Dusseldorf The employees should also benefit from the many new billion-dollar valuations for start-ups in Europe: founders are allocating more and more company shares to their employees, shows an analysis by the venture capitalist Index Ventures, based in San Francisco and London. 350 advanced start-ups were examined for the so-called Series D financing.
Five years ago, Europe’s founders gave an average of ten percent of their shares to employees. Today they are approaching the level of Silicon Valley: 15 to 17 percent is common in Europe, in the USA it is 17 to 23 percent.
Many experts consider employee participation as one of the most important instruments in the start-up business. Founders can use it to put together an attractive salary package – even if they can only pay low salaries at the beginning.
In addition, investments are a means by which companies retain talent. As a rule, employees have to earn their share packages over four years. The great promise of the founders: Anyone who has been involved in building up their company for years should be rewarded: Headquarters and long-term employees can become millionaires.
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The fact that more shares are being issued today is also due to the founders’ bargaining power in times of the venture capital boom. Because they have to negotiate the shares for their employees in financing rounds with their investors. At the moment her position is better than ever.
Up to 15 percent of the start-up capital is earmarked for employee shares.
(Photo: Linus Petit)
David Nothacker did that too. He is the founder and head of Sennder, a Berlin-based logistics start-up that exceeded a billion dollar valuation in a financing round in January. Recruiting talent is a constant topic for him: the company, founded in 2015, now has 900 employees and is set to continue to grow.
Those who own shares are more interested in the company’s success
Like most other German start-ups with participation programs, Sennder uses the concept of virtual stock options. Put simply, Nothacker has reserved twelve percent of his company for employees: “If we were to sell at the current valuation, our employees would get a total of 120 million euros,” he says.
As the Handelsblatt learned, there was just a foretaste: Sennder has made two million euros available for disbursement from the latest financing round. Employees who have been with us for more than a year and are partially remunerated with shares were able to have the current value of their participation paid out.
In several cases, options worth more than 10,000 euros have been converted: “Now everyone understands that these shares are really worth something – and not play money as with Monopoly,” says Nothacker. Like many observers, some employees find it difficult to trust valuation billions on paper.
But, according to Nothacker, a high double-digit number of employees also took advantage of the offer to receive a larger part of their salary in the form of virtual shares in the future. A good sign for the founder: the employees believe in the company, take risks and are even more interested in the company’s success in the future.
According to the venture capitalist Index Ventures, start-ups often start involving employees at an early stage. The younger the company, the more important the means, because only low salaries can be paid and it is otherwise difficult to retain good employees.
One example is the young Berlin company Hier Foods. Founder Lara Hämmerle and her 24 employees use an app to connect regional food producers with supermarkets. Hämmerle is in the middle of the so-called seed phase and has earned a seven-figure amount so far.
Up to 15 percent of the start-up capital is earmarked for employee shares. “The amount of the shares varies with us depending on the position, but all employees receive the offer,” explains Hämmerle.
Five years ago, according to Index Ventures, investment programs were reserved for managers, but today they are also for entry-level positions. Sennder has also expanded the participation program from the management level.
All developers and employees with personnel responsibility are now involved. “When the program is established and successful, we will certainly expand it to include newcomers,” says Nothacker. In times of talent shortages, options can make all the difference when it comes to finding talent.
Germany offers worse conditions for participation than neighboring countries
“Funding used to be the biggest bottleneck for business growth in Europe,” says Dominic Jacquesson of Index Ventures. Today, instead, it is well-trained employees such as developers and salespeople – who are increasingly demanding equity investments.
However, founders such as Nothacker and Hämmerle continue to criticize the regulatory conditions in this country. At Index Ventures they are confirmed: Together with Belgium, Germany is one of the European countries with the worst prerequisites for employee participation.
Issuing real shares is structurally not feasible for German start-ups. Employees would then have to be involved in all – sometimes time-critical – decisions. And the virtual options are subject to the high taxation of up to 50 percent for premiums.
Nothacker thinks this is wrong: “Our employees are investing in shares, so the capital gains tax of 25 percent should apply.” Especially since founders could even structure their companies in such a way that they only pay one percent tax when they sell shares.
Under the current conditions, the logistics start-up Sennder had to pay 2.4 million euros for its two million program including ancillary wage tax costs, while the employees only received one million euros. A disadvantage in international competition. “I would be willing to pay more taxes myself if the employees had more of their profits,” says Nothacker.
In the last legislative period, the Union and the SPD have already decided on changes, which, from the start-up scene’s point of view, hardly bring any improvements. The traffic light coalition wants to tackle the issue again. Exit open.
More: The new power of the founders: Why the start-up scene is changing massively