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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.
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:
It can be complicated and expensive for employers to grant stock options to their employees, with different schemes required for each European country.
Tax policies can make it cost-prohibitive for employees to acquire their equity.
Six policy recommendations to encourage employee ownership in startups.