BERLIN, GERMANY – NOVEMBER 15: German Finance Minister Christian Lindner makes a statement to the media at the Chancellery after the weekly government cabinet meeting on November 15, 2023 in Berlin, Germany. The topic came after Germany declared that the coalition government’s transfer of federal funds in 2021 was originally intended to mitigate the effects of the coronavirus pandemic, and that it was illegal if they were not used for climate change mitigation measures. It was a ruling by the Constitutional Court. (Photo by Sean Gallup/Getty Images)
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Germany on Friday approved a major reform package to its capital market framework to help its technology industry compete with Silicon Valley.
The reform, which is scheduled to come into force on January 1, 2024, will bring about a series of changes to Germany’s framework regarding share-based compensation in start-ups, company listings and taxation.
This reform has been in the works for some time and was widely anticipated.
The main changes include employee stock ownership plans, which allow companies to transfer parts of their business to employees.
Martin Mignot, a partner at Index Ventures who has championed reform of stock option policies in Europe with the aim of improving retention rates for technology employees, said the law had previously been seen as “disadvantaging employees and leaving no one out.” It was a really unfair policy.”
“Germany had a formal ESOP plan by law, but it was administratively very cumbersome, with all minority shareholders having near voting and veto rights, and there were few tax benefits.” said Migno, referring to the acronym for employee stock ownership plan. .
“That made it virtually impossible for companies to use a real ESOP,” he added.
Index has invested in a number of high-profile German tech startups, including HR software company Persona and financial services startup Raisin.
What’s changing?
Germany’s new rules for ESOPs would defer taxation on employee stock options until the point of sale, ensuring that employees are not taxed as soon as they receive their shares, according to the draft. Contents of the bill viewed by CNBC.
Meanwhile, the scope of the plan will also be expanded to allow more growing companies to benefit.
The threshold for companies eligible for Germany’s ESOP plans will be raised, allowing companies with 1,000 employees and annual revenues of up to 100 million euros ($108.7 million) to distribute shares to employees.
Capital gains tax rules will also be changed so that employees of start-up companies will be taxed on the profits they make when they sell their shares. This tax is seen as reflecting the risk employees take on young, unproven start-ups.
The new law also means companies listed in Germany can issue dual-class shares. These stocks are a key attraction for venture-backed startups because they allow founders to maintain control of the business.
The United States and competition for talent
Europe now has a much more established venture capital industry, providing startups with access to ample funding, with billions of dollars worth of funding raised by companies across the continent.
But talent acquisition bottlenecks remain, meaning it’s harder to compete with Silicon Valley giants when it comes to finding top talent.
European high-tech startups are unable to match some of the offers of major US companies. Google,Amazon, meta “Stock options, however, offer an alternative way to compete on compensation,” said Mignot of Index Ventures.
Most notably, German proponents say they want to tackle the “brain drain” of talented local technology workers to the United States.
“We don’t need to think of startups as small businesses. We should think of startups as leaders in tomorrow’s new industries. One of our investors often says, ‘In 10 years, in 20 years, who will be in S&P? “We’ll be one of the 500 leaders in 20 years?” said Hanno Renner, co-founder and CEO of Persona.
“This regulation is a big step towards accelerating the whole German flywheel and ensuring that German startups have the ability to attract the best talent. So when it comes to startups like Pernio, we want to grow I want him to continue to do that and continue to build a world championship,” Renner said.
Tao Tao, co-founder and chief operating officer of German travel startup GetYourGuide, said that German companies like Google, Meta, BMW.
“The industry wants to be competitive on the world stage,” said Tao, who relocated to New York to expand GetYourGuide’s footprint. “I think this is a really level playing field. To attract talent to Europe and Germany, we need to make the playing field more attractive, and it’s not that difficult.”
Planning has been in the works for some time. Germany introduced rules in 2020 to make employee stock ownership plans more attractive. But startups and investors, including venture capital firm Index Ventures, said the rules do not go far enough to address concerns.
Now, the company says Germany will become one of the leading countries in Europe when it comes to ESOPs.
Haven’t done it yet
Technology entrepreneurs and investors told CNBC there’s more work to be done. According to one German startup founder, companies with group structures still do not apply for ESOP rules in Germany. He said he preferred to discuss confidential matters anonymously.
Going forward, Migneault expects the European Commission, the EU’s executive body, to approve a pan-European framework for stock options that would allow technology companies to “passport” stock options to different countries such as France and Italy. are doing.
“There are still national plans, but they are not the same,” he said. “You also have similar qualities. [but] One stock option cannot be issued in one country, which applies everywhere and could result in the same system everywhere. ”
He added: “In an ideal world, the second stage idea would be that there would be some form of stock option passport, and any country could issue stock options that would be recognized by European countries, so they could only be issued once. …It makes it very easy to scale across countries.”
Meanwhile, another plan is currently being drawn up by the government to allow pension funds to invest directly in German venture capital funds.
Officials in the country’s tech industry have complained that German tech companies are owned more by large North American pension funds than by domestic pension funds.
They argue that this means German taxpayers will not benefit if the company successfully goes public or is acquired at a higher valuation.
Correction: Some of the key changes relate to employee stock ownership plans. Previous versions incorrectly listed plan types.
