Part II: Employee equity compensation: Europe vs. US
Venture as an asset class has undergone a transformational change in the last decade. The typical time from Series A to IPO has lengthened, largely, but not wholly, due to an influx of private capital, which postpones the imperative to initiate an IPO. I explored this changing venture landscape and its impact on employee equity in “Part 1: Employee equity in a changing venture landscape.”
In an ideal world, employee equity compensation is transparent, value-additive and efficient to implement for both employees evaluating career prospects and for companies looking to scale. We may not have an employee equity utopia to model our European framework from, but the Bay area is as reasonable an approximation as we have. San Francisco’s more mature employee compensation plans, developed over 30+ years, have helped create the tech giants that have dominated the valley. Employee ownership is part of the “secret sauce” for attracting and retaining top talent in the US and subsequently developing their world-renowned venture ecosystem.
Comparing and contrasting employee equity programs: US vs. Europe
Using data from the Radford 2020 VCAC Compensation Report and 2020 VCECS US & European Executive Compensation Study we are able to compare employee equity compensation data across Europe to the equivalent data out of Silicon Valley.
We’ve come to three observations:
1. Total compensation packages in Europe are lower than in the US
2. New hires are offered significantly less equity in Europe than in the US and this gap is largest at the early stage
3. Local legal complexity in Europe is higher than in the US
- Total compensation packages in Europe are lower than in the US
Our data suggests that on average, Silicon Valley companies compensate employees (base salary + targeted bonus), from management to engineers, ~2x more than their European counterparts. This difference exists to a degree regardless of a startup’s scale or the respective position being compared.
It can be argued that differences in living costs, quality of life, and competition for talent drive this divide in compensation, but regardless, comparable positions are simply paid more in San Francisco than in Europe. This difference in compensation is exacerbated when company valuations skyrocket and employee equity value increases astronomically. When looking at the top venture success stories, equity value becomes insurmountable compared to cash salary, which brings us to the next point.
2. New hires are offered significantly less equity in Europe than in the US
Across all our employee compensation data, San Francisco continues to deploy a sizable amount of equity to new hires relative to their European peers. Segmenting this data by fundraising status shows a near ~7x increase in new hire equity in early-stage startups in San Francisco relative to Europe. So while the gap narrows between Silicon Valley and Europe in subsequent fundraising rounds, Europe consistently falls behind in percentage of company ownership allocated to new employees.
We find this particularly shortsighted given the importance of early team members to a company’s success. The ability to offer equity upside is essential to attracting top talent early in a company’s growth journey, especially when resources are scarce but execution is key. When the lure of equity with potential huge upsides, on top of admittedly better weather, takes and then keeps our top founders and engineers in California, Europe misses the opportunity to build even more incredible tech companies here in Europe.
3. Local legal complexity in Europe is greater than in the US
Finally, equity compensation is simply more complicated in Europe. There are varying degrees of regulation and tax schemes across countries that make offering equity to employees as a substitute for salary less advantageous in Europe. In the Bay area, more than ~70% of companies have an equity compensation program for every employee. In Europe, just ~30% of companies offer equity to every employee. Instead, the historic norm in Europe is limited equity offerings available only to founders and management. The aforementioned variations in regulatory and tax have led to there being a wide range of employee liquidity plans in Europe.
For example, in Germany, one of the fastest-growing tech hubs in Europe, employee equity programs such as the ISO that created the success of Silicon Valley are simply not possible. Employees in Germany generally participate in Virtual Share Option Plans (VSOPs), where employees are required to pay significant tax upon exercising their options, as well as a capital gains tax upon the subsequent sale of their shares. The value leakage this creates for both companies and employees makes equity compensation less appealing. Germany is just one example.
European tech companies are coming together as a community to drive change, Not Optional is an open letter to policy makers urging policymakers to reduce the regulatory hurdles in offering compelling employee option plans in Europe. Not Optional has reviewed and compared employee stock offerings across 20 European countries and created a ranking system based on overall ‘friendliness,’ as well as, summarising various rules and regulations. Of the 20 countries ranked, only 5 European countries were ranked more attractive than the US in terms of stock option ‘friendliness’.
So what now?
The employee equity programs in Europe, or lack thereof, is not a new problem. Nor is it an unsolvable problem. Historically, high-growth startups in Europe have not had easy and efficient access to liquidity. This continues to change for the better. In 2020, France announced a set of changes that make stock options simpler and more efficient for companies and their employees. Employees, founders and investors will continue to push for regulatory changes to allow more fair and systematic approaches to employee equity.
Solving a portion of this pain point is what inspired Balderton to launch Europe’s first dedicated secondary fund. Historically, liquidity options for employees in European startups have been ad-hoc and only available in breakout companies where a marketplace develops. Our Liquidity I fund set out to change that system. Since launching in October 2018, we’ve helped management teams of some of Europe’s fastest-growing tech companies provide paths to liquidity for employees ahead of an IPO date. In our experience, we’ve seen how crucial it is for incentivizing and aligning employees with management’s mission which provides more time to focus on business growth rather than looming exit conversations.
Given Europe’s approaching wave of exits and influx of tech unicorns, now is the time for companies to prioritise and demand a regulatory system that benefits founders and employees. The ability to offer employee ownership in startups is pivotal to the continued growth and maturation of Europe’s startup ecosystem. We shouldn’t expect employees to accept the status quo, nor should we be complacent with losing top-tier talent to US startups and more risk-averse positions. We, as a community of venture capitalists and entrepreneurs, need to push forward a European ecosystem that benefits employees, spurring a virtuous cycle of innovation.
