TL;DR: Understand how a European share plan compares to that in the United States. Detailed report.
As usual, the US is a leader in pretty much all things startup and startup employee ownership is no different. As an employee of a startup, one would think that their shareholding (ESOP) would be the most critical thing they would care about. Let’s face it, it’s how they get rich too, right? Well… actually no.
Share ownership is something that is widely misunderstood in Asia, but it seems Europe isn’t much more advanced.
In Europe, either startup founders aren’t offering enough talent a meaningful stake in the company, or the talent isn’t asking for it! It’s no surprise that without talent that the likelihood of making the next tech giant is, well, not as high as the Bay Area. Index heard from founders that European employees usually don’t expect stock options. Seriously?
“It’s just not part of our culture. Interview candidates in Paris asked us about meal tickets, not about share options.”
Compare it to their expansion into the USA:
“Our second hire – an Office Manager – asked about share options during her job interview. This would never have happened in France, but Silicon Valley was very different.”
When you think about it, this can sort of be expected. There aren’t all that many exits. Globally, about 70% of all exit volume is just the Bay Area. Another 20% is China… Unless you know your options will be worth something and you have friends that have made cash, why should you care about startup employee ownership? It would be interesting to see what the impact is on salaries and whether staff take a haircut for options? I haven’t seen anything on this.
In the US, it would be common for the first ten employees in a share plan to all be promised options as part of their job offer. In Europe, it may be more like four of these ten. And it’s not unusual to see no equity promise at all.
Index Ventures wrote a report entitled ‘Rewarding talent’ wherein they analyzed 73 companies and 4,000 option grants and here are their key findings.
- European employees own less of the companies they work for than US employees. For late-stage startups, they own around 10%, versus 20% in the US.
- Ownership levels vary much more in Europe than the US. In Europe, employee ownership in late stage startups ranges from 4% to 20%. In the US, ownership is more consistent, as stock option allocation is driven by market forces.
- Employee ownership correlates to how deeply technical a startup is. An AI or enterprise software startup requires more technical know-how than a straightforward e-commerce startup. These employees are more likely to seek stock options.
- Ownership policy details adopted by startups vary between the US and Europe. For example, provisions for leavers, and accelerated vesting following a change in control.
- In Europe, stock options are executive biased. Two-thirds of stock options are allocated to executives, and one third to employees below the executive level. In the US, it’s the reverse.
- European employees still don’t expect stock options much of the time. US employees joining a tech startup with fewer than 100 staff would typically expect stock options straight away. This is much less true in Europe, although expectations are steadily rising.
- European option holders are often disadvantaged. In much of Europe, employees will be paying a high strike price, and they will be taxed heavily upon exercise as well as sale. Leavers often get nothing.
- There is wide variation in national policy across Europe, with the UK most supportive of employee ownership. Regulations and tax frameworks are radically different across Europe. The UK’s EMI scheme is most favorable, better than what is available in the US, and France is also good. Other countries, including Germany, lag behind in our opinion.
If you need an ESOP model for your startup, this is the only one on the net.
I thought this chart was interesting and worth sharing. It’s the evolution of startup employee ownership in US startups across funding rounds. Note the founders end up with 10% in the share plan
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