I would like some advice on how an e-stop should work for a desktop cnc machine. and I ask this with reference to estops in the EU machinery Directive (Page 197)
https://osha.europa.eu/en/legislation/guidelines/guide-application-machinery-directive-200642ec

With regards to the reaction of the system to an estop I am thinking the following should happen
- VFD driven Spindle: power cut immediately
- XYZ Axes: raise the z axis to top, then stop all motion

Q1: should the VFD be set to immediately stop the roation. I have seen some setups where the spindle is allowed to free rotate to a stop
Q2: should the z axis stop immediately or should it rise up to top posiiton?

The product is a cnc control box and is aimed at the maker hobby market, but it needs to be safe, and is still in design stage.
Make the assumption that there may not be guarding around the desktop cnc machine

 

Stop all motion, where there is risk of injury.

 

Most CNC machines will just keep the doors locked until it's safe to enter.

On a spindle, if you just go STO (safe torque off - ie, coast to a stop) it could take a long time to slow down. You could instead do an SS1 (safe stop 1 - a controlled stop followed by STO once it's stopped). This would mean it would be safe much sooner.
For XY axis - assuming it's a vertical machine - you can likely just go STO. The friction in the linear guides and ballscrews would probably stop the axis fairly quickly. That said, if you have the option to do an SS1, it would be better, so the workpiece can't coast into the spindle or tool or the table against the endstops or something like that.
For the Z axis - unless the spindle is perfectly counterbalanced (which is unlikely as you'd need to adapt to every possible took weight), you'll need a brake to hold the weight, OR a lead screw instead of a ballscrew. Main thing here is to make sure it won't drop under its own weight if you go STO on that motor.
And it's not safe to move the Z-axis up after an e-stop is triggered.
You ultimately want to stop all moving parts as quickly as reasonably possible when an e-stop is pressed.

 

Your risk assessment will dictate the safety level required. As stated by others, common practice is to keep access to unsafe areas until monitored motion is confirmed stopped.