A recent report by venture firm Index Venture shows the progress of various countries in terms of their stock options laws. Estonia and the Baltic states continue to lead the rankings, while Germany, Europe’s third-largest tech ecosystem, has the worst stock option set-up in the part of the world, alongside Belgium.
However, across Europe, the situation is improving with a rise in the percentage of stock options granted to scaleup employees to 16% from 12% five years ago, closing in on the US where employee stock ownership has increased from 20% to 22% over the same period.
The data was gathered by the Not Optional campaign, which was founded by Index Ventures and 700+ CEOs. It aims to improve the competitiveness of European startups by helping them attract the best global talent.
Why options matter
Stock options are important as they enable startups to attract talent by offering shares that employees can potentially cash out and make a fortune on in the future. The Not Optional campaign has found that over €5 billion has been transferred from founders and investors to European startup employees over the past 5 years.
However, employees in many European countries face hefty taxes on the profits from their shares, and the process of setting up a scheme is often opaque and differs from country to country.
In a quest to speed up the transformation to an innovative economy, the momentum is growing across Europe to improve policies and relax taxation rules to make it easier for companies to offer stock options to their employees.
The Baltic states have the best regulations, while Belgium, Germany, and Spain have the most burdensome policies. To speed up the changes, The European Commission is expected to establish a European Stock Options Working Group to address the issue of stock options reform at the European level.
The biggest change, however, is not about policy but about the shift in the founders’ and employees’ approach to stock options, with a growing awareness and willingness of talent and investors to become savvier about equity and using it as a means of hiring and retaining talent. “Talented candidates are becoming more aware of the value of equity, asking for it more often and expecting it”, said Dominic Jacquesson, Vice President of Insight and Talent at Index Ventures.
How Estonia is leading the pack
But what did Estonia already do in the right way? Here are some major points, according to Hedmal Law Firm.
- Share options in Estonia are treated as remuneration in kind and are defined by their properties, giving the employee the right, not the obligation, to buy or sell the option.
- The granting of a share option is not taxed in Estonia if there is at least a 3-year gap between the grant and the exercise of the option. If the 3-year deadline is not met or the employee sells the option, it will be taxed as a fringe benefit, and the company must pay both income tax and social tax based on the option’s market value.
- In the case of cash compensation for share options, the payment will be taxed as a regular bonus, regardless of the holding period of the option. Exceptions are made in case of a complete exit before the option is exercised, where a proportion of the compensation will be tax-free.
It’s also important to note that Estonia also had the best tax code in the OECD for the last nine years. But besides the legal frameworks, Estonia has innovative startups redefining ownership in the tech industry.
For example, KOOS, founded by Taavi Kotka, the former CIO of Estonia, offers a stakeholder incentivization platform. It leverages equity-like growth programs to reward and motivate all contributors to a company’s growth and success without having to give away a single share of the equity. Instead, rewards are paid out only when the company meets predefined business goals.
Wish to invest in Estonia or do business in the country that has Europe’s best legal environment? Read more about taxation in Estonia and send us a request for e-Consulting to find out more from one of our advisors.
