Partly as a result of stock options in European companies, I'm the wealthiest person I know my age. So I feel I'm easily justified in saying this article reads like a ridiculous whinge and/or propaganda piece. The tax I've payed on stock income is totally inline with what I'd expect for income in general. This article is trying to suggest that equity incentives are somehow especially and unfairly (!) singled out by European tax schemes but I don't see any meaningful argument to support that. If you want to make the arguments made by this article, IMO you have to first make the general argument that taxing wealthy people heavily is a bad thing.
In short: this article is a "too much tax" whinge masquerading as a piece of economic/business insight.
> This article is trying to suggest that equity incentives are somehow especially and unfairly (!) singled out by European tax schemes but I don't see any meaningful argument to support that.
From the article,
> A few years ago the Dutch capped bonuses for bankers, money managers, and other financial professionals at 20% of their base salaries. Entrepreneurs must navigate onerous tax rates and restrictions that often make equity sharing and options more trouble than they’re worth. When employees in Germany exercise options, they have to pay income tax on the difference between the fair market value and the strike price, and that rate runs from 14% to 47.5%. They also have to pay a 25% capital-gains tax on additional profits when they sell their shares. [End]
> If you want to make the arguments made by this article, IMO you have to first make the general argument that taxing wealthy people heavily is a bad thing.
Silicon Valley startups have gotten a reputation for being a way to get stinking filthy rich. What happened as a result? Tons of people, many of which visit this website, are out there everyday foregoing traditional careers, trying to make something new and something people want to buy.
The argument is that it takes a big carrot to get people to take big risks and work really hard to make something from nothing.
Those details about the Netherlands don't actually form an argument in my view, other than "look how much tax there is". And your additional arguments still just boil down to "we should not tax high levels of wealth" so heavily.
I'm not saying that sentiment is wrong (although I absolutely do disagree with it), I'm just saying that this article is disguising "too much tax!" as "look, I've identified an interesting pattern in European policy and causally linked it to Europe's less successful startup scene".
> When employees in Germany exercise options, they have to pay income tax on the difference between the fair market value and the strike price, and that rate runs from 14% to 47.5%. They also have to pay a 25% capital-gains tax on additional profits when they sell their shares.
almost exactly like in the US. hence the GP’s complaint.
I didn't want to make my post needlessly long, but the article continues,
> In contrast, American employees typically pay a 0% to 20% rate on capital gains when options are redeemed, though they may have to pay additional levies when they’re exercised, depending on the timing and the type of equity incentive program. Germany and 14 other countries, including Sweden and the Netherlands, are more burdensome than the U.S. regarding options, according to a 2018 study by Index Ventures, a venture capital firm in London and Silicon Valley.
To get the 0%, you have to exercise at strike price (only way to do that is to forward exercise your vesting schedule which is in theory great, but I have yet to see this allowed by a company for normal employees) AND you have to be under a certain threshold of income (39k for single and 78k for married [1]).
So in reality 0% is just not possible for most people with these options.
When you exercise, the spread between strike and fair market value is taxed, whether you sell or not, or even can sell. If the company is private, you have to pay and hope they become public or get sold.
If you happen to live in CA, add some more tax on top of that.
Now, as a founder, where you do not need to use options, the math is different, but still not zero percent.
A data point: we allowed this for all our employees (83b for everyone!) and no one took us up on it. It was frustrating because as a founder, I viewed it as a benefit, but employees didn't. At all.
My guess is very few people knew that AMT was a thing and/or didn't have enough liquid cash to buy at the time. Had I know that in a few years I'd have a tax bill in the tens of thousands of dollars I'd have taken a loan out immediately to early exercise all my options and been much better off.
Europe has none of the largest tech companies. The large ones that do exist were founded a long time ago, like SAP. Their startup pipeline is weak and IMO it’s all because of government policies, as there are huge numbers of highly talented people in Europe.
it's because Europe is a continent of 20+ different large languages and cultures. In Sweden everybody speaks Swedish and nobody uses cash. In Germany, nobody speaks Swedish and everyone uses cash. There is no homogenous market like in the US or China where you can blow up some product to 300+ million people.
