<aside> 💡 This guide would not be possible without the work of two founders - Alexey Mitko and Jason Atkins. Both are experts and worth consulting if you need guidance in the space. Please do not take this as legal or tax advice, and consult a lawyer before issuing any equity to employees.

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Step 1 - Choose Type of Equity to Issue

💡 In Australia early stage companies will almost always issue Stock Options, feel free skip to Step 2 . More relevant if you are trying to issue equity in other jurisdictions with different tax and corporate security legislation.

What is the difference between Shares, Options or Restricted Stock Units being issued?

• Shares - a piece of the company
• Options - an agreement to be able to buy a piece of the company in the future at a price that is determined now (also known as a strike price)
• Restricted Stock Units (RSU) - not equity really, but a derivative agreement for cash compensation that varies depending on what the share price is doing

What are the key differences between them?

• The key difference is generally around tax liability and when that tax payment falls due.

• A well-structured plan should never make employees have a tax liability when their stock is illiquid.

• For simplicity, we will discuss how to issue Stock Options for early stage employees as it is by far and large the most common for early stage companies.

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Step 2 - How to structure the ESOP? (Assuming Options)

💡Here is standard document for Australian ESOP agreements for early stage companies (current as at 1/08/2022)

What is important when structuring ESOP?

As a founder, it is critical to form a view on the following key terms

1. Vesting - When do the employees ‘unlock’ their equity
   1. Cliff - Period for which no equity vests (usually one year)
   2. Vesting Schedule - the preset time schedule that dictates when employees can take advantage of their stock options (e.g. options vest monthly over three years or 40% vest in the fourth year etc.)
   3. Vesting Hurdle - the conditions that need to be met for equity to vest (e.g. once company achieves $500k of revenue, it doesn’t just have to be the passage of time)
2. Limitations - What are circumstances that affect the employees’ relationship to their vested and non-vested options
   1. Good lever/bad lever provisions - Governs when an employee leaves the company what happens to their options
   2. Sale Rights - Governs what an employee can do with their vested options (e.g. they can’t sell till an exit event)
   3. Voting rights - What control rights attach to the employee options

How do I choose between different structures?

Consider what you are trying to achieve in the equity plan