Atlassian takes stock, other Aussie start-ups have few options

As Australian software champion, Atlassian, is expected to list on the Nasdaq later this year, are employee stock options a viable option for other Aussie startups?
Written by Mahesh Sharma, Correspondent

The first time I visited the offices of Australia's most successful tech startup Atlassian, it wasn't to interview the two famous founders that recently displaced disgraced mining billionaire Nathan Tinkler from the top of the BRW young rich list.

I was there to see Joris Luijke, who as VP of talent is responsible for Atlassian's arguably most important asset: People.

Our discussion canvassed the human texture of the Aussie software pioneer, which strives to attract the top staff to fabricate a successful company culture. A key detail was the employee stock options plan (ESOP), a little-known but critical part of the corporate culture, and a key weapon in the talent war against the big banks and corporate firms.

Stock options are rights to company shares, which accrue in value as a business grows in wealth. They empower employees with a stake in the company's future, and, when combined with performance targets, help align all participants to a single goal.

Atlassian offers the incentive to all of its employees — from the receptionist to top executives.

"Any company needs to create an environment where people love to work, and where they can be very successful," Luijke said, accented in his native Dutch. "If a product is released two months earlier, we can record the sales two months earlier, we get renewals two months earlier. Everything snowballs."

For an employee who is unsure of whether to join a startup, the promise to share in future riches is an incentive on par with the huge salaries and cash bonuses offered by the big banks and large corporate firms.

"Any employee can leave us tomorrow," Luijke said.

"At Atlassian, any HR managers, the executive team, all we think about every day is talent, and how we can keep that talent. For us, that's everything.

"The ESOP has been very successful."

However, it hasn't come cheap.

The software developer, like all Australian startups and companies, must pay tax when the stock options are issued. Luijke estimates that an AU$20,000 package might attract AU$4,000 tax upfront. This is unlike other developed economies, where stock options are classified as capital gains and taxed when they are "cashed in".

"It was a big decision for us, because we want people to feel that if Atlassian grows, they grow, and can feel the direct return," he said. "If they put in the extra hours that one time, staying back until late without being asked, creating value for the company, we want to acknowledge that. We want to incentivise that behaviour for people to go the extra mile."

The highly profitable software company — it has an online, automated sales model that eliminates the need to employ costly sales staff — can afford to pay the tax, Luijke said, but he believes financial and regulatory hurdles prevent other Australian startups from introducing their own employee share schemes.

Later this year, Atlassian is expected to complete an initial public offering (IPO) on the Nasdaq stock exchange, where shares in the company can be purchased by retail and institutional investors.

Atlassian stock options have multiplied in value as the company grew from a two-man startup founded in 2002 on a $10,000 credit card debt, secured a US$60m investment from Facebook investor Accel Venture Partners in 2010, and is today a global organisation with over 500 employees, projects over $100m in revenue, and counts most Fortune 500 firms among its 20,000 customers.

The faith in the ESOP is about to pay off big time, and not just for founders Scott Farquhar and Mike Cannon-Brookes, who met in the late '90s at the University of New South Wales: The IPO will deliver a windfall for Atlassian employees.

But the government's laws mean that other startups may not be able to afford the privilege.

Tomorrow: The government tax policy that shifted the goal posts for Aussie startups.

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