That's the reason why there are fewer startups in Europe. Europe has plenty of large technology companies if one stops equating technology with "user facing smartphone application". They just happen to be export oriented, or pharmaceutical or manufacturing and transport companies.
Trying to copy the US or China in producing rapidly growing startup companies is in my opinion foolish and we shouldn't buy into the constant hype of just trying to emulate America, but rather aim to increase where European companies advantages lie, in integrating high technology into existing economic sectors that integrate with industrial production.
Not only is this much better suited to the economic and social European environment that simply isn't accepting of the "break the rules, worry about the problems later" mentality of internet statups, it's also arguably much more equitable and reaches a larger section of the labour market.
>it's because Europe is a continent of 20+ different large languages and cultures. In Sweden everybody speaks Swedish and nobody uses cash. In Germany, nobody speaks Swedish and everyone uses cash.
How much does that matter though? You could just release your app/site/whatever in English and instantly have access to the US market.
The same things that make it hard to make one app for all of the EU also make it hard to make an app for the USA from outside the USA.
Even if you hire a UK or Éire citizen for their English skills, you have all the cultural reasons that means Tesco isn’t a supermarket brand in the USA and Walmart isn’t a supermarket brand in the UK even though both are English speaking nations. The language issues are also substantial, even though the cultural output of Hollywood has made it easier for many EU citizens to learn English than each other’s languages.
Yes, but irrelevant. The details of the Walmart brand are essentially unknown in the UK, and the very fact that Walmart are now trying to sell ASDA for almost the same nominal amount they bought it for 20 years ago demonstrates the exact difficulty I was referring to.
Because when I want to talk to someone for support, especially when it's a small business that might be slower to addressing my support concerns because of a lack of resources, I want to speak to a native English speaker I can understand with an 800 number.
US companies get that baked in. Everyone else has to grow to become that.
It does, the citizens of different countries don't care or know each other, anyone hardly knows how EU works or what people even do in Brussels. You have news stations that are literally for 300mil people. Same with every startup and product.
^ this, exactly. Europe is definitely not one big unique market, every country is a different one with its own specificity. They happen to share some regulation and to (almost all) use the same currency but they are quite different in their user behaviours and expectations.
- hey, we are startup, we can't pay you much, is that OK?
- well, we can't really compensate you with stock options, those are for founders
- oh no, your opinion doesn't matter, bosses are always right
- yes, you'll work crazy hours but we can only pay you for 40
In other words, EU startups have no mechanism in place to reward early employees that build the company from the scratch, it's all about making co-founders famous/wealthy. It's already bad in the US, imagine EU is 10x worse.
Did you get a competitive salary or ~1% of share of the company as an early employee? If not, you were used. The aforementioned is a typical Berlin startup. A favorite of mine is when a company tries to pay you with debt, i.e. instead of being just a developer, you become a banker for your future boss' idea. I wish I were joking...
Not hard at all, there is plenty of information about wages in IT. If you understand the root of the article, the US versus Europe comparison, take Silicon Valley numbers and compare to €58k and you will find it ridiculously low. Damn, you get more in Romania (Bucharest or Cluj), I am not kidding you.
What I see in Germany is that some of the startups are basically contracted by larger companies, tasked to develop complex solutions for a fraction of the price that an established company would require for the same task.
I wouldn't really consider those startups since they're not trying to develop their own product for a market segment. Those are more like small development shops (there are a lot of those here in the US as well).
I have never met any company like this, startup or not. Are you stuck in some scam? There are so many companies offering amazing benefits in Europe's capitals that it's hard to pick one.
At least in Croatia, I would say people are still figuring out how to do the startup thing. Certain incentives and incubators have appeared in the past few years, the country has shown some interest with improving regulation and some people are trying it out. The biggest thing I would say is the culture where I would say people are very risk averse so they do not want to jump into debt for some crazy idea so they cannot afford paying people. Most startups I know in Croatia are started by friends where no one is getting payed and then later there's a squabble when it turns out the friend who started the company now owns it while the others are just employees. Other startups hire lots of college interns for 5€ net an hour and waste time with them learning how to code instead of paying actual professionals. I would say the scene is improving and each year there are 2x as many startups doing recruiting but it's all still in its infancy.
