Startup equity compensation (ESOP) tips & best practices from Vow’s ESOP plan
We’ve worked hard to make our ESOP the best it can be to ensure our employees participate in Vow’s future success. Now we want to share some of its key features with the world.
There are many things we all want out of a high quality work environment — a mission we care about, values we align with, autonomy over our work, coworkers we respect and who respect us, and much more.
No matter how good these things are, we also know that we need to be fairly & effectively compensated for our work, to meet our own financial needs, those of the people who depend on us, and to be able to direct funds towards the causes & initiatives we care about. There’s absolutely nothing wrong with caring about our compensation and, as employees, we should have the tools & knowledge to effectively champion for fair compensation in our workplaces.
We believe all of this at Vow, which is why we’re sharing the ways we’ve structured our employee stock option plan (ESOP) for the benefit of employees.
We’ve worked hard to make our ESOP the best it can be to ensure our employees participate in our future success as a company, and want to share some of its key features. By doing so, we’re hoping these features become standard practice across the Australian startup ecosystem and beyond, for the benefit of startup employees everywhere.
A bit of additional context — I myself (Soroush) have had both (a) financially rewarding and (b) incredibly challenging situations with ESOPs over my 10+ year startup career. It was these experiences that made me insist on putting in place these employee-friendly ESOP features from the get-go at Vow, and why I’m excited to share these with the world :)
One of Vow’s core compensation principles is that “everyone is an owner”, which means every full-time employee at Vow is provided equity compensation, without exception.
In the economic system we live in, owning assets (also known as “equity”) is the most effective way for people to grow and secure their financial future. Given Vow is built by its employees through their hard work everyday, it’s also only fair that they meaningfully participate in our future financial success. Owning equity in the company means our employees benefit in a number of potential future scenarios — from a future listing of Vow on a stock exchange (i.e. IPO), a sale of the business, a tender offer to buy employee shares, or by participating in Vow’s future profits.
Key ESOP features for Vow employees
Let’s get into the some of the features we’ve put in place in our ESOP plan:
Transparent formula for calculating equity
All share options at Vow are calculated off a transparent formula, based on transparent pay bands, visible to all employees and shared with prospective hires. Pay bands are developed and regularly market adjusted using benchmarks from across a cohort of peer employers, using high quality third-party data wherever we can find it.
No option expiry
Vested stock options never expire, even after an employee leaves Vow. Employees have earned these shares through years of service and we don’t see any good reason they should lose these shares.
This isn’t standard practice, so watch out — many employers have ESOP policies by which options expire after a set period of time following an employee departure, unless that employee pays cash out of their own pocket to exercise those options.
Narrow “Bad Leaver” clause
There are specific situations under which an employee can have their vested options forcibly repurchased by the company. Some of these situations are reasonable, for example in the case of fraud or a serious crime.
However, companies often make these clauses incredibly broad, using them to enforce things good for the company but bad for the employee, such as non-competes. We don’t think stock options should be used this way, so we don’t at Vow.
No money upfront required from employees until liquidity event
In many startups and jurisdictions, you can be asked to pay a significant tax bill and/or option “exercise cost” before you’ve actually seen any liquidity (i.e. cash sale) of your stock options. This can sometimes be in the hundreds of thousands of dollars — not a small contribution!
What’s even more crazy about this is that it’s possible to pay this hefty bill, only for the stock sale gains to never be realised by you. So you can end up paying the company or tax for gains you never end up making. Talk about putting employees in a bad situation! While the details of this financial situation are a bit too complex to delve into in this article, the important takeaway is that tax & exercise costs are a serious and common risk to startup employees.
At Vow, we’ve structured our equity so that this shouldn’t happen. We do this by (a) ensuring our stock options qualify under the Australian government’s employer share scheme (ESS) tax concessions and (b) by ensuring employee equity doesn’t expire, meaning you don’t need to worry about exercising your shares until their is a real liquidity event.
(An important disclaimer on this one: we work hard to ensure tax bills are minimised for our employees, but obviously can’t plan for every possible tax situation and aren’t tax professionals ourselves. Always to seek professional tax advice for your specific situation.)
Regular equity refreshers
Every performance review cycle, we reward our top performing team members with additional stock options for good work. To ensure fairness, we provide these performance grants via a rigorous, company-wide process that normalises ratings across different managers.
Wrapping up & takeaways
We hope this is helpful to startup employers and employees everywhere thinking about equity compensation best practices.
If you’re a prospective or current employee, do your homework and make sure your company is matching these ESOP best practices or is otherwise working to ensure fair and meaningful equity for you and your fellow employees.
If you’re a startup founder or leader, make sure you’re doing your homework to ensure these best practices and more are in place to fairly compensate your team members and protect them from unnecessary financial stress.
And if you want to tackle climate change, create incredibly delicious new food experiences, work on some of the coolest scientific, engineering & operational challenges in the world, and do it all at a world-class workplace that cares deeply about its employees, check out Vow — we’re a cultured meat company that’s working to create better meat for meat lovers 🍗.
For those looking to move to sunny Sydney, Australia ☀️🇦🇺🦘 where our HQ is located, we do provide visa & relocation support for many of our open roles.
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Please also reach out any time with feedback or questions about this post — we’d love to hear it 🙂.
