Startups often don’t have the means to compete on salaries when it comes to hiring talent. Rewards like employee stock options help but in Luxembourg, they are complex and costly to implement and vest. The Luxembourg Startups Association wants this to change.
Open-source intelligence gathering firm Tadaweb was among the first Luxembourg tech startups to implement employee stock options almost a decade ago.
“Early startups cannot pay the same salaries as Amazon or big banks. So, employee stock options compensate for the salary and give employees more leverage early on,” Tadaweb co-founder and committee member of the Luxembourg Startups Association Genna Elvin said, adding: “It helps to retain talent if they have to vest their options and want to create that joint value and actually bringing in talent from far away. There’s only advantages to having them!”
Luxembourg vs Silicon Valley
In Silicon Valley, employee stock option schemes are commonplace and the cost of setting them up remains accessible for all budgets. In Luxembourg, startups have to seek legal counsel to establish such a scheme.
What is more, stock options have become stigmatised in Luxembourg, after it was found the scheme had been misused by the financial industry to pay tax-free bonuses. As a result of these kinds of incidents, in 2021 the Luxembourg government dropped its tax regime for stock options.
Under the current regime, employees who take the scheme end up being heavily taxed on their stocks. This creates a financial burden on the employee, and an additional barrier for startups wishing to use this kind of scheme to attract and retain talent.
“By putting the stock options in the same bucket as benefits in kind in certain cases, it’s making it completely out of reach for young startups to be able to implement them properly because they’re getting lost in this big financial machine,” Elvin said, adding: “The whole process of doing everything is not conducive for startups.”
“By putting the stock options in the same bucket as benefits in kind in certain cases, it’s making it completely out of reach for young startups”Genna Elvin, Tadaweb co-founder and committee member of the Luxembourg Startups Association
Tadaweb implemented a “phantom option” plan, a workaround that meant staff did not have to pay the tax on the option upfront. However, now that the firm has reached a level of maturity where employees can vest their stock options, anyone wishing to do so will be taxed as a benefit in kind.
Popular With Startups
Despite the drawbacks, stock option schemes remain popular in the startup ecosystem. eLfy Pins’ events media firm, Supermiro, has dedicated 5% of the company’s value to stock options reserved for employees who have been with the company for three years or more. Since introducing the scheme in 2017, 20% of employees have taken up the offer.
“I think it’s really something that people really appreciate, because it’s a step that says that you’re proud of the company, you’re an important member and we recognise that you do a lot to make it grow,” said Pins, adding: “And if the company is doing well, then you will also have a more substantial incentive.”
“It’s a step that says that you’re proud of the company, you’re an important member and we recognise that you do a lot to make it grow”Elfy Pins, co-founder Supermiro
France & the rest of Europe
In its manifesto, the Luxembourg Startups Association calls on Luxembourg to create a specific limited shareholding plan for startups that would allow them to grant options to subscribe to shares in the startup at a price fixed in advance (exercise price). The association suggests the regime be inspired by the French Bons de Souscription de Parts de Créateur d’Entreprise (BSPCE) programme.
This legal instrument confers the right to subscribe to a share of the issuing company at a price which is pre-defined at the time of it being granted. Importantly, the granting of BSPCEs does not entail any cost for the issuing company and it is issued free of charge to the beneficiary who pays nothing as long as the BSPCE is not exercised.
Over the past five years, employee stock option ownership in Europe grew from 20% to 22%, according to the Not Optional campaign by Index Ventures. The VC firm rated the Baltic countries as having the friendliest European regimes with France a close contender. And, since January 2023, Ireland, Spain and the Netherlands updated their policies that impact stock options, with similar steps expected to be taken by the UK, Austria and Belgium in 2023.
In the future Europe could adopt a more harmonised approach. The European Commission is expected to establish a European Stock Options Working Group led by innovation commissioner Mariya Gabriel, as part of the New European Innovation Agenda, its strategy for startups published in July 2022.
On its side, the Luxembourg Startups Association is working with lawyers to develop legal toolkits aimed at startups. At the same time, it has met with ministers and the prime minister to discuss the main gaps in the startup ecosystem, including a special treatment for employee stock options.
Elvin said: “The biggest thing for us was that they acknowledged the country needs to do better. They made no promises, but I think a lot of the work that we’re doing is getting them out from under the rug and saying: ‘if you do want to have a thriving startup ecosystem, then you need to address these.’”