5 ms·

Giving options in European startups

47 points by jkaljundi 14y ago

opminion 14y ago
Employment agreements, in terms of how risks are shared, differ in that employees and the state expect the employer to take a higher risk over the ups and downs of the business in Europe than, say, in California. It has an effect over the meaning of share options. Employers do not have any incentive to share a positive future when (they perceive that) the employees do not share a negative present.
- troels 14y ago
  I'm not sure I understand what you mean. Usually, stock options would be accompanied with a lower salary. That is surely a negative present?
  - opminion 14y ago
    Yes, but that would be assuming that salaries have a market value. In Spain salaries are often raised by collective bargaining. I don't know how much an effect it has on software developers, but the law is intended to raise the minimum salary for junior developers thus reducing the possibilities for a consensual agreement on a low salary. http://en.wikipedia.org/wiki/Collective_bargaining http://en.wikipedia.org/wiki/Collective_bargaining Similar for holidays, working hours, etc.
    - troels 14y ago
      OK. So you mean that compensation (The whole package, including social benefits, long vacations etc.) is greater in Europe, than it would in the states? I don't really believe that. Not if we're talking software engineers at least. A country like Spain would probably have average wages on the range of half what it would be in the states. And even in some of the better faring European countries, salaries still seems to be slightly less than what they are in the valley.
      - opminion 14y ago
        Of course I didn't say that. I said that compensation is affected by other forces than supply and demand (market value), so that the minimum compensation is higher than it would be at market value in that country, not that it is higher than in the US. Related to that, the southern European countries don't have individual control over the currency, so prices are higher than they would be if they were in control of the Euro. Salaries have been raised by law (civil service, collective bargaining, state pensions) in order to match prices. As a consequence, those salaries do not correspond to productivity, so employees are expensive, which pushes unemployment up. If you employ people in Italy a main problem will be that your employees have to pay European prices for food and clothing. In order to prevent what many consider abuse, there are laws protecting the minimum compensation you have to offer to them. The workaround for that is not share options, but the black market.
lrem 14y ago
This article completely omits the question of laws. As far as I know, they get quite convoluted in this regard in some of the countries. I remember that once my father's company got the idea to give out some stock, they found out that doing that legally was pretty hard. What they finally did was selling the stock at what they perceived market value, giving at the same time cash bonus equal to that value. If it's going to be that complicated in your case, you'd better be pretty sure that people are really interested in the stock...
- jkaljundi 14y ago
  I left that part out on purpose by wanting to focus more on the softer side of things, but I agree this is a problematic issue. Easier in some European countries, harder in some others. The tax laws also keep changing all the time. Saying that, I believe it is possible to solve that part in any European country even today.
- eps 14y ago
  From what I've been told the European laws made establishing anything but the SARL/Gmbh (LLC equivalients) a fairly complicated deal up until recently. And this sort of company restricts share sales only to family (?), but not to the employees and not in a staright-forward fashion. In recent years though the laws has changed, and so setting up SA (Inc equivalents) is much simpler now.
  - davidw 14y ago
    > From what I've been told the European laws made establishing anything but the SARL/Gmbh (LLC equivalients) a fairly complicated deal up until recently That's still plenty complicated in many countries - Italy, for instance, although we did manage to improve things just a little tiny bit: http://www.governo.it/Notizie/Presidenza/dettaglio.asp?d=69038 http://www.governo.it/Notizie/Presidenza/dettaglio.asp?d=690...
- lachlanj 14y ago
  I couldn't agree more
PeterisP 14y ago
