Until recently, stock options for employees were a non-issue in Germany.
Why? Because until recently, Berlin’s now-thriving community of high-growth technology companies was just a pipe dream.
But, as with everything in Berlin over the past few years, times have changed.
When GetYourGuide raised its seed round in 2012, the city was mostly known for its nightclubs and art scene. In these early days, our employees were students, dreamers and vagabonds in their mid-20s, surviving on very low salaries. And that was par for the course: “poor, but sexy” was Berlin’s mantra. “Real” jobs were mostly found in Frankfurt, Munich or Hamburg.
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As capital started to trickle in, though, Berlin slowly became a magnet for talent. The fundamentals were all here: affordable rent, a straightforward immigration policy, and culture in spades. New arrivals found the city’s raw energy mesmerising, and word started to spread. Everyone knew that something was about to happen.
Fast forward to 2019, the Cambrian explosion in German tech has been more pronounced than anyone dared to dream a decade ago. $4.5B in venture funding flows into Germany’s tech companies every year ($3B to Berlin alone), we’ve had a spate of major tech IPOs, and the pipeline of billion dollar private companies is strong. With Berlin’s culture as vibrant as ever, a still-affordable cost of living, and capital now flooding in, comparisons to millennium-era Silicon Valley are inevitable.
In Silicon Valley employee stock ownership in startups like Google, PayPal and Facebook produced thousands of millionaires who went on to found companies of their own.
But one element is missing in Berlin. During Silicon Valley’s ascent, employee stock ownership in startups like Google, PayPal and Facebook produced thousands of millionaires when those businesses went public. Those alumni, endowed not only with investable capital but with an appetite for risk and innovation, then went on to found companies of their own. The next generation of top talent followed them, attracted by the prospect of sharing in future success in the same way, and the world’s most influential community of entrepreneurship was born.
So what’s holding back Berlin from becoming the next Silicon Valley? The answer is the German government
The German government’s leading Grand Coalition spends most of its time on policy aimed at preserving the economy of the past five decades, rather than looking toward the decades ahead of us. Employee stock ownership is the most egregious example. In Germany, due to restrictive legal and tax regulations, stock programs in the mould of Silicon Valley are simply not possible.
These regulations exist under the outdated pretence of “protecting workers from risk”, but are more than just relics of the past. They severely prohibit German growth companies from recruiting the best and brightest from the global talent pool, and they are inflicting real economic damage in the present.
Employees that have made money from working for a successful start-up are most likely to become founders of their own and use their proceeds to fund the next venture. But instead of supporting this virtuous cycle, as the US, UK, France or Israel do, Germany’s centre-left government refuses to allow employee stock ownership.
Companies can get around the restrictions by issuing ‘virtual stock options’ which do not confer any real ownership of the company. But even these are unattractive as any gains from such options is taxed at more than 50%. Start-ups in this country need to offer twice the compensation package to allow the same exit proceeds for an employee at exit, and many can’t foot the bill.
The financial winners of the German tech boom are mostly foreign investors. The employees only get the crumbs of the pie.
Implicitly, this gives a massive advantage to the traditional German companies with stagnating stock prices and predictable cash salaries. The bitter result is that the financial winners of the German tech boom are mostly foreign investors, founders and the German tax office itself. The losers are the employees, who only get the crumbs of the pie.
Yet, there is a glimmer of hope. The agreement between the Grand Coalition has a provision calling for an evaluation of employee stock ownership in German tech companies (although this is non-binding).After two years without any action, German entrepreneurs have become increasingly outspoken.
What can we learn from this? My takeaway from countless conversations with policymakers is that Germany is still not ready to trust its own innovators. Politicians are much more comfortable with spending millions for governmental innovation programs than giving more ownership and tax incentives to the employees that have championed real success.
Most recently, Index Ventures’ initiative #NotOptional put the topic back on the agenda and has received considerable support across Europe and Germany in particular. At a #NotOptional roundtable in Berlin last month, young MPs from across the German political spectrum strongly agreed with the motion of employee stock ownership reform, and promised to draw attention to the topic in parliament.
If the Bundestag is serious about creating stability and prosperity for Germany, it needs to stop looking inward and backward to its past, and enable the innovation that is happening at its doorstep to carry us into the future. Berlin’s tech community needs to tap into the city’s raw energy and continue to push the issue, and we just might eventually be able to make that future happen.
Johannes Reck is co-founder and CEO of GetYourGuide.