BERLIN, GERMANY – NOVEMBER 15: German Finance Minister Christian Lindner gives a statement to the media at the Chancellery following the weekly government cabinet meeting on November 15, 2023 in Berlin, Germany. The topic was a ruling by the German Constitutional Court declaring that the coalition government’s shift of federal money in 2021 originally earmarked to alleviate the consequences of the coronavirus pandemic and that had gone unused towards climate change mitigation measures was unlawful. (Photo by Sean Gallup/Getty Images)
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Germany on Friday approved a package of key reforms to its capital markets frameworks to help its technology industry compete with Silicon Valley.
The reforms, which are expected to come into effect on Jan. 1, 2024, will usher in a litany of changes to Germany’s frameworks for stock-based compensation at startups, listing of companies and taxation.
The reforms, which have been in the works for sometime, had been widely expected.
Some of the major changes will be to employee stock options plans, which allow companies to hand a slice of the business to their employees.
Martin Mignot, a partner at Index Ventures who has pushed for reform to stock options policies in Europe to improve tech employee retention, said that previously the laws were “disadvantageous for employees and a really unfair policy for everyone.”
“There was a formal ESOP plan in law in Germany but it was just so cumbersome administratively where every minority shareholder gets a vote and veto right almost, and also very little tax advantage,” Mignot said, referring to the acronym for Employee Stock Option Plans.
“It made it such that it was virtually impossible for companies to use actual ESOP,” he added.
Index has invested in a number of high-profile German tech startups, including human resources software firm Personio and financial service startup Raisin.
What’s changing?
Under the new German rules on ESOPs, taxes on employees’ stock options will be deferred until the point of sale so that staff aren’t faced with the prospect of being taxed on their shares as soon as they receive them, according to a draft version of the legislation viewed by CNBC.
Meanwhile, the scope of the scheme will also be widened so that more growth companies can benefit.
The threshold for companies that can take advantage of German ESOP plans will be raised so that firms with up to 1,000 employees and a maximum of 100 million euros ($108.7 million) of annual revenues can distribute shares to staff.
Capital gains tax rules will also be changed so that startup employees are charged tax on the profits they make when they sell their shares. This tax is viewed as a reflection of the risk that employees take on a young, unproven startup.
Meanwhile, capital gains tax rules will be changed so that startup employees are charged tax on the profits they make when they sell their shares. This tax is viewed as a reflection of the risk that employees take on a young, unproven startup.
The new legislation will also mean that companies listing in Germany can issue dual-class shares. Dual-class shares are a key point of attraction for venture-backed startups, as it allows founders to maintain control over the business.
Competing with the U.S. for talent
Europe now has a much more established venture capital industry which has provided startups with access to ample amounts of cash, with billions of dollars worth of funds having been raised by funds across the continent.
But bottlenecks remain around attracting talent that mean it has been harder to compete with Silicon Valley giants when it comes to finding the best people.
European tech startups are unable to match some of the offers by U.S. tech giants like Google, Amazon, Meta and Microsoft — but stock options provide them an alternative way to compete on compensation, Index Ventures’ Mignot said.
