An ESOP is a pool of equity, usually options, reserved for employees and issued over time under a formal plan. In Australia its value depends less on the percentage granted than on whether the plan is structured to use the ATO's ESS start-up concession, which most eligible startups do.
What an ESOP actually is, cleared of the US baggage
Say “ESOP” to an American and they may picture a trust-owned retirement structure, the kind large private businesses use to hand ownership to staff over decades. That is not what founders in Sydney or Melbourne are setting up. Here an ESOP is an employee share option plan: a pool of options, carved out of the cap table, that the company grants to employees as part of their package and that vest over a set period. When I talk to candidates about a role that includes “ESOP,” this is what they mean, and it is worth saying explicitly on the offer so nobody is picturing the wrong thing.
Companies I place into typically start thinking seriously about setting one up once they are past about ten people, which lines up neatly with the stage I work in: the first finance hire, then the first CFO.[1] Before that the pool is often informal or non-existent; after it, a candidate weighing two offers will ask about it directly.
How big the pool actually is
There is no legal minimum or maximum, but a market range exists and candidates know roughly what it is. A pool set too small reads as stingy at Series A; one set too large without a refresh plan runs out by Series B and forces an awkward top-up conversation with existing holders.
The pool usually tops up at each raise rather than being sized once and left alone, and it is typically carved out of the pre-money valuation, which is a dilution cost the founders and early investors absorb together, not something that dilutes new money.
The tax question decides whether the grant is worth what it says
A pool is only half the plan. The other half is which ESS tax treatment applies, and it changes what the grant is actually worth to the person receiving it. Under a taxed-upfront scheme, tax on the discount is due in the year the options are granted, whether or not there is any cash from them to pay it with. Most startups instead want their plan to qualify for the ATO's start-up concession, which reduces the taxable discount to nil for an eligible unlisted company incorporated less than ten years, with aggregated turnover under $50 million, where the discount on shares is 15% or less of market value (or, for options, the exercise price is at least market value) and the interests are held for a minimum of three years or until the person leaves. Structured this way, tax only arrives as capital gains tax when the shares are eventually sold, not on the day the grant lands.
I go through how the ESS rules actually work, upfront versus deferred, in more detail separately.
The guide I built with the founding CFO of a company that sold for $1.6 billion
The best explanation of how a well-run ESOP behaves at scale did not come from a law firm. It came from Alexey Mitko, the founding CFO of Eucalyptus, who built finance functions from scratch at Canva, Koala and Eucalyptus before Eucalyptus sold for $1.6 billion. I sat down with him and packaged what he had learned into a guide, “Employee Share Schemes (ESOP) for Finance Leaders and Founders,” because the ESOP at Eucalyptus worked genuinely well for the people who joined early.[2] It is a practical read on how to value a grant and what to weigh up when equity is on the table, and it is free to download from the guide.
Presenting it well matters as much as sizing it well
The most common mistake I see is presenting the grant as a bare percentage. Ten percent of a business worth two million dollars and 0.1% of a business worth two hundred million are both real numbers, and comparing the percentages tells a candidate nothing useful about which one they would rather have.
I set out how to present a grant as a range of dollar outcomes instead, which is the version candidates can actually evaluate.
For roles north of $200k, I see the ESOP genuinely move a decision between two similar offers. A strong pool, clearly explained, is one of the few levers a founder has that costs no cash today.[3]
Common questions
Is an Australian ESOP the same as a US ESOP?
No, and the overlap in the acronym causes confusion. A US ESOP is usually a trust-owned structure used by larger private businesses to transfer ownership over time. An Australian startup ESOP is an employee share option plan: a pool of options granted to staff and governed by the ATO's employee share scheme (ESS) rules.
How big should an ESOP pool be?
There is no fixed rule, but Australian startups I see typically carve out roughly 6 to 10% at pre-seed or seed, 8 to 12% at Series A, and 10 to 18% by Series B and beyond, usually topped up at each raise rather than set once.
Do ESOP grants get taxed when they are issued?
It depends on the plan design. Under a taxed-upfront scheme, yes. Most eligible Australian startups instead structure the plan to qualify for the ATO's start-up concession, which reduces the taxable discount to nil, so tax only arrives as capital gains tax when the shares are eventually sold.
When do companies usually set up an ESOP?
In the businesses I place into, serious ESOP planning tends to start once headcount passes roughly ten people, which is close to where the first dedicated finance hire usually lands too.
Does an ESOP actually influence whether a candidate accepts an offer?
For senior roles, yes. A well-explained pool is one of the few things a founder can offer that costs no cash today, and I see it move a decision between two otherwise similar offers, particularly above roughly $200k in base.
References
- From my client work: serious ESOP planning tends to start once a company is past roughly ten employees, close to where the first dedicated finance hire typically lands.
- My ESOP guide, “Employee Share Schemes (ESOP) for Finance Leaders and Founders”, written with Alexey Mitko, founding CFO of Eucalyptus, Canva and Koala.
- From placements I have run: a clearly explained ESOP is one of the few genuine differentiators between two offers at similar cash compensation, particularly for roles above roughly $200k base.
These guides set out how we see it, drawn from the searches we run and the finance leaders we place. They are general information about the market, not financial, accounting or legal advice, and they are no substitute for advice on your own circumstances.