Profit Sharing & Employee Share Plans

The people who own and work in Australian startups display a much more striking resemblance to their US cousins thanks to an increasing percentage of them taking equity as part of their remuneration packages.

Giving your workforce equity is an enticing strategy to retain talented staff, foster workplace culture and reduce pressure on cashflow. The practice has become part of the global tech industry culture as more and more million- and billion-dollar exits turn everyday staff into high net worth individuals.

Employee Option Plan, Employee Equity Plans or…?

Using equity to pay your staff can be done by a number of methods and is known by a variety of different names, such as Employee Ownership Scheme, Employee Share Purchase Plan, Employee Incentive Schemes, Participation Share Ownership Plan and so on. Most likely, you will know them by these acronyms: Employee Share Option Plan (ESOP) or Employee Share Scheme (ESS).

There are slight differences in how these plans are executed, but generally speaking, they have one goal: incentivising or compensating employees with an ownership stake in the business instead of cash.

This is particularly useful for startups who are often sacrificing cashflow in the early days to scale quickly, but also have to compete with larger corporations that can offer higher salaries for top talent.

An Employee Option Plan is a framework for employees to receive or buy shares in the company they work for. Not only is it meant to attract, retain and motivate, but most importantly, it can also align employee interests with those of the company, encouraging everyone to swim in the same direction.

How big is it?

According to the Australian Startup Salary Guide 2021/2022 from talent experts Think & Grow and KPMG High Growth Ventures, almost half of all Australian startup employees, 49 per cent, said an ESOP formed some part of their remuneration package.

Executive roles generated an average $167,000 in equity value with around two-thirds, 64 per cent, participating in ESOP. Forty-five per cent of non-executive employees were granted on average $17,000 in equity options as part of their salary package.

A significant proportion of executive “Chief” and “Head of” roles saw up to 2-3 times of their base salary awarded in equity. In some instances, as much as 10 times their base salary was offered as equity.

Examples of major tech industry figures on the need for ESOP:

• Atlassian made it clear how highly it values ESOP as an incentive to grow the tech talent pool in Australia to the House of Representatives Standing Committee on Tax and Revenue. “As a knowledge-based industry, the technology sector’s lifeblood is its human capital—the people who innovate valuable new products capable of competing on the global stage,” the company said. “Australia’s technology economy will only gain if more talented people choose to enter its ranks via the start-up ecosystem, whether domestically or from abroad.”
• Blackbird Chief People Officer Justin Angsuwat said that Australia and the  US, had a big opportunity to secure previously inaccessible talent because the pandemic had changed perceptions about where highly skilled candidates could work. “The pandemic changed the dynamics of talent pools. They were historically constrained to office locations but the shift to remote work has unlocked massive talent pools right across the US and we’re starting to see this play out in Australia on a more global scale…If all goes well, employees have a huge financial upside through equity — it can be life changing. But equity programs haven’t always been designed in employee-first ways, and are rarely supported with the education needed for employees to fully benefit from it.”

How we can help

The right legal advice is critical for technology companies that want to achieve the four business outcomes necessary for an ESOP to be deemed successful.

Firstly, it must be cost-effective. It’s no use establishing equity incentives if the price of establishing the scheme outweighs the amount of capital it reploys within the business over the long-term. The right tech startup lawyer will be able to strategise this for you.

Secondly, it has to adequately incentivise employees. ESOP isn’t a ‘nice to have’. Employees need to view it as a fundamental component of the incentive structure, on equal footing with the higher salaries competitors may offer, for it to effectively encourage them to align their values and goals with your business and to ‘go the extra mile’.

Thirdly, it must be legally enforceable. Many technology companies have employees based around the world. Employee option plans are regulated by governments and must comply with local regulations. Pulling one off the internet that’s improper for where your employees are or for where your business is located could mean fines!

Fourthly, it cannot expose the business to undue risk. Lawyers for technology companies all have first-hand stories of takeover targets receiving a dream offer, only to have the whole saga held up because the company had botched the ESOP.

All of these business goals can be achieved by putting in place a thorough process with the right legal experts that identifies the ideal cliff, vesting period, exercise rights and overall structure based on your business’s industry, situation and payroll.

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