ESOP fable: The startup sector's most glamorous — and misunderstood — acronym
Large secondaries by Australian startups like Canva have raised awareness of employee stock option plans. But experts are warning founders that poorly designed schemes can make life difficult for their startups.
The wave of secondary share sales sweeping through the Australian startup ecosystem, led by Canva but also featuring the likes of Safety Culture and Eucalyptus, has thrown the spotlight on Employee Share Option Plans (ESOPs). But despite the excitement over the potential windfalls, experts are warning founders that poorly designed equity schemes can make it harder for startups to raise money down the track, while also resulting in employees leaving money on the table.
With Canva in the process of selling a whopping USD1.5 billion in shares held by early employees and investors, more than a few millionaires are expected to be minted.
Yet despite the well-reported win, big bonanzas for startup employees are more the exception than the rule. Regardless, there are concerns the lack of transparency in employee share option schemes and a lack of education for staff participating in them can also cause problems.
“It needs to be way, way simpler than it is now,” said Kim Hansen, founder of equity-management platform Cake Equity. "In the early days of a startup you can get an inexperienced lawyer, it can be random how they setup the contracts. That will slow down your startup and make it harder to raise money."
