THE ESOP
CLARITY SHEET
Everything you need to understand about
an equity offer in one document.
When surveyed, roughly 50% of startup employees in Australia feel like they’ve been ‘scammed’ by ESOP. Not all employers act in bad faith, but ESOP is complex, the information gap is enormous, and most employees don't know what to ask, let alone what they’re signing up for.
This document aims to close that information gap. Each question and its accompanying answer directly affects what your equity is actually worth. If you're an employer filling this out, you're signalling that you take transparency seriously. If you're an employee bringing this to a conversation about ESOP, you're not overstepping, you are just doing reasonable due diligence.
Section 1
WHAT YOU'RE GETTING
The raw facts about your equity grant.
01
How many options are being granted, and what percentage of the company (fully diluted) does this represent?
The number of options on its own means nothing - 10,000 options could be 1% or 0.001%. "Fully diluted" means the total of all shares on issue plus all options in the pool, allocated or not. Your percentage is calculated from that total.
02
What is the exercise (strike) price per option, and what would it cost in total to exercise the full grant?
The strike price is what you pay per share to convert options into actual shares. Your upside is the gap between this price and the share price at exit. The total exercise cost tells you how much cash you'd need to pay out of pocket to purchase the shares.
03
What was the company's most recent valuation?
This lets you estimate what your percentage might be worth today, on paper. Early-stage valuations reflect what investors were willing to pay at the last raise. Ask whether this is pre-money (before the investment) or post-money (after).
04
When do the options expire?
Options don't last forever. If they expire before the company has a liquidity event and you haven't exercised, they're gone, regardless of what the company is worth. Check whether the expiry runs from the grant date or the vesting date.
Section 2
WHEN YOU EARN THEM
Your options aren't yours until they vest.
05
What is the vesting schedule, and is there a cliff?
Vesting is the process of earning your options over time. The cliff is the minimum period before any options vest at all - if you leave before the cliff, you get nothing. After the cliff, options vest at a regular cadence (monthly, quarterly, or annually).
06
Does any vesting accelerate if the company is acquired?
If the company sells before you've fully vested, you need to know whether your unvested options accelerate (vest immediately), lapse (you lose them), or continue under new terms.
Section 3
IF YOU LEAVE
What happens to your equity when your employment ends.
07
If I leave voluntarily, what happens to my vested options? How long do I have to exercise them?
When you leave, unvested options almost always lapse. The critical question is what happens to the options you've already earned. Some plans let you hold them until exit. Others require you to exercise (pay the strike price in cash) within a fixed window - often 90 days. If you can't afford to exercise, you lose them.
08
What are the good leaver and bad leaver definitions?
Good leaver (resignation, redundancy) and bad leaver (misconduct, breach) provisions determine how your vested options are treated. Under bad leaver clauses, even vested options can be forfeited or bought back at a discount.
Section 4
WHAT IT'S WORTH
The factors between the headline number and what actually reaches you.
09
How much capital has the company raised in total, and do investors hold liquidation preferences?
Liquidation preferences mean investors get their money back before common shareholders (including option holders) receive anything from a sale. The total raised tells you the size of that preference stack. A 1x non-participating preference is standard. Anything above 1x, or participating preferences, significantly reduces what's left for you.
10
What is the current ESOP pool size, and is it expected to increase at the next round?
The ESOP pool is the total equity set aside for employee options. When it's expanded (usually at a funding round), all existing shareholders are diluted - including you. Dilution means your percentage of the company decreases as new shares are created, even though your number of options stays the same.
11
Is there any path to selling shares before an IPO or acquisition?
Shares in a private company are illiquid - you can't sell them on a market. Unless the company facilitates a secondary sale, buyback, or tender offer, your only path to value is a full exit event. That could be 5, 10, or more years away - or may never happen.
Section 5
TAX & YOUR RIGHTS
What this costs you beyond the strike price, and what protections you have.
12
Does this grant qualify for the ESS startup concession?
The ESS startup concession is an Australian tax benefit. If it applies, you pay no tax when you receive or exercise options - only capital gains tax when you eventually sell shares. If it doesn't apply, you may owe tax at your marginal rate much earlier, potentially when you leave the company - even if you haven't sold anything.
13
Can I see the full ESOP plan rules?
The offer letter is a summary. The plan rules are the legal document that governs everything - leaver provisions, buyback rights, board powers, amendment clauses. You're being asked to accept a financial arrangement, and you should be able to read the document that governs it.
14
How will I be kept informed about the value of my equity and any changes that affect it?
You should know how and when you'll receive updates - whether that's annual statements, access to a cap table platform, or direct communication from the company when material events (like a funding round) change your position.
Reference
GLOSSARY
Options
The right to buy shares at a set price in the future. Not shares - a promise that you can buy shares later.
Strike / Exercise Price
The price you pay per share when converting options into shares. Your profit is the difference between this and the share price when you sell.
Fully Diluted
The total shares that would exist if every option, warrant, and convertible instrument were converted. This is the real denominator for your ownership percentage.
Vesting
Earning your options over time. Until they vest, they're not yours and can't be exercised.
Cliff
A waiting period before any options vest. Leave before the cliff and you get nothing.
Dilution
When new shares are issued, your percentage decreases even though your number of options stays the same. The pie gets bigger; your slice gets proportionally smaller.
Liquidation Preference
Investors' right to get their money back before common shareholders receive anything from a sale.
Good / Bad Leaver
Categories that determine what happens to vested options when you leave. Good leavers usually keep theirs. Bad leavers may forfeit them.
ESS Startup Concession
An Australian tax benefit - no tax on grant or exercise. You only pay capital gains tax when you sell the shares.
Post-Termination Exercise Period
The window after leaving a company in which you must buy your vested options or lose them.
Cap Table
The record of who owns what in the company - every share, option, and convertible instrument.
Secondary Sale
Selling your shares to a private buyer before the company IPOs or is acquired. Not always permitted, and usually requires board approval.