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Aversion to risk. I was told by German entrepreneurs that they can get funding only when they give bank/VC/investor a collateral of the same value or if they ar

by bitL 6y ago

Aversion to risk. I was told by German entrepreneurs that they can get funding only when they give bank/VC/investor a collateral of the same value or if they are already profitable and don't need it anymore.

garmaine 6y ago
Also German law doesn't make easy allowances for employee ownership / stock options. There's a hack to get around this where you write a contract for a percentage of the eventual exit, but this limits what sort of exits are possible. European laws, regulations, and investor culture are all setup in ways that hurt startups.
- jashmatthews 6y ago
  > Also German law doesn't make easy allowances for employee ownership / stock options. Airbnb gave me plenty of RSUs while I worked in Berlin. No problem. The Berlin startups with their shit together also know how to use UK (now Irish) Limited companies, which have no issues with offering options to employees.
  - garmaine 6y ago
    It’s a German tax law issue. It’s legal to do but not advantageous to the employee, because they don’t allow things like 83(b) elections. Not sure how Airbnb made it manageable in your case, but incorporating elsewhere doesn’t fix the issue.
    - hef19898 6y ago
      RSUs are working just fine. I got them from Amazon, I was able to get largely discounted shares from EADS back the day. Tax wise Amazon RSUs were treated like part of my salary, covering taxes when they vested ranged from selling all and selling parts of the RSU or covering taxes cash and keeping all of the RSUs. The discount at EADS was treated as part of my salary. No problem whatsoever. INAL, but all these instnces had in common was the legal entity being stock based (AGs in German parlance). Most companies in Germany end to be GmbHs, in that case ownership is harder to change but accounting is a lot easier. That being said, Berlin start-ups have a tendency to complain a lot. If they wanted, they could make a lot of things work.
      - garmaine 6y ago
        I’m talking about startups, not big public companies. That approach doesn’t work so well when the startup shares are illiquid and no market exists to sell them at vesting or tax time. In the USA this isn’t an issue because you can make an 83(b) election with our tax authority which basically means “I elect to pay taxes when I sell, rather than at vesting.” So as your illiquid startup shares vest and you accumulate paper wealth, you pay zero taxes on those vested options unless and until the company goes public, is acquired, pays dividends, etc. If the company goes under, as most startups do, you owe the tax man nothing. To my knowledge no equivalent setup exists under German tax law.
        hef19898 6y ago
        Which doesn't prevent companies from issuing them, does it? Obviously, I'm no tax expert. I did hear of enough instances where people in the US owed taxes for basically worthless shares here on HN. And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. No harm to your bottom line. And a potential upside.
        garmaine 6y ago
        Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. But there IS a process. AFAIK there is no such thing in many European jurisdictions, like Germany. > And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. ...how? Sell to whom? On what market? I think you’re missing the point. These are pre-IPO shares with explicit sale restrictions that prevent you from selling.
        hef19898 6y ago
        Back to the start-up? Or just combine the RSUs with a cash bonus large enough to cover the taxes? Both solutions would work.
  - passerby1 6y ago
    If you sold them, what was the taxes to pay?
gumby 6y ago
Tolerance for risk by entrepreneurs is low too. I used to read the German blog ,,Gründerszene’’ — “founder scene” but all the companies they covered were just retail shops without a physical presence: organic oats on the web! Nothing technical and nothing high growth. Tragic.
- alkonaut 6y ago
  If I were to start my business, that's what I'd set out to do though. I'd want to start a company that could grow from just me, to maybe 10 people in 10 years. Doing round the clock coding and VC pitches hoping to be sold to Google to me seems like a nightmare compared to trying to make a cereal store on the web with products I really enjoy. This isn't just risk aversion, it's really that the tiny changce of being a billionaire doesn't really appeal to me more than a solid chance of just building a business and having a healthy work/life balance the whole way. Nothing to be about "startups" means you have to have things that "scale" or hope for exponential growth or being able to sell the company, or even some new or impressive tech. To me it literally means "a young company bootstrapped with a small amount of cash, hoping to grow".
  - gumby 6y ago
    Then it's simply a business. Nothing wrong with that but calling your local grill or clothes shop a "startup" turns the term into just a synonym for "small business".
    - alkonaut 6y ago
      I use it as a term for "just-started company hoping to validate business model then grow". Not just "VC funded company looking to grow exponentially". E.g. wikipedia "startups refer to new businesses that intend to grow large beyond the solo founder" I don't mind that definition. But I also wouldn't call my company not a startup if it doesn't want VC funding or doesn't hope to grow more than linearly/organically.
techdragon 6y ago
I saw similar things when I last looked into the Australian angel/VC startup funding works. This was 10 years ago however so things may have improved since then. But at the time it was most definitely due to a risk averse stance by investors.
JumpCrisscross 6y ago
Look at the consequences of personal bankruptcy in Germany [1]. They are severe and permanently close off entire career paths. Europe’s culture is less risk tolerant, fundamentally, than America’s. That said, entrepreneurship isn’t the sole path to innovation. Germany has a solid history of non-entrepreneur value finding. [1] http://www.privatinsolvenz-hilfe.org/en/german-bankruptcy-law.html http://www.privatinsolvenz-hilfe.org/en/german-bankruptcy-la...
- raverbashing 6y ago
  Personal bankruptcy does not apply to corporate contexts. And it is much rarer than in the US
  - JumpCrisscross 6y ago
    > Personal bankruptcy does not apply to corporate contexts Most entrepreneurs have leveraged their personal finances at some point. I personally remember running payroll off a personal credit card in a particularly tough quarter. That route is prohibitively risky in most European countries. > it is much rarer than in the US That is the point. There is reduced risk taking in Europe. Many entrepreneurs’ successes are preceded by failures of varying magnitude. The American system’s willingness to forgive and forget creates lots of problems, but it also fosters an innovative culture that is comfortable with risk taking.
    - raverbashing 6y ago
      > That route is prohibitively risky in most European countries. I'd say this is risky everywhere and regardless of the fact that personal bankruptcy is a thing in the US. Heck, running big debts on credit cards is a pretty unique US thing, because usually the limits are either little and/or the interest rate is prohibitive. I agree the risk taking is smaller in Europe, but if you need a loan go talk to your bank, putting a debt in a credit card is a stupid idea period even in the US.
dx87 6y ago
That's the reason Nassim Taleb gave in Black Swan as well. He said in Europe and Asia, failing is looked at negatively, while in the USA failing is fine, as long as it wasn't due to lack of effort. So the USA has a lot of failures, but also a lot of innovation, whereas European businesses are more stable, but also don't innovate as much.
- kamaal 6y ago
  Even a generation back, failures were a taboo in India. Risk aversion was to a point that would discourage people from even trying. Suicides dues to social shaming are common till date. The only way to make a living in India for a long while was like going through an established social heuristic. Any deviation used to be frowned upon. These days things are diluted to an extent. May be due to overall effects of globalization and people just moving on due to cultural dead ends.
megablast 6y ago
It’s funny though. Everyone has free health cover, so they should worry less about failing.