What you describe is not anything like a startup. Product quality and speed to market are very important, you cannot get these with students learning to code.
While the government policies don't always help, in my experience they are merely a hurdle and not the underlying reason it is difficult for startups to succeed in Europe. The ambient culture that defines behavior and sets expectations in the relationships between founders, investors, employees, and society at large is much more adversarial and conservative than the US.
Being an excellent engineer, the backbone of all good tech companies, is rarely recognized, poorly compensated, and engenders much less social status than if you were on the US west coast. Ironically, even though there are many highly talented engineers in Europe, European executives and investors frequently hold American engineers working in Europe in much higher regard and treat them differently than engineers from their own countries. I've seen it many times.
This is not an environment that incentivizes the world-class native engineering talent that exists in Europe to perform up to their abilities in a high-risk startup. Good engineers correctly view themselves as being undervalued, so there is no point in taking the risk. Nothing will change until Europe places more value -- economic, social, and cultural -- on being an exceptional engineer instead of treating them as a modern day factory worker subservient to the managerial class. This is not something you can easily change with government initiatives.
Agree with this. Where people gravitate to in terms of career choices is very much driven by compensation patterns, and somehow, in (Western) Europe, being on the technical side of tech/IT just does not pay.
Large companies (those that are not tech-centric, e.g. financial services, etc) still tend to see it as a back office function and often outsources majority of operations to India (or fly and settle temporary employees locally). Companies that places tech at the center of their business recruit and hire a lot of tech talent from outside of Western Europe. There are also local developers, but their pay, compared to jobs in, say, marketing, sales, and other rather fluffy business functions, is low, low, low. Someone mentioned Bookings before. Their pay is on-par with the market average here, which is 50-80K. And that is very low compared to how a similar position is valued in SV.
Startups here in general also underpay their tech workers compared to counterparts in the US, since they point to the large companies locally (which already underpay tech roles), and say, "well, we can't afford corporate pay, we are just a startup". So you are kind of double-underpaid, even though the job descriptions are usually copy and pasted SV-speak with rainbows and unicorns.
Isn't Booking a US corporation and Yandex is a Russian one. Generally when people say "Europe" in this context they are mostly referring to the EU and the "satellites".
Regardless, the EU alone has 50% more population than the US, while the population is about as educated, yet it's only a small fraction of the US on this list.
I don't necessarily dispute that Europe is a worse environments for startups to succeed, I just don't see why taxing equity incentives has anything to do with that. And I think taxing equity incentives is fair.
it's because the market is heavily fragmented and to reach sufficient numbers you need to cover the whole European market. a startup here needs an accountant of the bat to handle the tax mess, a lawyer because incorporation is all but easy in most countries with few exceptions, a gdpr specialist, etc.
that's why there are comparatively few steps, the entry cost are massive and discouraging, and that's on top of the internationalisation requirements of course.
This is ridiculous. No, you don't need staff lawyer, accountant or "GDPR specialist" to start in Europe. One company I worked at didn't employ an accountant until pushing to €10M turnover. They still don't have a lawyer.
This is incorrect - if you have more than 10 employees that handle data, and that basically means everyone sitting behind a computer, your company has to designate someone as data privacy officer who has to make sure that things get handled according to GDPR.
These rules arent strictly enforced yet, but when you run into issues and it can be shown that you didn´t take steps to implement it, it has consequences.
That's not what the GDPR says. There's no bright line for the number of employees handling data.
A DPO should be assigned if:
>(a) the processing is carried out by a public authority or body, except for courts acting in their judicial capacity;
>(b) the core activities of the controller or the processor consist of processing operations which, by virtue of their nature, their scope and/or their purposes, require regular and systematic monitoring of data subjects on a large scale; or
>(c) the core activities of the controller or the processor consist of processing on a large scale of special categories of data pursuant to Article 9 and personal data relating to criminal convictions and offences referred to in Article 10.
(Article 37)
And in any case a data protection officer is different from a representative, as the title of Article 27 indicates ("Representatives of controllers or processors not established in the Union").