Perceived stock worth for employees is highly correlated with liquidity - and there is almost no liquidity for most of european startup stocks. Even in the great local success stories IPO's are not the goal, and the employee-stock of a successful company is practically useless, as you can't really sell it when you want to (no buyers unless the company itself is sold) and there will be no dividends in the foreseeable future, as all profits are reinvested in growth. 0.1% in a billion-worth company should be a life-changing financial event, winning the "startup lottery" by working your ass off to build a great product from nothing. But what good is it if you can't use it to buy a car or a house? It's just paper.
- jkaljundi 14y ago
  Agree with that, a point I was trying to make. I have not compared the statistics though for US vs Europe. There are more liquidity events in the US, but there are also more startups. For some numbers, Jay Weintraub had a good blog post on exit statistics a few weeks ago: http://www.jayweintraub.com/2012/09/the-vast-majority-of-startup-ideas-dont-suck.html http://www.jayweintraub.com/2012/09/the-vast-majority-of-sta...
- Swizec 14y ago
  I keep saying this on HN, but I'll say it again: Equity is not tasty. Now freelancing for startups, that's a whole different ball game. All of the realistic benefits, none of the risk.
  - wslh 14y ago
    It is an interesting point: startups are a market target. Providing services for startups can be an excellent source of income. My company was selling primarly to startups until the 2007 crisis, it was no intentional but very profitable: we were benefited by companies which changed their products a million times without any profit. After the crisis,in 2009/2010 we ended up having established companies as cutsomers. One of the reason is that less outsourcing and less investments are made by startups.
  - potatolicious 14y ago
andyshora 14y ago
I joined a promising startup 18 months ago as the 3rd developer, employee #6, and was promised vast riches in the very near future. I was promised a decent amount of preferred stock options which 'would make me rich', and joined on a salary about £15k less than I could have earned at an established company down the road. Over the next few months, while the company size went from 6 to 20, and the board were organising the stock options scheme, I was still highly motivated by the favourable options which had yet to be sorted out. A year in, and I was given a very very small fraction of the 11% option pool, which would amount to less than 0.1% of the total shares, which was also subject to dilution. At this point I had all of the speculation previously made by my superiors denied, my importance to the company was downgraded, and I struggled to negotiate a raise in salary that would bring me up to what I'd call an average salary. This whole procedure was very demoralising, I would have been happy with no options and a decent salary to start with, and all of the speculation of how many billions the company would get acquired for in a years' time would not have bothered me in the slightest. After all, we had no customers, had not launched a product, and I was a key developer. Needless to say I left shortly after to start my own company. When I left, they offered to 'do something' about the options and give me the raise I wanted, but at that point for me the damage had been done, and I no longer had the ambition to work there. I didn't execute any of the options that had already vested, and used this £300 to start my business. From my own experience and speaking with a lot of other startup employees in the UK, I believe we care more about the starting salary, and absolutely have to treat options as a bonus. Not only because of the dampened IPO/acquisition outlook in Europe, which i think many startup employees are unaware of, but because startups are a smaller part of our economy. In London for example, 'Tech City' is right next to THE city, where my friends work. You've got guys earning nothing at a startup, working and meeting for drinks, and living with friends who work at banks down the road. I would imagine the US startup scene feels much more like a microcosm, and because we are yet to have that level of separation in culture and circles we socialise in, the difference in lifestyle a salary gives you is a lot more noticeable. I regret not adapting this mentality from the start, and when we hire our first employee, I will certainly make sure the reason they are taking the job is not the millions they are guaranteed to make in a few years' time.
- Swizec 14y ago
ville 14y ago
"When will people get the message about grey text on light backgrounds?"

