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. To help founders save time on this, we've created a guide to figuring out the right employee share scheme structure for your startup.

We've partnered with our friend Dan Atkin, a Partner at K&L Gates, to draft these template documents that most Aussie startups can use. 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 an owner of the business — and the best way to do that is to make everyone an owner of the business.
• Australia 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 increasingly see 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, it's your responsibility to get this right.

✅ They’re designed with startups in mind

• These are not generic Employee Option Plan docs — they're 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 invest in your company, we prioritise properly incentivising the team 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 Share Ownership Plan documents

When to use a Startup Employee Share Ownership Plan vs a Loan Plan (LP)

• Provides a decision tree to check if you should use an Employee Share Ownership Plan (ESOP) or Loan Plan (LP) based on criteria such as company age, revenue size, individual ownership %
• Explains how an ESOP and an LP work, referencing key elements 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.

Clause checklist

• A range of alternative clauses to choose from so you can select the right one for your business.
• The clauses are inserted in the ESOP Rules document.

Rules

• Outlines all the key clauses of the ESOP 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.

Letter 1

• A standard letter to employees inviting them to participate in the ESOP.
• Includes high level clauses such as grant date, start date, number of options, vesting dates, tax etc.

Letter 2

• A similar letter to the one above inviting employees to participate, but it includes specific language and information to allow companies to issue the ESOP under new statutory regime granting exemptions to disclosure requirements.

Circular Resolution of Directors

• A standard resolution adopting the ESOP on the terms in the ESOP Rules and ESOP Letter.

If you would like to discuss any of these documents further, or would like some legal advice in relation to your ESOP — 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. The best way to reach him is daniel.atkin@klgates.com.

‍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.