Sure, you can get by without one, just like you can speed without getting a ticket. But that doesn't mean it's the type of situation that normally occurs. For example, if nobody in your company knows how GDPR works, how would you know that you're complying with it? The same goes for tax laws.
such bullshit. someone has to fill in the relevant taxes paperwork and handle the invoices. who does that is the accountant, even if it has founder, owner or some other label attached, and the time it takes to handle the paperwork is not free, whether you pay for it in money or work hours.
I co-owned one company and presently a board member on another.
Noone said that accounting needs not be done, just that you don't have to employ anyone you listed in a startup. You do as with any other non-essential work like cleaning, catering and so on: buy external services on the need to have basis.
This is also not something in any way unique to Europe. American start-ups also need to file taxes, incorporate and so on.
did I say employ? no I said needs. everyone here so fast at replying but have you tried reading what's written? and however you want to spin it is a cost, and that is a barrier to entry which is actually quite tall if you trying to bootstrap something outside the angel/vc scene which is pretty dull anyway in Europe.
and Europe tax return are far more convoluted than the average Delaware company, especially because of bullshit like vatmoss schemes that are a specific result of the European market fragmentation, which was the main point to begin with
If you call yourself not an accountant despite doing the bookkeeping I’m pretty sure other accountants wouldn’t bat an eye at that language. It happens all the time in startups. Yes the work isn’t “free” but everyone wears many hats in a startup and often works for free.
Sure, the time cost it's not free, but it's not large enough to be a meaningful barrier of entry. For me, filing basic company taxes took like a couple hours per year.
Right. It's exactly the same barrier to entry a kebab restaurant or a bike repair shop has. If that's enough to detract one from starting a company, perhaps it's for the better.
Or, as with everything these days, pay another company to deal with it. I've been seeing ad's for Pilot.com all over recently which claims to do this work for you, in exchange for a fee, naturally.
Where are the talented people in Europe? I was looking for some for 14 years when I had my startup (in the most liveable city in the world apparently), but nobody came. What I learnt is that - naturally - nearly all highly talented people go to the USA (or sometimes UK) to maximise their chances. Also, the 2 most talented/intelligent people in IT I know since they were kids live in the US permanently now. One is at Google.
Keep believing that you'll find "huge numbers of highly talented people" here, you won't - unless perhaps you mean in the arts...
If you offered more suddenly more talented people would appear at your door. People with the know how quickly realise the range. If the top of the range is too low they don't come knocking even.
They are not evenly distributed. If you mean Vienna under the city - software engineers do not tend to stay there - low salaries, no software product jobs, only basically IT departments - so you are seen as spends there.
The problem in Sweden at least is that you need to pay this tax before you can even sell your stocks. So basically you have no money to pay the taxes with.
When I received my stock options for the company I paid no taxes at all. When I exercised them I got a tax hit, but that had to be paid like six months later so there was no issue selling enough stock to pay the tax.
Another funny thing about wealth creation.
Norway and Sweden has more dollar billionaires pr capita than the US [1].
This works if you are in a position to sell the stock to pay the tax. If the company is not publicly traded you need to find a buyer, and because you really need that money before the tax returns you might have to sell at a lower price than the one you were taxed on, if you can find one at all. This makes it harder for startup employees to exercise their stock options before an exit or the company going public, unless they already have cash at hand.
Source: Have exercised stock options in a Norwegian startup. I was lucky enough to have enough cash at hand to pay the tax.
Same as the US. You pay tax on the valuation difference when you exercise. and AFAIK you have to exercise before you sell on any primary or secondary market.
The topic though is not really about billionaires, which generally are the founders of the company. It's about the much larger number of multimillionaires that got their money from stock options on IPOed companies. There are far fewer of those in Europe.
But, to be honest, that's really not that much different than in the US. While you hear a lot about incentive stock options (ISOs) in the US not being taxed until you sell them, in reality most people who exercise ISOs will have to pay alternative minimum tax (AMT, a kind of parallel tax scheme to 'normal' taxes) when they exercise. When I exercised my options I had to pay more in tax than I did for the exercise price of the options themselves.
I'm talking about employee stock options. Google "personaloptioner". When you exercise the options and get stocks you need to pay taxes on the difference between the strike price and the market value, even if you have no possibility to sell the stocks (if the company is private for example).
