January 20, 2020

Europe loosens rules on stock options, but employees are still sceptical

France joins the wave of countries loosening rules on stock options, but employees still prefer hard cash.

Photo by Adolfo Félix on Unsplash

France is today unveiling a series of small changes to rules on employee stock options to make it easier for French startups to compete with US rivals and big corporations in hiring staff.

The changes to French stock option rules — including lowering the price at which they can be offered to employees and extending a programme with friendlier taxation to foreign companies with employees France — will make the country one of the most startup-friendly places in Europe, according to Not Optional, a campaign backed by 500 European founders that has been lobbying share option reform.

Stock options policies were singled out as a major barrier to European tech growth.

Strict or difficult-to-implement stock option rules are seen as one of the reasons — alongside availability of capital — why Europe has struggled to keep up with the US in creating large tech businesses.


“Stock options policies were singled out as a major barrier to European tech growth at last year’s World Economic Forum, so it is encouraging to see the progress that has been made in the last year,” says Martin Mignot, partner at Index Ventures, which backs the Not Optional campaign.

“France has a clear ambition to be a world-leading country in technology,” says Cédric O, French minister of state for digital affairs. “To achieve it our tech ecosystem needs to be deeply international. That’s why we have adopted these key measures for foreign talents and startups. Now we would like this national initiative to become a pan-European one.”

After years of stagnation, recently there have been a series of moves around Europe to reform strict, heavily taxed or difficult-to-implement share option rules, which have come to be seen as a hindrance to startups looking to scale.

Ireland has also recently brought in small changes to its stock option rules, and the new Finnish government is considering changes to the way stock options are taxed, with a new regime expected to be brought in in the first half of this year. In Germany, the German Startups Association has started a campaign to lobby for change (more details below ?).

Thierry Breton, the European commissioner for Internal Market and Services, also recently mentioned stock options in Commission hearings, a sign that the issue is on the Brussels agenda.

But do employees care?

Many European tech employees are, however, at best ambivalent about stock options. When we asked Sifted readers about their attitude to options we mostly heard negative stories.

“In my experience, European candidates don't really weigh stock options as high as they should,” says Jonathan Barker, head of people operations at blockchain platform Status, and former head of staffing for Google in Europe, Middle East and Africa. He says this is in part because European staff don’t always understand options.

I've been offered equity by companies and I avoid it.

“I've had some real battles to explain/educate stock options/grants and their realistic value to candidates,” he says.

Anh-Tho Chuong, an angel investor at Ajna Partners based in France, believes there is a communication problem about options in many startups (read the full piece here).

But it may also be that there are relatively few exits in European tech, so being able to cash in seems a distant prospect.


Some employees have had negative experiences with options. Peter, who works at a fintech startup, tells Sifted why he became disillusioned:

“My first job in startups I took options because they were a 'struggling' startup and were trying to keep running costs and wages low,” he says. “I believed in the company at the time so I took them, and they seemed pretty valuable based on the rounds they were raising.”

The company promised to issue more shares throughout the year but then failed to do this. Talent began to leave, as did Peter, two years later.

“The company has since had to do a down round and my options are currently worthless. Lesson learned,” he says. “Now I've been offered equity by other companies and I avoid it. I would only be happy to take them if they were larger companies that were either listed or on the verge of listing.”

A long road

European tech startups will be delighted that stock option law, which has stagnated for 20 years since the dotcom boom, is finally beginning to see reform. The hope is that discrepancies, including huge variations in taxation, will slowly subside between countries within Europe, and compared to rules in the US.

Harmonising a patchwork of rules will simplify things, particularly for the bigger European scaleup companies like TransferWise and Klarna, which operate across multiple countries.

Share options are also particularly seen as a tool for hiring senior US executives who can bring valuable Silicon Valley experience to young companies as they scale.

The way they were being taxed made a lot of stock options plans unattractive.

In France, opening up the so-called "BSPCE" options scheme to foreign companies is a way to alleviate the tax burden. When US companies hand out options to France-based staff as part of a US plan, both employer and employee get taxed more heavily than they would through a "BSPCE"-compliant alternative.

"The way they were being taxed made a lot of stock options plans unattractive -- that had to change," says Nicolas Brien, CEO of France Digitale, an industry group which represents 1,500 startups in France and Europe.

"For French startups, the change in options rules is a factor of attractiveness and retention," Brien says. "For U.S. tech companies with employees in France, the change was nothing short of essential."

But whether the reforms will make employees feel any less cynical about options remains to be seen.

Roundup of reforms:


The new coalition government is looking at changes to the tax treatment of share options issued by startups. Currently, if startups issue shares, the employees must pay income tax on any gains to the price of these shares, even if they do not sell but simply hold them.

In practice, no employees want shares in startups that have raised funding, because they are taxed every time there is another upward round.

“In practice, this means that no employees want to own shares in startups that have raised funding, because they are taxed every time there is another upward funding round,” says Kimmo Reina, partner at law firm Bird & Bird, based in Helsinki.

