March 20, 2019

Does Europe need to fix “monkey money” stock options?

More than 500 founders and startup executives have joined the campaign to change the region's “punitive” employee ownership rules

Maija Palmer

9 min read

Photo credit: Denisse Leon on Unsplash

As head of engineering at Take Eat Easy, Sebastien Arbogast, like many managers at startups, used to struggle to hire developers.

“There are a lot of corporate jobs in Belgium — a lot of safe options — and they often have elaborate salary packages with cars and perks like that which are hard for a startup to match,” he says.

In places like the US, generous stock options can often be used as an enticement — an employee might be willing to take a salary cut on the promise of a big payout later if the company is sold or launches on the stock market. It is a way for younger companies to be able to afford big hitters, even when cash flow is tight.

Belgium has one of Europe’s least friendly stock option regimes

In Belgium, however, stock options are less tempting, says Arbogast. He refers to stock options as “monkey money”; something which may have appeal for a 20-something straight out of university, but unlikely to have much sway with a 30-something with family commitments.

Belgium has one of Europe’s least friendly stock option regimes, according to a recent study by venture capital firm Index Ventures. Stock options can be complicated to issue and companies typically give employees warrants instead, which are exempt from social security contributions. One of the biggest problems is that warrants and stock options are taxed when they are granted, rather than when they are exercised, meaning that an employee has to pay upfront for them, years before they may ever be able to benefit.

“You have to pay straight away and there is a risk that you will never get anything at all if the company fails,” says Arbogast. “The amount you pay isn’t big. For me it was a few hundred euros, so I felt it was ok to take that risk.” Ultimately Take Eat Easy failed, though, and Arbogast received nothing.

“It wasn’t even worth trying to recover the taxes we had paid for the warrants,” Arbogast says. “The accountants said it would be too complicated.”

Stock options, therefore, were never a big draw for his engineers. In terms of attracting people to Take Eat Easy, Arbogast said he had more luck with promising people autonomy and flexible working arrangements than any financial instruments.

Every country in Europe has its own rules on when share options are taxed — at grant, vesting, exercise, sale, or some combination of all.

Petitioning for a change to "punitive" rules

Belgium is not the only European country where the idea of stock options has struggled to take off. More than 500 startup founders and executives, led by Index Ventures, have now signed a petition to get Europe’s “patchy, inconsistent and often punitive” rules on employee ownership changed. Each country in Europe has its own legal framework and tax code.

In some countries, shares can be offered at a discount to the last-round valuation, making them more attractive, while in others this is difficult. In some places employees exercising shares become minority shareholders who may need to be consulted on company decisions — an unappealing prospect for companies. Taxation can come when shares are granted, vested, exercised or sold — or possibly at several of these points — depending on the country, and the tax rate can vary from nothing to more than 50%.

The Not Optional campaign maintains that one of the biggest bottlenecks for Europe’s startups and scaleups is not so much cash — it is hiring talent. Over the next 12 months, Europe’s startups will need to hire more than 100,000 employees, but they are at a disadvantage compared with their US competitors when it comes to hiring.

“The next Google, Amazon or Netflix could well come from Europe, but for that to happen, reforming the rules of employee ownership is definitely not optional,” the open letter reads.

In the US employees typically own 20% of late-stage companies, while on average in Europe they own 10%.

In the US employees typically own 20% of late-stage companies, while on average in Europe they own 10%.


Not Optional is holding a series of talks with policymakers around Europe this spring to raise awareness of the issue.

“As a founder my mission is to attract the best people from all over the world,” says Jean-Charles Samuelian, cofounder of French insurtech startup Alan, and one of the signatories to the No Option campaign. “To be attractive to people we need to be able to share value with 100% of our team from the start.”

Alan has grown rapidly in the past year, going from 14 staff to now more than 80 — and Samuelian plans to have 170 employees by the end of the year. Many of the new hires have been Americans, who have come with share option expectations that Samuelian has struggled to meet.

One of the problems with share options in France is the way they are priced, he says. It is not easy to offer the kind of big discounts in strike price — the price at which employees can exercise the options — as would be typically seen in the US. This means that the company can only offer the shares at close to their valuation at the time of the last funding round, meaning staff make smaller gains on these shares.

