EMPLOYEE OWNERSHIP FOR START-UPS

Author: Elena Galevska

CICOPA

Obvious differences exist between employee ownership (EO) in the US and in Europe – and this is especially clear when it comes to start-up companies.

The difference in ownership culture can already be seen in the first phases of setting up a company. During the job interview, the American candidates are commonly asked about equity in a start-up company, however, the question seldomly pops up in the European context. It is common for the first 10 employees of an American start-up to be promised stock options and later real equity, which is rather unusual in Europe.

In an attempt to shed more light on the ways European start-up employee ownership differs from the American share plans, Index Ventures conducted research, where 73 companies and 4000 option grants were reviewed. The findings can be summarized in eight key points.

    1. US employees own more of the companies they work in compared to European employees. The percentages owned by employees in European late-stage start-ups are around 10%, compared to roughly 20% in the USA.
    2. There is a bigger variation in ownership levels in Europe, compared to the US. Looking at late-stage start-ups, employee ownership spans between 4 % and 20 % for Europe, while it tends to be more consistent in the USA.
    3. The level of technicality of a start-up is correlated with employee ownership. Highly technical start-ups, such as the ones working in IT and software development, typically require higher know-how than online shops, hence the employees are more likely to seek EO.
    4. Differences can be found also in the ownership policy details. The US and Europe have different provisions for people exiting the start-up, as well as accelerated vesting following a change in control.
    5. Employee ownership in Europe is executive biased. As much as 66% of EO refers to executives, leaving the minority of shares in the hands of employees from lower hierarchical levels. In the United States, these ratios are turned.
    6. Most of the time, European employees have no expectations when it comes to employee ownership. Although the expectations of European employees are steadily increasing, they are still highly lagging behind American employees, who normally expect a certain type of employee ownership right away, given that they are among the first 100 workers joining the start-up.
    7. European stock option holders are prone to certain disadvantages. In most European countries, employees will have to pay a high strike price, and they will be heavily taxed upon exercising their option. The same applies to the sale of stock options. Moreover, people exiting the company may not get anything.
    8. European countries have various national policies when it comes to employee ownership. Taxation systems and legal regulations are majorly different from country to country in Europe. The UK has the most favourable and supportive framework for employee ownership, with France, Spain, and Italy doing also well. On the other hand, Germany lags behind.

Like in Europe, in Slovenia the legislation enabling or motivating employee ownership and start-up share ownership has not been highly developed in Slovenia either.

From the experience in many countries around the world, it is clear that legislation is crucial in promoting employee-centred enterprises. There is a long road ahead for both Europe and Slovenia, and we are just starting to walk on it.

 

The Institute for Economic Democracy recently drafted a law that would facilitate the conversion of companies to employee share ownership plans similar to the American ESOP program.

If you are interested to learn more about what your options of setting up employee ownership schemes are in Slovenia, we would be more than happy to address any of your questions. Contact us at [email protected]!

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