating The Plan Too Early

Sometimes the biggest mistake is creating a plan that’s too complex for your current stage.

If you’re pre-revenue or early revenue, you may want something simple and scalable rather than a highly customised scheme that needs constant management.

You can always evolve an incentive deed as your business matures (as long as you handle variations properly and keep everything documented).

Key Takeaways

• An incentive deed is a practical way to document incentive arrangements (cash, equity, phantom equity or milestone rewards) for your startup or small business.
• A well-drafted deed reduces confusion by clearly setting out eligibility, vesting/conditions, performance measures, and what happens if someone leaves.
• If you’re offering equity-based incentives, your company governance documents (like your Company Constitution and Shareholders Agreement) should support the incentive structure.
• For shares/options, consider Australian-specific requirements early (including Corporations Act disclosure/relief pathways and ESS tax treatment), and get advice tailored to your situation.
• Leaver provisions (good leaver/bad leaver) and exit event clauses are critical for protecting your business as it grows or changes ownership.
• Your deed should align with your Employment Contract, workplace arrangements, and compliance obligations so it works in real life, not just on paper.
• Getting the structure right early can make fundraising, hiring, and scaling much smoother (and avoids disputes and rework later).

If you’d like help drafting or reviewing an incentive deed for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.