Start-Up Equity: An Overview.
Our thoughts on the state of Aussie start-up equity!
Equity and ESOP is always going to be a talking point when it comes to start-up life.
Some would argue it’s the only reason many candidates would choose to work in a start-up over a corporate company (I’d disagree personally).
Regardless of what you believe, when looking for a role within the start-up space, or hiring for your own start-up, it’s extremely unlikely that you’ll be able to avoid conversations about equity - yet it is still so misunderstood.
Thankfully, businesses such as Cake are doing their best to simplify equity within the start-up ecosystem, helping founders showcase the true value proposition and use it to their advantage to attract the highest performers, and candidates to truly understand what they may be signing up for.
And recently, Cake released ‘The State of Aussie Startup Equity’ - a report that takes a deep dive into the consensus amongst employees and founders within our very own start-up ecosystem.
It’s an excellent report, and well worth your time if you haven’t read it already.
But today I wanted to attempt to provide some further context and clarity around the attitudes toward equity and ESOP, both positive and negative, as well as take some educated guesses as to why some of the report’s findings are what they are, and suggest what can be done to help improve these finding for 2025 and beyond!
Before getting started, I do just want to make clear that Cake’s report is based on factual data that they have collected.
Whilst my opinions have been formed based on real findings and experiences in my own job, where I parter with 100s of founders and 1000s of candidates, they are still opinions.
I’ve always said that equity is generally perceived as a bit of a bonus by most candidates.
Yes, there are some that will not accept a role without equity on offer.
But in our experience, the majority of candidates just want to know that they have some, but perhaps don’t consider the actual value or upside potential of the ESOP, or the inner workings of what they’ve been offered or now have access to.
For many candidates, I imagine it feels similar to how I feel about the redraw facility on my mortgage…
To be quite honest, I don’t know what it is. I know I have one, and that feels good, it’s probably better to have it than not right? But, ask me what it is, and I’m a bit stumped.
I could guess, maybe I’m right, maybe I’m wrong - not sure.
And looking at Cake’s report, it seems that many candidates feel the same way about their equity.
According to the report, only 50% of employees understand how much their equity is worth (I’d guess it is actually a fair bit lower than this, I’ll explain why in a sec), and only 1/3rd of founders and employees feel that the value of equity is being communicated well.
So let’s jump into the first of those two points.
Only 50% of employees know the value of what they’re being given.
Straight off the bat, it’s an unfortunate fact that we speak with many candidates that are very confidently wrong about what their ESOP is worth, and how it works.
Having those conversations can actually be quite an unpleasant experience, as you speak with a candidate who’s poured their heart and soul into their role over the past 2-3 years, learning for the first time that their strike price is higher than the value of the stock.
I would take an unfortunate guess that a reasonable chunk of the 50% that ‘know the value’ are just under the impression that they know the value, when they do not.
Realistically, it’s almost impossible to truly understand the value.
Sure, you can know all the figures - the amount of options, the strike price of those options, the current valuation of the business.
But even then - does the business you’re joining have plans to become a Unicorn? Or are they content with slow and steady growth over the coming decade?
How long will you be waiting for a liquidity event? One of our clients is currently building a business with the view of an acquisition by 2026, a relatively short while to wait for your effort to be rewarded, whereas other companies have been teasing IPO for years without any sign of that actually happening.
All of these factors come into the equation that determines the ‘value’ of equity.
As an employee, you should ask as much as you can, and as an employer, you will only generate trust, buy in and confidence from your employees or potential employees by being transparent when it comes to the factors that I’ve mentioned.
Secondly, only 1/3rd of founders and employees feel that the value of equity is being communicated well.
For starters, as showcased above, defining ‘value’ is really hard to do. Those in the scene like Scouut, and Cake, can do what we can to help demystify the overall mechanics of equity and the generalised pros and cons, but this responsibility really falls on the employer.
I’ve seen enough start-up job offers to know that employers generally do a really bad job of showing the value of their equity.
Some, I think, are slightly embarrassed.
We’ve seen $6,000 of ESOP in a post Series A company getting offered, for example. And understandably, they were hesitant to truly explain what that was worth to the candidate (f*ck all).
Other founders perhaps don’t quite understand it themselves - or more to the point, they can’t be sure.
A founder may have growth targets or milestones to aim for, but do they really know exactly when they’ll be raising or how much for? We saw valuations from VC firms fluctuate wildly over the past couple of years - almost none of which led to easily predictable outcomes.
To be totally honest, I’m not sure a founder can truly explain the full value of an ESOP offering, as that partly (mostly) relies on things that have not happened yet.
61.3% of employees find equity as an important factor in accepting a role.
20.4% do not consider it important.
18.2% are neutral.
Until I see otherwise, I will always stand behind the fact that cash is king and the most important factor when accepting a role.
In our experience, a start-up offering equity (of any amount) will have an advantage over a start-up that is not offering equity. Our clients that do not offer equity (only about 20% of them in total) find themselves having to pay a fair whack above market to compete.
However, when 2 start-ups that offer equity go head to head, the cash component will be the differentiator more often than not.
Even if the difference in equity is $100K or more - a $10K cash swing will seal the deal (again, showcasing that the value of equity is not being explained properly).
So, as a founder, there are a few things that you could and should be doing to ensure the value of your equity is not going over a candidate’s head.
Be transparent, with everything. Strike price, current valuation of the company, current valuation of the options, money raised so far, future plans to raise, future plans to sell or merge the company, and anything else you can think of to paint a clearer picture.
Ensure your ESOP can be truly life-changing. In our experience, many start-ups will offer such small amounts that the potential upside - even with 10x or higher growth - is generally not interesting.
Reframe your view of the ESOP held by your employees. No longer view it as a salary, and instead view it as them making an investment into your business. Talented people do not need to be grateful for the fact that you pay them. You should be grateful that they chose to build your business, and not your competitor’s.
And of course, consider utilising a tool like Cake, that allows employees to log in and view real time updates on their equity status.
Finally, I just wanted to address a question that I get asked regularly.
“Can we pay less if we offer equity”
Probably not.
In my experience, you ideally need to be pushing close to 1% equity to be able to really enter a salary negotiation with room to manoeuvre.
Mostly, businesses offering this kind of % will be Seed or pre-Seed stage start-ups, with less than 10 employees.
Beyond that, you’re unfortunately going to be lumped in with heavily cashed up Series A start-ups (who generally pay extremely well, they will be well in line with figures showcased in our recent salary guide) and beyond, meaning there is too much competition to get away with much, if any salary negotiation (with high performing individuals at least).
There are ways to increase your odds, and Scouut has a fantastic track record of getting offers accepted at the first time of asking (~90% acceptance rate), but that’s where we get to flex our muscles, so you can reach out for more info on that one ;)
Thanks for reading!
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For those that are new to this Substack, I post (mostly) fortnightly content, addressing nuance, challenges and secrets of recruiting some of the most talented engineers and designers into Australia’s best start-ups & scale-ups.
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Matt@Scouut.com.au // 0477 622 408