Introducing our guide to stock options for European entrepreneurs

by Dominic Jacquesson

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In this post: Dominic Jacquesson

For tech startups, the most critical ingredient to become the next global giant is access to talent. Without this, it is impossible to grow.

But the market for talent is fiercely competitive. Multinationals, banks, consultancies, and established tech companies are all battling to secure the best people, particularly for technical roles. With high salaries, attractive benefits packages, and stability on offer, how can startups compete?

One big advantage startups hold over the heavyweights are a compelling small company culture and inspiring vision. It’s exciting to be part of a close-knit team, on a mission to create something truly innovative – and this can be a big attraction for talent.

But startups can also offer a more tangible benefit: ownership.

Stock option grants are one of the key reasons Silicon Valley has been so successful. Small startups with limited cash have managed to attract some of the world’s best talent because the chance to own a stake in a company that could become valuable a few years down the line is extremely enticing.

In Europe, employee ownership is less common. There’s no clear playbook for startups to follow. This is made even more complicated by the fact that we’re doing business on a continent made up of 30 different countries, all with different cultural norms, regulations, tax incentives – the list goes on.

At Index Ventures, we want to give entrepreneurs, policymakers and investors the insight they need to level the playing field and accelerate startup success in Europe. That’s why we’ve carried out the first major research of its kind into employee stock options for European startups.

What we discovered was striking. In Europe, startups aren't sufficiently rewarding the risk people take by joining them. On the whole, they’re not offering enough people a meaningful stake in the business. As a result, Europe is currently failing to attract and retain the talent it needs to produce the next global tech giant.

We analysed 73 companies and 4,000 option grants. Our analysis reveals that on average, US tech workers own twice as much of the companies they work for as their European counterparts, where such benefits are often reserved for only the most senior executives.

Many governments across Europe employ policies and practices that discourage ownership and even penalise companies who use it as an incentive to attract the best people. Our league table of European countries shows that Estonia and the UK have created the most favourable conditions for startups, with Germany, Spain, and Belgium most in need of change.Alongside 30 startup CEOs, we’ve launched #NotOptional, a campaign to raise awareness of the issue among European policymakers. Add your voice to the cause by signing the letter at NotOptional.eu

We also heard from founders that European employees usually don’t expect stock options. This is changing, however, as the number of high-profile exits increases and with it, an appetite for risk.

We expect the next generation of startups to offer options more widely to employees, following in the footsteps of leading European tech companies like Farfetch, Funding Circle, Criteo and King. Ambitious founders must stay ahead of this trend if they want to attract and retain the best talent out there and build iconic businesses.

The new Index handbook, Rewarding Talent, is an in-depth look at stock options, helping entrepreneurs answer questions like who should I offer stock options to? How many? When? How do I adapt my policy as my company grows? What happens if I move into different geographies? How can I make sure my employees understand the scheme?

Entrepreneurs will find all the information they need to design their stock option plans and policies: ready-to-use allocation models, advice from fellow startup founders who’ve been through it, plus our own perspective as investors.

If you’re looking to jump straight into practical guidance, we’ve also written a Quick Guide with our top twenty tips to set you on the right track.

Alongside the handbook and quick guide, we’ve launched OptionPlan, a web app that helps companies design their own stock option plan in a matter of minutes.

We hope Rewarding Talent will give today’s entrepreneurs the tools to offer stock options confidently to all employees. We hope that NotOptional will guide governments towards policies that make employee ownership more attractive (they will soon reap the rewards as innovative companies begin to flourish in their countries). And we hope investors will pass on our data-based guidance to their portfolio companies.

But more than this, we hope to ignite the debate over the role of employee ownership. If we use stock options to their full potential, we could soon see Europe’s first transformative global tech titan.

Read the handbook and prepare your stock option plan on the dedicated Rewarding Talent site. 

Published — Dec. 4, 2018