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Vibrant start­up ecosys­tems can bring enor­mous eco­nom­ic ben­e­fits in terms of inno­va­tion, job cre­ation, and pro­duc­tiv­i­ty growth. As a pol­i­cy­mak­er, your actions can be the cru­cial dif­fer­ence between an ecosys­tem that thrives, and one that fails. 

Over the past decade, poli­cies designed to sup­port star­tups have focused on the lack of invest­ment. The good news is there is no longer a short­age of cap­i­tal for tru­ly ambi­tious founders. There are more seed and ven­ture cap­i­tal firms active in Europe than ever before, and many of them are flush with funds and eager to invest.

Today, the avail­abil­i­ty of tal­ent, not the lack of cap­i­tal, is the biggest bot­tle­neck to growth of Euro­pean startups.

Europe’s excel­lent edu­ca­tion­al insti­tu­tions pro­duce a large pro­por­tion of the world’s most promis­ing soft­ware engi­neers, data sci­en­tists and design­ers. These indi­vid­u­als are in high demand from the largest and most deep-pock­et­ed cor­po­ra­tions, includ­ing those of Sil­i­con Val­ley and Wall Street.

Star­tups are unable to com­pete for this tal­ent with salary and ben­e­fits alone. But they can offer employ­ees a mean­ing­ful own­er­ship stake, in the form of stock options – reward­ing the risk employ­ees take with a young unproven busi­ness with a promise of a pay­out should the start­up succeed.

While employ­ee own­er­ship is rou­tine­ly used in Sil­i­con Val­ley to attract and retain tal­ent need­ed by star­tups with lim­it­ed cash, but near lim­it­less poten­tial, in Europe it is offered incon­sis­tent­ly and at far low­er lev­els. On aver­age, employ­ees of US star­tups own twice as much of the com­pa­nies they work for com­pared to their Euro­pean counterparts.

"I will build on the Commission's 2016 Start-up Initiative and Startup Europe programme, looking at the possibilities for an easier EU-wide company formation system, access to high tech workers from within and outside the EU (employment visa) and taxation referral of employee stock options at the time of divesting."

Fur­ther­more, Euro­pean poli­cies all too often penalise busi­ness­es and employ­ees for such incen­tives, with wide vari­a­tion between nation­al poli­cies and tax frame­works cre­at­ing a high­ly frag­ment­ed pic­ture across Europe.

We believe that clos­ing this dis­par­i­ty, and cre­at­ing a lev­el-play­ing field across Europe, will boost the growth prospects of star­tups and help entre­pre­neurs secure the best tal­ent. While entre­pre­neurs and investors need to do their part to increase the stake giv­en to employ­ees, pol­i­cy changes are crit­i­cal to mak­ing such incen­tives fea­si­ble and attractive.

The treat­ment of stock options varies wide­ly across Europe. Some coun­tries, such as Esto­nia, the UK, and France, have reg­u­la­to­ry and tax regimes which are at least as favourable as those in the US. The major­i­ty, how­ev­er, includ­ing Ger­many and Spain, lag behind.

Cur­rent poli­cies dis­cour­age stock options on two levels:

For com­pa­nies

It can be com­pli­cat­ed and expen­sive for employ­ers to grant stock options to their employ­ees, with dif­fer­ent schemes required for each Euro­pean country.

For employ­ees

Tax poli­cies can make it cost-pro­hib­i­tive for employ­ees to acquire their equity.

Six pol­i­cy rec­om­men­da­tions to encour­age employ­ee own­er­ship in startups.

  1. Cre­ate a stock option scheme that is open to as many star­tups and employ­ees as pos­si­ble, offer­ing favourable treat­ment in terms of reg­u­la­tion and tax­a­tion. Design a scheme based on exist­ing mod­els in the UK, Esto­nia or France to avoid fur­ther frag­men­ta­tion and complexity.
  2. Allow star­tups to issue stock options with non-vot­ing rights, to avoid the bur­den of hav­ing to con­sult large num­bers of minor­i­ty shareholders.
  3. Defer employ­ee tax­a­tion to the point of sale of shares, when employ­ees receive cash ben­e­fit for the first time.
  4. Allow star­tups to issue stock options based on an accept­ed​‘fair mar­ket val­u­a­tion’, which removes tax uncertainty.
  5. Apply cap­i­tal gains (or bet­ter) tax rates to employ­ee share sales.
  6. Reduce or remove cor­po­rate tax­es asso­ci­at­ed with the use of stock options.

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