- Germany on Friday approved a series of changes to its rules on stock-based compensation at tech startups, company listings and taxation.
- Under the new rules, taxes on employee stock options will be deferred until the time of sale, so that employees do not face the prospect of being taxed on their shares as soon as they receive them.
- The scope of the plan will also be expanded so that more growing businesses can benefit from it.
BERLIN, GERMANY – NOVEMBER 15: German Finance Minister Christian Lindner makes a statement to the media at the Chancellery following the weekly government cabinet meeting on November 15, 2023 in Berlin, Germany. This was a ruling by the German Constitutional Court stating that the coalition government’s transfer of federal funds in 2021 initially intended to mitigate the consequences of the coronavirus pandemic and which had not been used for emergency measures climate change mitigation was illegal. (Photo by Sean Gallup/Getty Images)
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Germany on Friday approved a set of key reforms to its capital markets to help its technology industry compete with Silicon Valley.
The reforms, set to take effect on January 1, 2024, will usher in a litany of changes to Germany’s frameworks for stock-based compensation at startups, company listings and taxation.
The reforms, which had been in the works for some time, were widely expected.
Some of the major changes will concern employee share plans, which allow companies to transfer a share of the business to their employees.
Martin Mignot, a partner at Index Ventures who has pushed for reform of stock option policies in Europe to improve tech employee retention, said previously the laws were “disadvantageous for employees and was a truly unfair policy for everyone.”
“There was a formal ESOP in law in Germany, but it was so administratively cumbersome that each minority shareholder had almost voting and veto rights, and also very few tax benefits,” said Mignot, referring to the acronym for employee share ownership plan. .
“This made things such that it was virtually impossible for companies to use true ESOPs,” he added.
Index has invested in a number of leading German technology startups, including human resources software company Personio and financial services startup Raisin.
Under new German ESOP rules, taxes on employee stock options will be deferred until the time 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. of the legislation consulted by CNBC.
At the same time, the scope of the plan will also be expanded so that more growing businesses can benefit from it.
The threshold for companies eligible to benefit from German ESOP plans will be raised so that companies with up to 1,000 employees and a maximum of 100 million euros ($108.7 million) in annual turnover can distribute actions to their staff.
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 considered to reflect the risk taken by employees in a young and unproven startup.
The new legislation will also mean that companies listed in Germany will be able to issue dual class shares. These stocks are a key attraction point for venture-backed startups because they allow founders to maintain control of the company.
Europe now has a much more established venture capital industry, which has given startups access to large amounts of liquidity, with billions of dollars of funds having been raised by companies across the continent.
But there remain bottlenecks in attracting talent, meaning it’s harder to compete with Silicon Valley giants when it comes to finding top talent.
European technology startups are unable to compete with certain offers from American giants like GoogleAmazon, Meta and Microsoft — but stock options give them an alternative way to compete on compensation, said Mignot of Index Ventures.
Of particular note, reform advocates in Germany say they want to combat the “brain drain” where talented local tech workers leave for the United States.
“We shouldn’t look at startups as small businesses, we should look at them as the new industry leaders of tomorrow – one of our investors often says: ‘Who in 10 or 20 years will be one of the leaders of the S&P 500 in 20 years?'” said Hanno Renner, co-founder and CEO of Personio.
“This regulation is an important step in accelerating the entire flywheel in Germany and ensuring that German startups have the ability to attract top talent. So when approaching a startup like Personio, continue to grow and create global champions,” Renner said.
Tao Tao, co-founder and chief operating officer of German travel startup GetYourGuide, said German companies would struggle to offer the same paid plans offered by Google, Meta or BMW.
“The industry wants to compete on the global stage,” said Tao, who moved to New York to increase GetYourGuide’s presence. “I think this really levels the playing field. We need to make things much more attractive and not less difficult to attract great talent to Europe and Germany.”
The plans have been in the works for some time. Germany introduced rules to make its employee share plans more attractive in 2020. However, startups and investors, including venture capital firm Index Ventures, said the rules did not sufficiently meet their needs. concerns.
Now, the company claims that Germany will be one of the leading countries in Europe when it comes to ESOPs.
Much more needs to be done, tech entrepreneurs and investors told CNBC. In Germany, companies with a group structure still do not apply for ESOP rules, according to the founder of a German startup, who preferred to remain anonymous to discuss sensitive topics.
In the future, Mignot hopes that the European Commission, the EU’s executive body, will approve a pan-European framework for stock options that would allow technology companies to “passport” stock options into different countries such as France and Italy.
“Even though there are still individual plans per country, they are not the same,” he said. “You have similar qualities (but) you cannot issue a single stock option in one country that is applicable everywhere and could be the same system everywhere.”
He added: “This idea of a phase two in an ideal world where there would be some form of passport for stock options, where any country could issue a stock option that would be recognized by any which European country, so we would only do it once. would make it very easy for you to operate in several countries.”
At the same time, the government is developing separate plans that would allow pension funds to invest directly in venture capital funds in Germany.
Insiders in the country’s tech industry have expressed frustration that there are more stakes from large North American pension funds in German tech companies than from domestic pension funds.
They say this means German taxpayers would not reap the benefits if a company successfully goes public or is acquired at a higher valuation.
Correction: Some of the major changes will concern employee stock ownership plans. An earlier version incorrectly indicated the type of plan.