Are European tech start-ups being held back by lower ‘reward for risk’?

Reward for risk: Giving employees ‘a greater stake in the game’ is essential if Europe is to produce the next wave of global tech giants, according to a new research by Index Ventures.

Over the past decade, in tandem with the explosive growth of early-stage businesses in Europe, investors and entrepreneurs alike have been speculating how to catalyse further growth for scale-ups.

Most start-ups that pass the need for Series C funding struggle to find capital in Europe, and even in the early stages of growth, industry experts often cite an aversion to risk as a reason why entrepreneurs don’t push their businesses further, and investors don’t take a gamble.

According to new research, it may be less about investors and founders avoiding risk, and more about tech workers not being rewarded for their risk-taking. Index Ventures found out that Silicon Valley tech workers receive double the ‘reward for risk’ of their European counterparts.

Even though European tech is thriving, the collective sector must go further in rewarding risk if it is to produce the global tech titans of the future.

In Silicon Valley, the reigning global gold standard for tech entrepreneurship, employee ownership is routinely used to attract and retain the best talent. On our side of the Atlantic, it is offered inconsistently and at far lower levels.

The research shows that on average, tech workers in the US now own twice as much of the companies they work for compared to their European counterparts, where such benefits are often reserved for the most senior executives.

A league table of European countries shows that in terms of broad equity ownership by employees, the UK has created the most favourable conditions for start-ups, with Germany and Spain most in need of change. However, this shows that there is wide variation between national policies across Europe– particularly when it comes to tax frameworks.

Index Ventures has backed some of the fasted growing start-ups in Europe, included Adyen, Deliveroo, Farfetch, Funding Circle and Skype, and is no stranger to the ups and downs of the European tech ecosystem. “Europe is on the cusp of greatness, but risks coming short of building companies the size of Amazon, Facebook and Google if it cannot compete for the talent it needs,” founding partner, Neil Rimer, says.

Index is launching a new handbook at Slush Helsinki later this month, to provide entrepreneurs and policymakers with the insight they need to level the playing field and accelerate success in Europe.

There are three main factors preventing greater adoption of employee ownership as a means to secure talent in Europe. Firstly, European governments must create the right conditions to encourage broader employee ownership.

According to the report, European employees are often penalised for their stock options and similar equity instruments. In much of Europe, employees must pay a high strike price and are heavily taxed on exercise as well as sale, with leavers often receiving nothing. This is in stark contrast to the US where stock options are supported and encouraged by more favourable tax policies.

In light of Brexit, the research suggests that retaining existing tech talent may be crucial. Martin Mignot, partner at Index Ventures adds: “Access to talent is the single most important ingredient for creating transformative tech companies, which is why we are calling on European governments to help level the playing field for our ambitious entrepreneurs by creating the right conditions to support and incentivise employee ownership. Attracting the best talent is the biggest focus for all entrepreneurs and should be the singular focus of all governments who seek to support innovation, entrepreneurialism and job growth.”

The report also reveals a missed opportunity in that financial benefits of employee ownership is not widely understood in Europe. This is essential to increase awareness of their value among tech workers. The research notes that European workers still do not expect stock options much of the time, but Index expects this will change over time as employees begin to witness the benefits first hand and more European tech companies experience high-profile exits.

European entrepreneurs have to date suffered from a lack of information on the level of ownership incentives offered by their counterparts in Europe and the US. Rewarding Talent at last ‘lifts the lid’ on this issue, providing founders and governments with the insight they need to compete and succeed.  As part of Rewarding Talent, Index is also launching OptionPlan, an app for entrepreneurs to design their own stock option plans.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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