Attracting and retaining top talent is one of the biggest challenges startups face today. By offering employees a stake in the company’s future success, startups can foster a culture of ownership and commitment. In this article, we will explore how stock options work, their benefits, the current European landscape, and how they can be optimised for greater impact.
Stock options give employees the right to buy company shares at a set price after a certain period, also known as the vesting period. If the company’s stock price rises, employees can purchase shares at the lower, predetermined price and potentially sell them for a profit. This mechanism aligns employees’ interests with the company’s success, encouraging them to stay and contribute to its growth. They are very popular in the US because there is no upfront cost or tax for the employee or the company. In Europe, stock options’ rules and tax treatment vary by country, but the goal is to incentivise and reward employees for the company’s growth.
Attracting and retaining talent
For founders, stock options are a valuable tool to attract top talent. With limited cash for salaries, especially in the early days, stock options can supplement compensation packages, making them competitive with larger companies. This stake in the company’s future success motivates employees to work harder and stay longer.
Other interested parties in stock options plans besides founders and employees are the investors themselves, as they understand that such incentives benefit the company. Like the founders, the investors see the increased chances to attract the necessary talent to pursue the company objectives, which will also have a positive effect that creates alignment between employee interests and the growth of the startup itself.
Making stock options work for all
Ideally taxed only once and at the time of capital gain, options can reduce the tax burden for employees, making them highly attractive. In addition, startups that issue non-voting stock options allow founders and early investors to maintain control while offering attractive compensation packages to their employees. This provides a win-win situation for employees and company leaders. Both are best practices, but none are widely implemented in Europe. Yet.
The European landscape: Progress and pain points
Europe’s startup ecosystem is diverse, and so are its stock option policies. In our latest Startup Nations Standards (SNS) Report, seven out of 21 surveyed countries achieved a 100% implementation level for Standard 3, Stock Options, demonstrating that they have established top-tier stock option policies. This result is based on evaluating the following substandards: Taxation, Non-voting rights, and Stock Options schemes. The report finds that 16 countries (76%) allow the issuance of non-voting stock options, reflecting a positive shift towards more flexible equity compensation. Additionally, just over half (52%) of the countries set up a specific programme for Stock Options, indicating relative interest in this scheme at a national level.
However, there are significant disparities in how stock options are treated across EU member states. This is particularly striking regarding taxation, as Stock Options are taxed once at the time of sale in only nine countries (43%), thereby hindering their attractiveness. Differences in taxation, eligibility criteria, and regulatory frameworks can create a complex environment for startups operating across borders.
Moving forward
Given the significant heterogeneity between EU Member States, At ESNA we seek to improve coordination between countries for better policy. For startup founders, stock options are more than just a perk—they’re a strategic lever. With a perfect symbiosis between founders, investors, and employees when it comes to their respective interests around the startup, stock options are an instrument that contributes to the desired growth, fosters innovation, and cultivates loyalty.
By harmonising regulations, clarifying criteria, reducing administrative burdens, and boosting education—Europe can create a more favourable environment for startups to flourish. Embracing these changes can propel the continent to the forefront of the global startup ecosystem, making it easier for founders to attract and retain the talent needed to succeed.
