- Germany on Friday approved a series of changes to its rules on stock-based compensation in technology startups, corporate listings and taxes.
- Under the new rules, taxes on employee stock options will be deferred until the point of sale, so that employees do not face the possibility of a tax on their shares once they acquire them.
- The scope of the scheme will also be expanded so that more growing companies can benefit.
BERLIN, GERMANY – NOVEMBER 15: German Finance Minister Christian Lindner makes a statement to the media at the Chancellery following the government’s weekly cabinet meeting on November 15, 2023 in Berlin, Germany. At issue was a ruling by the German Constitutional Court declaring that the coalition government’s transfer of federal funds in 2021 originally intended to mitigate the consequences of the coronavirus pandemic but not used for climate change mitigation measures was illegal. (Photo by Sean Gallup/Getty Images)
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Germany on Friday approved a package of major reforms to capital markets frameworks to help the technology industry compete with Silicon Valley.
The reforms, which are expected to come into effect on January 1, 2024, will lead to a series of changes to Germany’s frameworks for equity-based compensation in startups, corporate listings and taxation.
The reforms, which have been in the works for some time, were widely expected.
Some of the major changes will be to employee stock option plans, which allow companies to hand over a slice of the business to their employees.
The laws previously were “unfavorable to employees and a really unfair policy for everyone,” said Martin Minot, a partner at Index Ventures who has pushed for an overhaul of stock option policies in Europe to improve retention of technology employees.
“There was a formal ESOP in the law in Germany, but it was very cumbersome administratively with almost every minority shareholder getting a vote and a veto, plus very little tax advantage,” Minno said, referring to the abbreviation for an equity ownership plan. employees. .
“It has made it almost impossible for companies to use an actual ESOP,” he added.
Index has invested in a number of high-profile German tech startups, including HR software company Personio and financial services startup Raisin.
Under new German rules on ESOPs, taxes on employee stock options will be deferred until the point of sale so that employees do not face the prospect of a tax on their shares once they acquire them, according to the draft version. From the legislation reviewed by CNBC.
At the same time, the scope of the plan will also be expanded so that more growing companies can benefit.
The threshold for companies that can benefit from German ESOPs 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 will be able to distribute shares to employees.
Capital gains tax rules will also be changed so that startup employees will be taxed on the profits they make when they sell their shares. This tax is seen as a reflection of the risks that employees are exposed to in an unproven startup.
The new legislation also means that companies listed in Germany can issue dual-class shares. These stocks are a major attraction for venture-backed startups, because they allow the founders to maintain control of the business.
Europe now has a more established venture capital industry, which has provided startups with access to abundant amounts of cash, with billions of dollars worth of funds being raised by companies across the continent.
But there are still bottlenecks surrounding attracting talent, which means it’s been difficult to compete with the Silicon Valley giants when it comes to finding the best people.
Index Ventures’ Minot said European tech startups are unable to match some of the offers from US giants such as Google, Amazon, Meta and Microsoft – but stock options offer them an alternative way to compete for compensation.
Of particular note, supporters of reforms in Germany say they want to address a “brain drain” as talented local tech workers leave for the United States.
“We shouldn’t think of startups as small businesses, we should think of startups as the new industry leaders of tomorrow – one of our investors often says, ‘Who in 10 or 20 years will be one of the S&P 500 leaders of the world?’ ?” 20 years?” said Hanno Renner, Co-Founder and CEO of Personio.
“This regulation is a big step to accelerate the entire wheel in Germany and make sure that German startups have the ability to attract the best talent, so when they come to a startup like Personio, they continue to grow and continue to build global champions,” Renner said.
Tao Tao, co-founder and chief operating officer of German travel startup GetYourGuide, said German companies would struggle to match the same pay packages on offer from the likes of Google, Meta or BMW.
“The industry wants to be competitive on the global stage,” said Tao, who moved to New York to grow GetYourGuide’s footprint. “I think this really levels the playing field. We need to make attracting great talent to Europe and Germany more attractive, not less difficult.”
Plans have been in the works for some time. Germany introduced rules to make share ownership plans for its employees more attractive in 2020. However, startups and investors, including venture capital firm Index Ventures, said the rules did not do enough to address their concerns.
Now, the company says Germany will be among the leading countries in Europe when it comes to ESOPs.
Tech entrepreneurs and investors told CNBC that there is still a lot to be done. In Germany, companies with a collective structure are still unable to apply for ESOP rules, according to the founder of a German startup, who preferred to remain anonymous to discuss sensitive matters.
Going forward, Minot hopes the European Commission, the EU’s executive arm, will approve a European framework for stock options that would allow tech companies to “passport” stock options to different countries such as France and Italy.
“Although there are still individual country plans, it is not the same,” he said. “You have similar qualities [but] You can’t issue one stock option in one country that applies everywhere and it can be the same everywhere.”
He added: “This is the idea of a second phase in an ideal world where there would be a form of stock option passport, where any country could issue a stock option which would be recognized by any European country so you could only do it once. … It would allow You can easily expand across countries.”
Meanwhile, the government is currently developing separate plans that would allow pension funds to invest directly in venture capital funds in Germany.
Insiders of the country’s technology industry have expressed frustration that companies from major North American pension funds have greater ownership in German technology companies than in local pension funds.
They claim this means German taxpayers will not reap the benefits if a company successfully goes public or is acquired at a higher valuation.