In the US you can have a discount of 50 to 70% [on the strike price] but in France it is very difficult to do this.

“In the US you can have a discount of 50 to 70% but in France it is very difficult to do this. You may be able to have a small discount but it is very complex. It creates a lesser incentive for employees,” he says.

“It has been a big conversation, especially with people from the US. We spend a lot of time explaining how it works,” says Samuelian. While he hasn’t directly lost a potential recruit because of the share option issue, he is worried that many will have failed to apply in the first place.

Companies turn to "phantom" alternatives

Spain is another country singled out as being “difficult” for stock options, because the process is complex and administrative costs of setting up a scheme can be high. Indeed, when Graham Rittener, founding partner at Zinc, a Barcelona-based design consultancy, wanted to reward two key staff members with shares, it took two years to set up the programme.

“We didn’t expect it to take that long,” says Rittener. “We thought it would take a couple of months.”

Rittener wanted to give the two high-performing staff members shares to help keep them at the company as it grew. After much discussion with lawyers over potential pitfalls, he ended up issuing “phantom shares”, which gave the employees no ownership rights or say in the company decision making, but which would pay out a percentage if the company was sold. Among other things Zinc had to be careful to keep the shareholding below the 5% threshold when a number of ownership rights would have been automatically triggered.

Like Arbogast, Rittener sees share options as a useful tool, but one with limited appeal.

“It depends on what type of person you are trying to recruit,” he says.

Tax breaks for a relatively small pool of highly skilled workers doesn't always play out well as a political issue.

So far not a focus for Brussels —but they are listening

The share option issue has not, so far, been high up on the agenda of the European Commission. While the commission has been keen to boost the tech-based economy with funding through the Horizon 2020 programme, and initiatives like the creation of the Digital Single Market, employee ownership has not been a focus.

In part, says Pēteris Zilgalvis,  head of unit for startups and innovation in the Digital Single Market Directorate in DG Connect,  this is because stock options fall between departments — they can be seen as a company law issue or a tax issue. There is some concern in the European Commission, he says, about straying into areas like tax, where member states like to keep autonomy. Equally, pushing for tax advantages for a relatively limited group of highly skilled workers might not play well in a climate of austerity and populism.

But, Zilgavis adds: “I am in listening mode and would be glad to know more details.”  If stock option rules are genuinely hindering the development of Europe’s startups the European Commission could take a role in trying to harmonise practice across the region.

Estonia, Israel, the UK, Portugal and France are seen as having relatively friendly regimes.

Stock option practice varies greatly between countries. Estonia, Israel, the UK, Portugal and France are seen as having relatively friendly regimes. This includes deferring tax until the shares are sold, and keeping the tax rate on these low.

The UK’s Enterprise Management Incentive, introduced in 2000, for example, is seen as very favourable — employees pay nothing until the shares are sold and then it is at the 10% rate for capital gains tax. It has led to booming interest in stock options in the UK. However, the scheme is limited just to companies with less than 250 employees, and the Not Optional campaign says that maturing companies in the UK tech ecosystem are now being forced into much less favourable arrangements.

Sweden, similarly, eliminated income tax on stock options at smaller companies — those less than 10 years old, with fewer than 50 employees, and a balance sheet of less than Skr80m. However, it is of little help to Sweden’s larger tech companies, such as Klarna, which are reported to be suffering brain drain of senior executives because of Sweden’s high taxation.

Would stock options really make a difference?

Not every tech sector worker is convinced that reforming stock options would have a big impact. Arbogast, who since the failure of Take Eat Easy runs his own blockchain training business, ChainSkills — outside of Belgium — says it is not so much the complexity of the stock options that is the problem. Most employees, in Arbogast’s experience, took up warrants if offered them. They were just seen as incredibly unlikely to ever pay out.

Any stock options are only seen as a bonus with very little chance of them really paying out.

"Any stock options are only seen as a bonus with very little chance of them really paying out. In Silicon Valley companies all end up buying each other but there isn’t that kind of ecosystem in Belgium. So the only exits you really get is when companies go public and that is rare," he says.

So it may be a case of chicken and egg. Would a better stock option system lead to bigger and more successful tech companies? Or would more tech successes make the stock option system more credible?