Hi guys,
Welcome to a special Christmas edition of After the Cap Raise 🥂 🎉
If you’re like me, the break between Christmas and New Year is my favourite time of the year. It’s one of the few times you can get some clear air with everyone offline, which in theory means you can truly switch-off. However, I find many Founders relish this time period to work through those important, chunky items they keep putting off without the distractions.
My wife was onto this years ago when she organised our honeymoon over the break. She wisely chose Cook Islands as our destination, 1. Because it is beautiful; but 2. Because the internet connection is so poor I couldn’t do work even if I wanted to. It was an amazing break (although I may have still snuck a few HBR articles while sipping cocktails by the pool…).
If you do log on during the break and start working through some of those big items, there’s one thing I would recommend adding to the list – sorting out a good employee share plan (feel free to pour yourself an Aperol Spritz if you want to at make this activity a bit more festive).
In Australia, I think ESOPs are one of the most misunderstood, poorly executed, but also potentially extremely valuable tools Founders have in their kit bag to help accelerate their growth.
No founder, no matter how brilliant their business idea or how capable they are, knows all the ins and outs of the journey ahead. And there’s no way they can do it without building a high-quality team around them.
I honestly believe the difference between a good founder and those who are able to build a truly scaleable business are those who are able to attract, develop and manage high-performing talent. Whilst Paul Graham and Brian Chesky’s polemic on ‘Founder-mode’ had its time in the sun last year (with many points I agree with), the reality is a scaling business needs lots of people and bringing on board higher quality people increases your likelihood of success.
Which brings us to ESOPs. Born in the United States, startups have historically employee share schemes as a way to attract and motivate talent.
First though a few home truths about your ESOP:
They rarely end up being as valuable as you hope
ESOP’s are a powerful incentive, but they rarely result in the big pay day for the team that we all hope. When I sat down to write this newsletter, I planned on listing out some of the success stories I had seen from Founders I have worked with and the Australian ecosystem more broadly. But then I drew a blank. The reality is these success stories are few and far between.
I had one client who successfully exited early in 2025 for eight figures. The Founder got a great exit and 5 or 6 of the early staff shared in a few million dollars which was a great outcome for them, but hardly the riches you hear from early Silicon Valley employees. The company was also bootstrapped from founding to exit, so you wonder whether the lack of VC investment helped to achieve this outcome.
In Australia, Canva represents the paradigm local case for ESOP at its finest, however Canva is far and away the biggest startup success story, and definitely the exception rather than the rule. Be that as it may, many Canva employees enjoyed the fruits of a liquidity event after a secondary share sale in 2025.
If you’re a Founder who wants to read about a company who did ESOP well, I’d encourage you to study Afterpay’s approach. I have met a number of ex-Afterpay employees who did very well out of their employee shares, which is a testament to how the company scaled, but also how they prioritised stock-based compensation.
Again, Afterpay is somewhat unique and was famously shunned by VCs early on due to restrictions on many Aussie VCs investing in fintech. The founding team instead decided to pursue a public listing on the ASX in 2016. This difference may have contributed to the success of their employee share schemes.
And secondly:
Employees don’t value their ESOP as much as you think they will
Having rolled out an ESOP myself to hundreds of employees and worked with dozens of companies who have done similar, a consistent theme is that employees don’t value it as much as Founders assume. I think this comes down to a combination of a lack of understanding of what an ESOP is and how it actually works, as well as the limited examples of success mentioned above.
Many employees currently view ESOP as a nice to have, but rarely does it change behaviour. If you asked employees whether they would prefer to take ESOP or the cash at today’s share value, I hazard a guess most would take the small amount of cash over the potential upside.
With all this in mind, ESOP remains important to get right. So let’s move on to how to actually structure ESOP and offering it to your staff.
Firstly, on structure. Most startups are able to offer shares under something called the ‘startup concessions’ which allows employee share schemes to be taxed differently to standard employee share schemes. It is a really positive scheme that avoids employees having to pay tax until their shares actually result in a cash sale, avoiding them having to put their hands in their pocket with actually receiving the benefits.
All shares or options offered to employees need to be done at ‘market value’. Most in the startup world would consider this to be the last capital raise valuation, however the startup concessions allow for different methodologies. The main of which is a ‘Net Tangible Asset Value’ - essentially the total value of all your assets, minus all your liabilities. For most startups, this NTA is often very low, much lower than the capital raise value you have raised at.
This leaves Founders with two choices:
Offer shares at market value aligned with your most recent capital raise. This is the model you often see in the US and allows employees to share in the upside of the valuation growth from the day they start to the day they depart. While it is probably the fairest option, it can be flawed. If you end up selling below your last raise value, which I have seen. a number of times, employees end up with nothing.
Offer shares under an NTA valuation - more often than not this will result in a valuation much lower than the last raise value, and typically only a few cents. I actually much prefer this option. If your goal is to motivate your staff by offering them equity, why would you not give them these options at the lowest possible price?
And while we are talking about legals and structure, please get a lawyer to pull together your documentation. I have lost count of the number of issues I have encountered down the track from Cake or AirTree Open Source VC templates being used early on. The templates are fine, but rarely hold up as you scale. While a good ESOP will cost you in the vicinity of $5k, I think it is money well worth spending to get it right.
Then we come to the real difference between a standard ESOP and one which truly motivates - how it is presented to employees.
Below are some tips I would consider in the roll out of your ESOP:
Sell the dream. It is your job as a Founder to articulate to your people what the ESOP could become. And this is not just “it could be worth millions one day!”. It is about constantly selling your vision for where you see the company heading, showing the team progress against those goals and sharing details about the company’s traction.
Make a big deal of it. Too often ESOP documents get issued and forgotten about. You should be constantly talking about the new offers, celebrating when team members shares vest. At my startup we had three year vesting and every time a new staff member became a share holder we would have an all-company presentation - we wanted everyone to know it is a significant milestone.
Treat your employee options holders like shareholders. Sending out an update to investors? You should be including your employee option holders. Start making them feel like they are a part of the journey and a true shareholder.
Get creative. There’s no rule that says that you need to offer all employees the same equity under a 1 year cliff and 4 year vesting schedule. Think about the things you value as a company and use equity to help drive it. At WithYouWithMe we used to give our best employee of the quarter an additional chunk of equity. We also had ‘bounty list’ of really important projects which we wanted completed, but never hit the top of our priorities. If employees wanted to get stuck in and work on these projects, they would be rewarded with additional ESOP. It was out way to keep employees motivated while hitting company milestones.
This is the tip of the iceberg when it comes to ESOP and I could talk about it for hours. But we’d need a second festive drink for that. In the meantime, I encourage you to spend some time thinking about how you design something that works for you in order to put together something that ultimately inspires your employees.
For a deeper dive on startup equity, former Eucalyptus founder Charlie Gearside has a solid breakdown on YouTube here, with a compelling argument for why ESOP is a key lever for future wealth creation in Australia.
There are also ample resources published by Aussie VC firms including Airtree as well as Eucalyptus’ alumni Alexey Mitko’s take on startup equity so you can compare approaches.
Until next time,
Luke Rix and the KC Ventures team
P.S. If you’re a Founder looking for support with your forecasting, or any finance needs, hit me up at [email protected]. We see how different companies approach ESOP, which can help inform your own approach.