Not Optional | For Policymakers

The availability of talent is the biggest bottleneck to the growth of European startups.

For Europe to compete with the US, its startups must be able to attract and retain the best and brightest minds, and stock options are a proven route to achieving this. The model has been integral to Silicon Valley’s success since the earliest days: in return for a slice of the pie, talented employees take chances on startups, make salary sacrifices and turn down high paying, secure jobs in public companies.

But stock option rules in Europe have long been structured in a way that makes it hard for employees to benefit, and companies to offer them. This includes excessive bureaucracy, taxing employees too early, and being overly restrictive on what types of companies can benefit.

Not Optional has worked closely with Europe's policymakers for over five years to remedy this. We’ve supported the reform of stock option treatments in over a dozen European countries, including the UK, France, Germany, Netherlands and Ireland, and continue to work with the EU to encourage wider adoption of startup friendly policies.

There's still work to do.

Wide variation between national policies and tax frameworks remain, 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.

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 nonvoting 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.

How stock options nurture innovation and drive economic growth

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, despite progress, 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. 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.

Use your influence to nurture the next generation of European businesses