Why is a new approach to employee stock options needed in Australia?

B3GIN Team
31/01/22
B3GIN - Employee stock-options Australia

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Employee Stock Option Plans (ESOPs), Employee Share Schemes (ESS)
  • Globalisation also affects the job market

Until a few years ago, the “war for talent” was local, or even national, with startups competing with large corporations in a limited area.

Today, with an increasingly globalised job market, Australian startups are facing even more competition. More so with the remote-first companies.

In the United States of America, Europe, South East Asia, and all around the world, the lack of talents is one of the most important challenges for the Tech ecosystem to continue growing.

Our team members are the backbone of our startups, regardless of the stage of development.

Whether raising funds or scaling up, attracting, motivating and retaining talent is one of the keys to success.

There are four main levers for recruiting and retaining employees:

  • strategic vision,
  • salary,
  • corporate culture
  • and a financial instrument giving employees an interest in the company’s results: employee stock options.

 

  • What are employee stock options? A quick reminder

Employee stock options give the beneficiary the right, once acquired, to subscribe to a share of the company at a price fixed in advance. This means that the employee who is granted stock options will have the possibility to buy, in the future, shares of the company at a price fixed today.

When used well, employee stock options become a key tool in talent management.

Employee stock options are intended to align the interests of founders, investors and employees. What is the situation in Australia?

Let’s generalise (just) a bit… The lack of success stories in Australia coupled with poor knowledge and the “illiquid nature” of stock options often make them not very attractive.

 

*On the employee side, poor knowledge or bad experiences (we have either read or heard about them) create two ways of thinking: either “I’m going to be a millionaire” or “it’s no worth”. (We have done a study on 150 employees which shows that the average knowledge of employees about their stock options is only 4.5/10).

Some candidates who are offered employee stock options think that this is a subterfuge to get paid less than they should.

Moreover, while in the US there are many (and well-publicised) examples of employees who have made a lot of money from stock options, in Australia the examples are (very) limited.

For example, Bonnie Brown became a millionaire when she joined Google as a part-time masseuse, or Elon Musk’s remuneration at Tesla consists solely of stock options (no salary, no bonus!).

Finally, employee stock options in unlisted companies are not liquid. Companies are staying private (i.e. not going public) for longer than before. And employees, who have an average age of 32, want to monetise their vested stock options to finance the purchase of a house or to get married. The waiting time is too long.
Candidates therefore often prefer to receive a higher salary than to receive employee stock options.

 

* What about founders?

For a founder, the distribution of stock options is a dilemma:

  • either the founder allocates too many stock options to employees and this will reduce the share the founder holds,
  • or the founder allocates too few and the recruitments will be affected: candidates, especially those with a lot of experience, will find that the remuneration package is too low to take the risk of joining the company

Our study also showed that founders often have a partial view of stock options, limited to the one given to them by their investors.

 

*What about investors?

The answer to the founder’s dilemma is often given by investors who set a % of the capital reserved for stock options. Very often, the shareholders’ agreements used are pre-existing, standardised models. Wishing to protect their investments, the VCs add clauses that are not always beneficial to the employees.

 

The situation is unclear for all the involved parties: while employee stock options are intended to align the interests, their current use can be counterproductive. Employee stock options are not in the forefront of startups in their strategy to create a unique culture or to retain talents.

 

  • As part of the 2021–2022 federal budget, the Australian government has introduced tax and regulatory changes to help companies implement employee share schemes (ESS).

Looking in other countries at taxes and regulations for employee stock-options, Australia has a favourable system. And with the latest changes, employees are even more incentivised to receive employee stock-options.

 

 

A few decades ago, a career in a company was very important. Today employees change jobs more frequently. And there is a trend among the younger generation to have a sense of purpose in their company and to be involved.Giving employees the opportunity to be financially involved and sharing the value created is important to better engage talents.

    To (re)align interests, there are avenues to explore in Australia:

    At B3GIN we believe that shared value is a key concept in the success of startups and we help employees to better understand stock options.

    We can mention a few ways to improve the image of stock options:

    – Simple and transparent clauses in the shareholder agreement (e.g. refrain from having a bad leaver clause in the agreement)
    – Have a communication and training plan on stock options
    – Have a stock option plan that takes into account the profiles in the company, the sector of activity and the objectives of the company

    In summary: stock options are a concept which, if well worked out, explained and implemented, becomes a win-win bet.

     

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