Most Finnish startups issue share options instead, which are not taxed each time the valuation goes up. However, options incur high income taxes — around 50% — on exit.

The government is looking at ways to make the use of employee shares more tax-efficient, and is expected to bring out new legislation in the first half of this year.

As in many other European countries, the issue has become prominent because of the shortage of skilled tech staff, says Reina. Finnish companies are increasingly looking to hire from abroad, and it has become important to bring the Finnish share scheme more in line with other countries.


Ireland’s attempt, three years ago, to bring in a new tax regime for startup stock options, has so far been a failure. The Key Employee Engagement Plan (KEEP) allows employee stock options to be taxed as capital gains, at 33%, rather than as income tax, at an eye-watering marginal rate of 52%.

But the scheme has so many restrictions that take-up has been very low. In fact, just 35 individuals have been granted options under KEEP so far.

Just before Christmas the government made some small adjustments to try to make the plan less restrictive, for example extending it to part-time employees and allowing companies that have a group structure, i.e. those with a subsidiary, to use the scheme for the first time.

But the reality is that the war for talent is over and talent won.

But Brian Caulfield, venture partner at Draper Esprit, based in Dublin, is hoping these will just be the first of many KEEP restrictions to be loosened. At the moment the scheme can only grant options worth up to €250,000 to one individual over three years and option grants can’t be worth more than half an individual’s salary. For senior hires, where options can make up a big portion of pay, this can end up being a big constraint, says Caulfield.

“I think there was a misplaced concern that companies would push employees to take stock options instead of salary, so they put these restraints in,” he says. “But the reality is that the war for talent is over and talent won. The danger of employees being exploited is pretty low.”

Ireland is a great place to be a corporation, but not to be an entrepreneur.

In addition, the total value of options can’t be more than €3m for a company using KEEP, a number that Caulfield finds “ridiculously low”.

The high taxation of startup share options is in sharp contrast to the low tax rates corporations enjoy in Ireland.

“Ireland is a great place to be a corporation, but not to be an entrepreneur,” says Caulfield.

Together with Scale Ireland, the trade body representing Irish innovation-driven companies, Caulfield is lobbying Ireland’s political parties, who are preparing for a general election in February, to make sure the options issue gets into their manifestos. He says he’s getting a good reception from politicians.

“I have been advocating for change for many years but in the past year I have seen much stronger engagement than ever before,” he says.

For many years Ireland’s economy has been boosted by foreign direct investment (FDI), tempted in by low corporate tax rates. But with many other countries now lowering their tax rates, Ireland’s advantage is waning. Now there is more interest in helping local businesses grow.


Predominantly due to the immediate timing and height at which they are taxed, employee stock options are almost entirely absent among German startups. For years, the workaround has been offering virtual, or “phantom,” stock options.

Christian Vollmann, founder of Nebenan, puts it more bluntly. “Real stock options don’t exist in Germany,” he says. Yet, a key group representing startups, of which Vollmann also serves as vice president, wants to change that this year. If nothing happens, he says, Germany will be at a major disadvantage in the global war for top talent.

“[The Federal Association of German Startups] wants to increase the pressure. We think it could be changed within this legislative period in Germany,” Vollmann tells Sifted, adding that Germany’s Grand Coalition has already agreed to improve employee participation. It just comes down to the government’s “willingness,” he says.

Nikolas Samios, a founder of both Cooperativa VC and PropTech1 Ventures, has written about stock options for popular websites like Gründerszene. He believes the German government is, as indicated by its plans to set up a future fund for startups, generally pro-innovation. But, he says, the government is reluctant to grant "taxation breaks” and “lacks an understanding of what’s necessary.”

“France is obviously listening to experts,” Samios tells Sifted.

“We think it's doable to at least take the first steps towards a solution,” Vollmann says. “Maybe not implement the perfect solution, but, for sure, we want to increase the pressure.”

The Association, led by its newly inaugurated team of 30 German tech all-stars, is currently conducting a study analyzing in further detail the status of stock options in Germany and possible solutions. And while the study is in progress with plans to present in Spring, Vollmann says his “gut feeling” is a focus on fixing the timing of taxation.

Both Samios and Vollmann describe how in Germany employee stock options present a dry income problem. Employees are taxed the moment they are granted stock options, not when cash actually hits their accounts. “Stock options are taxed instantly like salary. There is no liquidity to an employee,” Samios says.

“You're taxed on an income that you don't actually have in your bank account. That's actually the single most important reason that there are just no options at all in Germany,” according to Vollmann, who adds that employees can also be taxed much higher than founders who have equity.

Virtual stock options, which most German startups appear to use, are a hack to simulate more American stock option plans that are taxed the moment an employee receives money out of it. Though virtual stock option plans appear to solve the timing issue, they are incredibly bureaucratic and expensive to implement. Employees are still taxed at a very high rate, which can near 50% in Germany, and virtual stock options are also very difficult to explain to those unfamiliar with them.

“It's very hard to explain to someone from the United States that he's not getting real options, but virtual options,” Vollmann says.