Not Optional Event

Why European startups need to offer stock options

A major theme throughout last month’s Not Optional event, which explored how Europe could become more entrepreneurial, was the need for startups to offer stock options.

Speakers at the event argued that employee ownership is key to attracting experienced talent — the people who can make businesses grow and turn startups into scaleups — as well as retaining staff. In order to attract and retain the best talent, more European startups must start offering stock options; this is not optional (hence the name of the event).

Why do stock options help attract talent? They convince people to leave their safe, high-paying job for a riskier role at a startup.

“Attracting talent from multinationals who can offer significant compensation packages is a challenge for startups,” explained Liz McCarthy, CEO of Scale Ireland. “You really have to work hard to sell the opportunity, and that’s where stock options can be a huge tool for startups to attract the kind of talent that can scale and sell their products globally.”

Tyto is certainly aware about the importance of employee ownership. That’s why we have made all our staff partners in its project by giving every Tyto employee share options. We believe it is vital that employees feel ownership of the company and invested in delivering our clients the best possible service.

So why do so few European startups offer stock options? Partly, it is for practical reasons: McCarthy pointed out that some startups cannot afford the legal and professional services required. But more broadly, it is because of government regulation. Europe’s patchwork approach to employee ownership means that it is difficult to bring stock options across borders, and taxation is a major issue: in Germany, options create a “dry income” problem, where employees are taxed the moment they are granted stock, before they even receive any money in their account.

Tyto’s has sidestepped some of the legal and bureaucratic challenges of setting up stock options by working with an innovative new platform called Vestd which is worth checking out.

Index Ventures, who organised the event, have been campaigning on the issue of stock options for years. They recently shared a letter with policymakers, signed by over 700 CEOs, founders, investors and employees of Europe’s startups, calling for them to “fix the patchy, inconsistent and often punitive rules that govern employee ownership”.

There have been some efforts by governments to fix these issues; the German deputy finance minister Jörg Kukies announced during Not Optional that new legislation would soon be revealed reforming stock options in his country. And last year, Ireland made changes to its options scheme to help startups — although McCarthy highlighted that there were still problems.

“The Irish government enabled part-time employees to be granted KEEP share options, but you actually have to work 20 hours a week to be eligible,” she said. “As anyone knows who works in the startup space, some of the most important and experienced people you bring in to scale up a business are often working less than that.”

Could the European Union fix these issues? Unfortunately not. Several representatives from the Commission admitted during Not Optional that, because taxation is controlled at the national level, an international scheme wouldn’t help. Instead, the EU has come up with the Startup Nations Standard, a set of best practices that countries should adopt to foster startup growth. What are these best practices? We’ll examine those next time in this series.

This is the second part in a series recapping the Not Optional event. Part 1 covered why Europe faces a global war for talent.