One of the questions we get asked again and again by founders is — “how the hell do I set up an employee option pool”? — this is great as…
Employee options are one of the most important tools a founder has for building a great team.
These schemes aren’t rocket science — but they can be fiddly.
That’s why we’ve worked with our friend Dan Atkin, one of the Partners at K&L Gates, to draft these template documents that can be used for most Aussie startups. These are the same docs we use when setting up Employee Option Plans for our portfolio companies.
Key reasons to get ESOP docs in place
✅ Equity is key
- One of the single best things a founder can do is to get their whole team thinking like they’re an owner of the business — and the best way to do that is to actually make everyone an owner of the business
- Aus is still well behind the US in terms of how prevalent equity incentives are — but this is changing fast
- The best companies in our portfolio are very generous with their options, and the best startup team members are increasingly seeing the benefit of equity compensation.
✅ You don’t want to mess it up
- It’s important to get these docs right as messing them up can lead to costly tax problems down the track — in the worst case, you might wind up lumping your employees with expensive and unnecessary bills from the ATO
- Given many of your team members will have already taken a salary cut to join your company, its your responsibility to get this right
✅ They’re designed with startups in mind
- These are not generic Employee Option Plan docs — they have been specifically designed for use by Aussie startups
- They include all the standard terms we’d expect to see used for startups, including vesting, acceleration etc.
✅ Get it done before a fundraise
- Whenever we back your company, we’ll always want to make sure the team is properly incentivised with equity
- At Seed and Series A stage, we usually like to see an Employee Option Plan of around 10–15% of the company
- If you’ve got a well drafted Employee Option Plan in place before the fundraise, it’ll mean that getting the round closed will be much easier and faster
A guide to the Employee Option Plan documents
Intro — When to Use a Startup Employee Option Plan vs a Loan Plan (LP)
- Provides a decision tree to check if you should use an Employee Option Plan (EOP) or Loan Plan (LP) based on criteria such as company age, revenue size, individual ownership %
- Explains how an EOP and a LP works, referencing key criteria such as vesting criteria, buy-back rights, leaver rights, tax impacts
Tax and Valuation Criteria
- Outlines the conditions that need to be met for your business to be eligible for tax concessions
- Outlines the valuation methodologies that are approved by the ATO, and that you should use to value your business
- A range of alternative clauses to choose from so you can select the most right one for your business
- The clauses are inserted in the EOP Rules document
- Outlines all the key clauses of the EOP plan adopted by the company e.g. vesting of options, treatment of options for leavers etc.
- Includes the Option Exercise notice to be signed by each option-holder
- A standard letter to employees inviting them to participate in the EOP
- Includes high level clauses such as grant date, start date, number of options, vesting dates, tax etc.
Circular Resolution of Directors
- A standard letter adopting the EOP on the terms in the EOP Rules and EOP Letter
If you would like to discuss any of these documents further, or would like some legal advice in relation to your employee option plan — Daniel Atkin (Partner at K&L Gates) is a dream to deal with and always happy to pick up the phone and have a chat.
We’ve worked with him on setting up numerous option plans with our portfolio. Best way to reach him is firstname.lastname@example.org.
Disclaimer — These documents, and any guidance notes within these documents, must not be relied on as legal advice and we recommend that you seek professional legal and tax/financial advice to ensure that these documents are suitable for your specific situation.