A guide based on our recent webinar ‘ESOPs Demystified: Designing employee ownership plans that work.’
For many founders, moving from the early to late-stage of start-up growth ushers in a new era of support. Key founding members have joined the journey, and you likely have a suite of advisors to offer sage insights. However, with new opportunities come new challenges.
Suddenly, the stakes are higher, the challenges more complex, and your once-simple ESOP feels like a puzzle with too many pieces to fit together. In our recent webinar, ‘ESOPs Demystified: Designing employee ownership plans that work’ industry leaders, Adrian Pennino, KPMG Director, and Xavier Keary, Gilbert + Tobin Partner, ran through what considerations founders should be aware of when navigating ESOPs through periods of growth. Read on for a high-level overview of the best ways to manage challenges and avoid common pitfalls.
‘Why does my current ESOP plan need to change?’
Put simply, your business has outgrown it. What worked when you had a team of five won’t necessarily scale when you’re managing a team of fifty across multiple countries. The focus has shifted from setting up an ESOP to managing it effectively, often across jurisdictions and funding rounds.
At this stage, your ESOP becomes a key part of your governance and compensation strategy, and it needs to be managed accordingly. Whether you’re preparing for a Series B, expanding internationally, or planning for an exit, your ESOP should be reviewed and updated regularly. It’s not a “set and forget” tool, it’s a living part of your business infrastructure.
Considerations for managing ESOPs through capital raises and exits
Capital raising can significantly impact your ESOP. New investors may require you to expand your ESOP pool, adjust strike prices, or restructure vesting schedules. These changes need to be carefully managed to avoid diluting existing shareholders unfairly or creating tax issues for employees. It's also crucial to consider how much equity you’re giving away with each round – if the aim is to exit, being conscious of exactly what each stakeholder will receive means you avoid disappointment at the final hurdle.
Secondary share sales and exit events also raise important questions. What happens to unvested options? How are exercised shares treated in a sale? Are employees entitled to participate in liquidity events? These are not just legal questions, they’re cultural ones. How you handle them will affect morale, retention, and the reputation of your business for potential new hires.
It’s also worth considering how your ESOP interacts with your broader compensation strategy. As your company grows, you may need to introduce performance-based vesting, milestone triggers, or differentiated equity packages for senior hires. These changes should be reflected in your plan rules and communicated clearly to your team.
Considerations for managing ESOPs through international expansions
Hiring internationally adds another layer of complexity to your ESOP. Securities laws vary by country, and what’s compliant in Australia may not be in the US, Germany, or Singapore. You’ll need to work with legal advisors in each jurisdiction to ensure your offers are valid and enforceable.
The good news is that with the right structure, you can adapt your ESOP to work across borders. Many companies use a core set of plan rules with country-specific addendums to meet local requirements. Equity management platforms can also help by providing a centralised system for tracking and administering options globally.
Tax is another consideration. Employees in different countries may face different tax treatments on their options, and mobility (e.g. employees relocating) can trigger cross-border tax issues. Planning ahead and getting the right advice can help you avoid surprises and ensure your ESOP remains a valuable part of your global talent strategy.
Common pitfalls for later-stage founders
Watch out for these issues as your company scales:
❌ Failing to update your ESOP as you grow beyond start-up tax concessions: While these concessions make ESOPs significantly more attractive to employees, it’s crucial to ensure you still fit the criteria, and have plans to ensure what happens when you don’t.
❌ Not planning for how ESOPs interact with capital raises, secondary sales, or exits: Big events have big outcomes – not just for you, but for your employees. Being able to provide clear outcomes off the back of these events is essential to growing right.
❌ Offering equity to international employees without checking local securities laws: Australia, Singapore, the US and the EU are different jurisdictions. Knowing what is within your rights in each country means you're able to promise and deliver to staff.
❌ Assuming your original plan rules will work indefinitely - many need to be revised: From little things, big things grow. Make sure your governance and structure grow with you.
❌ Poor communication with employees about changes to their equity or valuation: Building a strong company requires the right people. Be transparent and upfront or avoid reputation damage.
Your ESOP is more than a hiring tool - it’s a strategic asset that needs to be managed with the same care as your financials or product roadmap. As your company grows, so do the expectations of your team, your investors, and your regulators. By evolving your ESOP to meet these demands, you can continue to attract top talent, retain key people, and build a culture of ownership that scales with your success.
If you’d like to learn more about how we can support you in navigating ESOP complexities, get in touch with the KPMG High Growth Ventures team.
If you'd like to catch the full webinar to hear more from our specialists, find the full recording on our events page here.