by bitL 6y ago

garmaine 6y ago

Also German law doesn't make easy allowances for employee ownership / stock options. There's a hack to get around this where you write a contract for a percentage of the eventual exit, but this limits what sort of exits are possible. European laws, regulations, and investor culture are all setup in ways that hurt startups.

jashmatthews 6y ago
> Also German law doesn't make easy allowances for employee ownership / stock options. Airbnb gave me plenty of RSUs while I worked in Berlin. No problem. The Berlin startups with their shit together also know how to use UK (now Irish) Limited companies, which have no issues with offering options to employees.
- garmaine 6y ago
  It’s a German tax law issue. It’s legal to do but not advantageous to the employee, because they don’t allow things like 83(b) elections. Not sure how Airbnb made it manageable in your case, but incorporating elsewhere doesn’t fix the issue.
  - hef19898 6y ago
    RSUs are working just fine. I got them from Amazon, I was able to get largely discounted shares from EADS back the day. Tax wise Amazon RSUs were treated like part of my salary, covering taxes when they vested ranged from selling all and selling parts of the RSU or covering taxes cash and keeping all of the RSUs. The discount at EADS was treated as part of my salary. No problem whatsoever. INAL, but all these instnces had in common was the legal entity being stock based (AGs in German parlance). Most companies in Germany end to be GmbHs, in that case ownership is harder to change but accounting is a lot easier. That being said, Berlin start-ups have a tendency to complain a lot. If they wanted, they could make a lot of things work.
    - garmaine 6y ago
      I’m talking about startups, not big public companies. That approach doesn’t work so well when the startup shares are illiquid and no market exists to sell them at vesting or tax time. In the USA this isn’t an issue because you can make an 83(b) election with our tax authority which basically means “I elect to pay taxes when I sell, rather than at vesting.” So as your illiquid startup shares vest and you accumulate paper wealth, you pay zero taxes on those vested options unless and until the company goes public, is acquired, pays dividends, etc. If the company goes under, as most startups do, you owe the tax man nothing. To my knowledge no equivalent setup exists under German tax law.
      - hef19898 6y ago
        Which doesn't prevent companies from issuing them, does it? Obviously, I'm no tax expert. I did hear of enough instances where people in the US owed taxes for basically worthless shares here on HN. And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. No harm to your bottom line. And a potential upside.
        garmaine 6y ago
        Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. But there IS a process. AFAIK there is no such thing in many European jurisdictions, like Germany. > And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. ...how? Sell to whom? On what market? I think you’re missing the point. These are pre-IPO shares with explicit sale restrictions that prevent you from selling.
        hef19898 6y ago
        Back to the start-up? Or just combine the RSUs with a cash bonus large enough to cover the taxes? Both solutions would work.
- passerby1 6y ago
  If you sold them, what was the taxes to pay?