Isn’t this often true in the US as well? You pay to exercise your stock options, and then pay taxes on them (since they’re income). But if your company is still private, they’re basically illiquid.
and given that there are so many countries outside europe who don't tax you as much it is just easier to move there.
I have a bunch of German friends who just went to Singapore to start their business there. In the US you also get less taxed. So it is a way of saying, hey I'm healthy, priviledged, why should I fund this massive safety net. I'll come back to Europe when I'm 60 and vulnerable.
> I'll come back to Europe when I'm 60 and vulnerable.
Come back to what exactly? If you haven't contributed to the social safety net, you're not going to get much out of it, and by the time you're 60 chances are a lot of things could change, for better or worse.
His point is that if people grow up in a country with a strong safety net (and enjoy the benefits of that upbringing), then move away to start businesses or earn money away from that country to avoid paying into the cost of that safety net, there might not be so strong a safety net when they plan to return.
Which makes perfect sense; if it happens at scale, how would that safety net survive?
Right now, the few who do this are free riders on a system everyone staying behind is supporting. It's not a problem if a thousand people leave Germany to go make money outside the German tax regime and then return in their old age, their system can absorb it.
What would happen if a fifth of the population did that? It might be harder to sustain that level of social services with that loss of tax revenue, i.e. payment for those social services.
What do you mean by safety net? If you haven't paid into pension funds (as required for employees but not eg freelancers), then you aren't receiving anything out of it. The situation for pensioners is actually very different: many can't live on regular pension so they're going to southern EU countries, or eg Thailand for much lower cost of living compared to central EU. Also, Germany's SPD party wants to buy pensioner votes by giving long-time employees additional tax money ("Grundrente"), but not eg freelancers who actually paid these taxes - a corrupt and unconstitutional plan. Their pension story is completely bankrupt anyway; in Berlin they're putting limits on housing rents and all other kinds of unhelpful restrictions on landlords, when renting property is one of the few ways to make a living when retired due to the ECB's zero interest rate policies.
If you did not contribute to the pension funds, you get money as social care, at least in my Eastern European country (part of EU). You never have to work a day in your life, this is what a number of people are actually doing.
Are they uniquely free riders or just joining the rest in their free riding? The majority of people are not net tax contributors. There's a fascinating gender difference as well, with only men as a group being net tax contributors.
Being shackled to the mediocre majority is never fun, some feel the shackles more than others.
Or they don't want one. I like safety nets, they are needed for some people that cannot make a living on their own, but I don't want one for me. It's a huge difference between "like", "need" or "want".
>I guess they'll have contributed to their personal wealth instead and will just come for the public services / safety offered.
Safety? I'm quite sure Singapore is a much safer country than Germany. The US, not so much...
But if you've already moved to Singapore and you want to live in a safe country when you're older, it would make no sense to leave Singapore, unless maybe you're moving to Japan. Western Europe is of course generally safer than America (very little gun violence, after all), but Singapore is one of the safest places on the planet. Just don't walk on the grass.
In the Netherlands at least that pension is proportional to the number of years you worked in the Netherlands, so it would be very small indeed. And health care isn't free, just insurance is mandatory and standardized.
Germany is appr. 50%. Usually you have the option to cover that tax by selling half of your RSUs, Options whatever and keep the rest or by keeping 100% and pay the tax in cash. Kind of fair, especially since you can get part of that tax back with your income tax declaration.
In Australia you pay the marginal tax rate which is nearly 50%, both on acquiring the shares, and (usually) any gains between then and when you sell them.
The article is real poorly written, I can't work out what it's saying the US or EU equivalents are.
To me the article reads as a complaint that the legal and tax structures of employee stock and options compensation in Europe make such compensation rare.
It doesn't present numerical data on how rare it is though, I'd like to see data on this.
You can use existing information, especially that you are on this site you should know where to look.
Even ignoring this, how many successful European startups did you hear about? How many from US? Just rough numbers, are they anywhere equal or for each European one you have dozen or more in US?
In short: this article is a "too much tax" whinge masquerading as a piece of economic/business insight.