BERLIN, GERMANY – NOVEMBER 15: German Finance Minister Christian Lindner gives a statement to the media at the Chancellery after the weekly government cabinet meeting on November 15, 2023 in Berlin, Germany. The subject was a ruling by the German Constitutional Court declaring that a transfer of federal funds in 2021 by the coalition government was originally intended to mitigate the consequences of the coronavirus pandemic and which had become unused for climate change mitigation measures. , That was illegal. (Photo by Sean Gallup/Getty Images)
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Germany on Friday approved a package of major reforms to its capital markets framework to help its technology industry compete with Silicon Valley.
The reform, which is expected to come into effect on January 1, 2024, will bring a number of changes to Germany’s framework for stock-based compensation in startups, listing of companies and taxation.
The reforms, which had been in the works for some time, were widely expected.
Some of the biggest changes will be to employee stock option plans, which allow companies to hand over a portion of the business to their employees.
Martin Mignot, partner at Index Ventures, who has pushed for reform of stock option policies in Europe to improve tech employee retention, said the earlier laws were “harmful to employees and really an unfair policy for everyone.”
“Germany had a formal ESOP plan in law, but it was very cumbersome administratively,” Mignot said, referring to the acronym for employee stock option plans, where each minority shareholder gets the right to vote and veto, and taxes. The profit is also very less.” ,
“It made it almost impossible for companies to use true ESOPs,” he said.
The index has invested in several high-profile German tech startups, including human resources software firm Personio and financial services startup Raisin.
What is changing?
Under new German rules on ESOPs, taxes on employees’ stock options will be deferred until the point of sale so that employees do not face the prospect of being taxed on their shares as soon as they receive them, according to a draft version seen by CNBC. Of the observed law.
Meanwhile, the scope of the scheme will also be expanded so that more growth companies can benefit.
The threshold for companies availing of German ESOP schemes will be raised so that companies with up to 1,000 employees and a maximum of 100 million euros ($108.7 million) in annual revenue can distribute shares to employees.
Capital gains tax rules will also be changed so that startup employees can be taxed on the profits they make on selling their shares. This tax is seen as a reflection of the risk that employees take on a young, unproven startup.
Meanwhile, capital gains tax rules will be changed to allow startup employees to be taxed on profits they make when they sell their shares. This tax is seen as a reflection of the risk that employees take on a young, unproven startup.
The new law will also mean that German-listed companies can issue dual-class shares. Dual-class shares are a major point of attraction for venture-backed startups, as it allows the founders to retain control of the business.
Competition with America for talent
Europe now has a highly established venture capital industry that has given startups access to substantial amounts of cash, with billions of dollars in funding raised across the continent.
But barriers to attracting talent remain, meaning it has become harder to compete with Silicon Valley giants when it comes to finding the best people.
European tech startups are unable to match some of the offerings from US tech giants GoogleAmazon, meta and Microsoft — but stock options give them an alternative way to compete on compensation, Index Ventures’ Mignot said.
In particular, supporters of the reforms in Germany say they want to tackle a “brain drain” where talented local tech workers are moving to the US.
“We shouldn’t be thinking about startups as small companies, we should be thinking about startups as new industry leaders for tomorrow and who will be in the S&P 500 in 10, 20 years,” says one of our investors. In 20 years,” said Hanno Reiner, CEO and co-founder of Personio.
Rainer said, “This regulation is a huge step forward to accelerate the entire flywheel in Germany and ensure that German startups have the ability to attract the best talent, so that when they come to a position like Personio, they can continue to grow and Keep becoming a global champion.”
Tao Tao, chief operating officer and co-founder of German travel startup GetYourGuide, said German companies will struggle to match similar pay packages on offer at companies like Google, Meta or the likes. BMW,
“The industry wants to be competitive on the global stage,” said Tao, who has moved to New York to expand GetYourGuide’s footprint. “I think it’s really leveling the playing field. We need to make it more attractive and less difficult to attract great talent to Europe and Germany.”
Work on the plans has been going on for some time. Germany introduced rules in 2020 to make its employee stock option plans more attractive. However, startup and venture investors, including venture capitalist firm Index Ventures, said the rules do not go far enough to address their concerns.
Now, the firm says Germany will be one of the leading countries in Europe in terms of employee stock option plans.
not done yet
Tech entrepreneurs and investors told CNBC that there is still more work to be done. In Germany, companies with a group structure still won’t apply for ESOP rules, according to a German startup founder, who preferred to remain anonymous discussing sensitive matters.
Moving forward, Mignot hopes the European Commission, the EU’s executive branch, will approve a pan-European framework for stock options that would allow tech companies to “passport” stock options to different countries, such as France and Italy. Will give.
“Although different countries still have plans, they are not the same,” he said. “You also have similar qualities [but] You can’t issue a stock option in one country that applies everywhere and have the same system everywhere.”
He added, “It’s a second-stage idea in an ideal world where there would be some kind of stock option passport, where any country could issue a stock option that would be recognized by any European country, so you could do it with just one. The bar will do the same…it will allow you to move across countries very easily.”
Meanwhile, separate schemes are currently being drawn up by the government that would allow pension funds to invest directly in venture capital funds in Germany.
Tech industry insiders in the country have expressed disappointment that German tech companies are owned more by large North American pension funds than by domestic pension funds.
They argue that this means that German taxpayers will not benefit if a company successfully goes public or is acquired at a high valuation.
