Why most Australian startups getting equity compensation wrong
Equity compensation is widely used in the industry, but I find that something goes wrong between Australian culture and startup culture. I’ve seen this happen in other places as well, but not to the extreme that it does in Australia. Here’s what goes wrong and how it should actually be.
Since moving to Sydney as an experienced tech leader, I have received numerous offers from various startups and VCs to join as a CTO. I accepted some of these offers, particularly those related to advisory roles, but declined most of them. The offers I turned down were often unreasonable and sometimes offensive. For example, one entrepreneur proposed giving me 15% equity in the company after a year if I built all the technology, which included indexing the entire internet and adding an AI model. It is important to note that this company had no product, clients, or income. Another profitable company offered me 2.5% equity without a salary, contingent on transforming their non-scalable business into a profitable SaaS, with the 2.5% equity only being granted “if the SaaS managed to get clients.” A third startup, which had a brilliant idea but only around $1,000 in monthly sales, asked me to join as CTO without any equity compensation but promised “a $1,000,000 payout once we hit $10 million in sales.” The list goes on; I have received even more unreasonable offers from others.
Equity compensation was designed to motivate employees to contribute to the company as if they owned it. The idea is based on the simple understanding that an “owner” of a business would take more responsibility than an “employee.” However, it wasn’t designed to exploit people or to make someone else bear the risk of your company.
Here is a table that summarises how to deal with equity compensation according to the state of your company. I give some details below:
| Product/Value | Paying Clients | Salary Offered | Equity Compensation | Details |
|---|---|---|---|---|
| No | No | No | Don’t! | Non-Useful: Offering equity with zero payment without a product or clients is highly risky and unlikely to attract talent. |
| Yes | No | Yes (Full/Reduced) | High | Useful: Equity compensation can be motivating when the company has a product or value but no paying clients yet. It aligns employee incentives with future growth. |
| Yes | Yes | Full | Low | Useful: When the company has both a product/value and paying clients, equity compensation is effective in rewarding employees and aligning their interests with company success. |
| Yes | Yes | No | Don’t! | Non-Useful: Offering equity without money, while you got paying clients, may undervalue employee contributions and is generally unattractive. |
Useful Equity Compensation Models
- Full Salary + Equity Vested with Milestones/Achievements
In this model, employees receive their full salary while also being granted equity in the company. The equity is vested over time and tied to the achievement of specific milestones or goals. For example, an engineer might receive 1,000 shares once they successfully complete the development of a critical product feature. This model aligns the employee’s financial incentives with the company’s success, motivating them to contribute to key developments. - Full Salary + Option to Purchase Future Shares at a Fixed Price
Employees receive a full salary and are given the option to purchase company shares in the future at a predetermined price, often referred to as stock options. For example, an employee might be granted the option to buy shares at $10 each, regardless of the market price at the time of purchase. If the company’s value increases and the stock price rises to $50, the employee can still purchase shares at the original $10 price, reaping significant financial benefits. This model encourages employees to stay with the company long-term and work towards increasing its value. - Slightly Lower Salary + Future Equity
Employees accept a slightly lower salary in exchange for the promise of receiving equity in the future. This model is effective when the company already has some tangible value, such as a promising product, investments, or a growing customer base. For example, a startup with initial seed funding might offer a developer a 10% lower salary but compensate with future shares once the company reaches a certain valuation or secures additional investment. This model helps startups manage cash flow while still offering employees a stake in the company’s growth.
Non-Useful Equity Compensation Models
- No Company Value, Product, or Paying Clients: Offering Equity as Compensation
When a company lacks value, a tangible product, or paying clients, offering equity in exchange for work is generally not beneficial. For example, if a startup with no revenue or proven concept offers an engineer equity instead of a salary, the equity may ultimately be worthless if the company fails. This model is often viewed as high-risk for the employee and can be unappealing unless the individual is deeply passionate about the idea and willing to gamble on its success. Offering to hire an engineer to pay with future equity of the product that they would build, is unfair and would be understood as underestimating the engineer. - Company with Value and Paying Clients: Offering Only Future Equity
In a scenario where a company already has established value, a product, and paying clients, offering employees only future equity as compensation can be seen as unfair or insufficient. For instance, if a profitable company offers a marketing specialist future shares instead of immediate compensation for their work, it might come across as undervaluing their contribution. Employees may feel that they deserve a more immediate financial reward, considering the company’s current success. This model can lead to dissatisfaction and difficulty in attracting top talent. - Equity Offered in Lieu of Salary for a High-Risk, Early-Stage Startup
When a startup is in its very early stages, without any funding or proof of concept, offering equity instead of a salary can be a poor compensation model. For example, if a founder asks a marketing expert to work full-time for equity alone, with no immediate salary or funding in place, the risk is extremely high for the employee. If the startup fails, the equity will be worthless, and the employee would have effectively worked for free. This model may only attract individuals willing to take on significant risk, which can limit the talent pool. - Equity Compensation Without Clear Vesting Terms or Exit Strategy
Offering equity without well-defined vesting schedules or an exit strategy can be problematic. For instance, if a company promises equity to employees but does not clarify when or how that equity will vest—or how employees can cash out—this can create uncertainty and mistrust. Employees might find themselves with shares that they cannot sell or that have unclear value, making the equity effectively meaningless. This model fails to provide the transparency and security that employees typically seek in equity compensation.
