Hiring and retaining talent has been cited as major challenge by 50% of the start-ups in Germany, as a result the start-ups have on an average five vacant positions at any given period, this can be ascribed to the lack of skilled employees and higher salary expectations. One out of four start-ups in Germany even grapple to compete with big established competitors that incentivize the employees with high pay scales and other benefits, hence start-ups use stock option plans to level out the benefits for employees with the expectation of future payouts, but equity distribution framework conditions in Germany make it prohibitively difficult to issue stock options.
“Giving out stock options is prohibitively difficult under German law, and the workaround is twice as expensive as setting up such a scheme in London, Israel or in Silicon Valley, this is a massive disadvantage for German Start-ups” - Johannes Reck Founder GetYourGuide
Comparison of equity distribution schemes Germany vs U.K vs U.S.APain points of employee participation schemes in Germany
- Unfavorable tax treatment
- Lack of government backed schemes & transparency
- Administrative burden & shareholders rights
- Bureaucracy
Improvement suggestions
From the comparative analysis of schemes in U.S.A and U.K we can say that overall Germany requires better framework conditions for employee equity distribution, the mentioned pain points can be addressed as following suggestions by the policymakers in Germany:
- Creation of a separate incentivized share class for start-ups (Can follow in the footsteps ok U.K and U.S.A)
- Curtail/ reduce the tax disadvantages for employees by levying long term/ capital gains taxation on sale of shares instead of taxing them as income (especially avoid problem of “Dry income”).
- Eliminate uncertainties about tax consequences and equity issuance constraints by creating a neutral and transparent process based on international models. Also, ascertain a standardized cost-effective valuation method for equity shares.
- Improve conditions for start-ups to eliminate notarization on transfer of shares and give founders more autonomy to modify shareholder rights especially for younger start-ups.
Results and discussions
In this study we compare and point out the significant differences in employee participation programs in Germany vs UK and USA, mainly the equity distribution schemes were studied in detail and problems and pain points were discussed. From the study we can say that overall Germany requires better framework for employee equity distribution schemes at legislation levels to remain competitive in international comparison. The main points which need to be addressed are taxes, shareholders rights, reduce or eliminate the costs associated with transfer of shares and notarization and set standard guidelines for evaluating fair market value of the shares, even though there are some work arounds like offering VSOPs and some relief with introduction of article 19a in 2021 to the personal income tax act, still they don’t tackle the main issues and pain points as mentioned above. It is the need of the hour to look into these problems by addressing them the start-ups in turn can flourish by creating more job opportunities and as a result contribute towards overall economy.