gumby 6y ago

Tolerance for risk by entrepreneurs is low too. I used to read the German blog ,,Gründerszene’’ — “founder scene” but all the companies they covered were just retail shops without a physical presence: organic oats on the web! Nothing technical and nothing high growth. Tragic.

alkonaut 6y ago
If I were to start my business, that's what I'd set out to do though. I'd want to start a company that could grow from just me, to maybe 10 people in 10 years. Doing round the clock coding and VC pitches hoping to be sold to Google to me seems like a nightmare compared to trying to make a cereal store on the web with products I really enjoy. This isn't just risk aversion, it's really that the tiny changce of being a billionaire doesn't really appeal to me more than a solid chance of just building a business and having a healthy work/life balance the whole way. Nothing to be about "startups" means you have to have things that "scale" or hope for exponential growth or being able to sell the company, or even some new or impressive tech. To me it literally means "a young company bootstrapped with a small amount of cash, hoping to grow".
- gumby 6y ago
  Then it's simply a business. Nothing wrong with that but calling your local grill or clothes shop a "startup" turns the term into just a synonym for "small business".
  - alkonaut 6y ago
    I use it as a term for "just-started company hoping to validate business model then grow". Not just "VC funded company looking to grow exponentially". E.g. wikipedia "startups refer to new businesses that intend to grow large beyond the solo founder" I don't mind that definition. But I also wouldn't call my company not a startup if it doesn't want VC funding or doesn't hope to grow more than linearly/organically.

techdragon 6y ago

I saw similar things when I last looked into the Australian angel/VC startup funding works. This was 10 years ago however so things may have improved since then. But at the time it was most definitely due to a risk averse stance by investors.

JumpCrisscross 6y ago

Look at the consequences of personal bankruptcy in Germany [1]. They are severe and permanently close off entire career paths. Europe’s culture is less risk tolerant, fundamentally, than America’s. That said, entrepreneurship isn’t the sole path to innovation. Germany has a solid history of non-entrepreneur value finding. [1] http://www.privatinsolvenz-hilfe.org/en/german-bankruptcy-law.html http://www.privatinsolvenz-hilfe.org/en/german-bankruptcy-la...

raverbashing 6y ago
Personal bankruptcy does not apply to corporate contexts. And it is much rarer than in the US
- JumpCrisscross 6y ago
  > Personal bankruptcy does not apply to corporate contexts Most entrepreneurs have leveraged their personal finances at some point. I personally remember running payroll off a personal credit card in a particularly tough quarter. That route is prohibitively risky in most European countries. > it is much rarer than in the US That is the point. There is reduced risk taking in Europe. Many entrepreneurs’ successes are preceded by failures of varying magnitude. The American system’s willingness to forgive and forget creates lots of problems, but it also fosters an innovative culture that is comfortable with risk taking.
  - raverbashing 6y ago
    > That route is prohibitively risky in most European countries. I'd say this is risky everywhere and regardless of the fact that personal bankruptcy is a thing in the US. Heck, running big debts on credit cards is a pretty unique US thing, because usually the limits are either little and/or the interest rate is prohibitive. I agree the risk taking is smaller in Europe, but if you need a loan go talk to your bank, putting a debt in a credit card is a stupid idea period even in the US.

dx87 6y ago

That's the reason Nassim Taleb gave in Black Swan as well. He said in Europe and Asia, failing is looked at negatively, while in the USA failing is fine, as long as it wasn't due to lack of effort. So the USA has a lot of failures, but also a lot of innovation, whereas European businesses are more stable, but also don't innovate as much.

kamaal 6y ago
Even a generation back, failures were a taboo in India. Risk aversion was to a point that would discourage people from even trying. Suicides dues to social shaming are common till date. The only way to make a living in India for a long while was like going through an established social heuristic. Any deviation used to be frowned upon. These days things are diluted to an extent. May be due to overall effects of globalization and people just moving on due to cultural dead ends.

megablast 6y ago

It’s funny though. Everyone has free health cover, so they should worry less about failing.