47 points by jkaljundi 14y ago

Employment agreements, in terms of how risks are shared, differ in that employees and the state expect the employer to take a higher risk over the ups and downs of the business in Europe than, say, in California. It has an effect over the meaning of share options. Employers do not have any incentive to share a positive future when (they perceive that) the employees do not share a negative present.

troels 14y ago
I'm not sure I understand what you mean. Usually, stock options would be accompanied with a lower salary. That is surely a negative present?
- opminion 14y ago
  Yes, but that would be assuming that salaries have a market value. In Spain salaries are often raised by collective bargaining. I don't know how much an effect it has on software developers, but the law is intended to raise the minimum salary for junior developers thus reducing the possibilities for a consensual agreement on a low salary. http://en.wikipedia.org/wiki/Collective_bargaining http://en.wikipedia.org/wiki/Collective_bargaining Similar for holidays, working hours, etc.
  - troels 14y ago
    OK. So you mean that compensation (The whole package, including social benefits, long vacations etc.) is greater in Europe, than it would in the states? I don't really believe that. Not if we're talking software engineers at least. A country like Spain would probably have average wages on the range of half what it would be in the states. And even in some of the better faring European countries, salaries still seems to be slightly less than what they are in the valley.
    - opminion 14y ago
      Of course I didn't say that. I said that compensation is affected by other forces than supply and demand (market value), so that the minimum compensation is higher than it would be at market value in that country, not that it is higher than in the US. Related to that, the southern European countries don't have individual control over the currency, so prices are higher than they would be if they were in control of the Euro. Salaries have been raised by law (civil service, collective bargaining, state pensions) in order to match prices. As a consequence, those salaries do not correspond to productivity, so employees are expensive, which pushes unemployment up. If you employ people in Italy a main problem will be that your employees have to pay European prices for food and clothing. In order to prevent what many consider abuse, there are laws protecting the minimum compensation you have to offer to them. The workaround for that is not share options, but the black market.

lrem 14y ago

This article completely omits the question of laws. As far as I know, they get quite convoluted in this regard in some of the countries. I remember that once my father's company got the idea to give out some stock, they found out that doing that legally was pretty hard. What they finally did was selling the stock at what they perceived market value, giving at the same time cash bonus equal to that value. If it's going to be that complicated in your case, you'd better be pretty sure that people are really interested in the stock...

jkaljundi 14y ago
I left that part out on purpose by wanting to focus more on the softer side of things, but I agree this is a problematic issue. Easier in some European countries, harder in some others. The tax laws also keep changing all the time. Saying that, I believe it is possible to solve that part in any European country even today.
eps 14y ago
From what I've been told the European laws made establishing anything but the SARL/Gmbh (LLC equivalients) a fairly complicated deal up until recently. And this sort of company restricts share sales only to family (?), but not to the employees and not in a staright-forward fashion. In recent years though the laws has changed, and so setting up SA (Inc equivalents) is much simpler now.
- davidw 14y ago
  > From what I've been told the European laws made establishing anything but the SARL/Gmbh (LLC equivalients) a fairly complicated deal up until recently That's still plenty complicated in many countries - Italy, for instance, although we did manage to improve things just a little tiny bit: http://www.governo.it/Notizie/Presidenza/dettaglio.asp?d=69038 http://www.governo.it/Notizie/Presidenza/dettaglio.asp?d=690...
lachlanj 14y ago
I couldn't agree more

PeterisP 14y ago

Perceived stock worth for employees is highly correlated with liquidity - and there is almost no liquidity for most of european startup stocks. Even in the great local success stories IPO's are not the goal, and the employee-stock of a successful company is practically useless, as you can't really sell it when you want to (no buyers unless the company itself is sold) and there will be no dividends in the foreseeable future, as all profits are reinvested in growth. 0.1% in a billion-worth company should be a life-changing financial event, winning the "startup lottery" by working your ass off to build a great product from nothing. But what good is it if you can't use it to buy a car or a house? It's just paper.

jkaljundi 14y ago
Agree with that, a point I was trying to make. I have not compared the statistics though for US vs Europe. There are more liquidity events in the US, but there are also more startups. For some numbers, Jay Weintraub had a good blog post on exit statistics a few weeks ago: http://www.jayweintraub.com/2012/09/the-vast-majority-of-startup-ideas-dont-suck.html http://www.jayweintraub.com/2012/09/the-vast-majority-of-sta...
Swizec 14y ago
I keep saying this on HN, but I'll say it again: Equity is not tasty. Now freelancing for startups, that's a whole different ball game. All of the realistic benefits, none of the risk.
- wslh 14y ago
  It is an interesting point: startups are a market target. Providing services for startups can be an excellent source of income. My company was selling primarly to startups until the 2007 crisis, it was no intentional but very profitable: we were benefited by companies which changed their products a million times without any profit. After the crisis,in 2009/2010 we ended up having established companies as cutsomers. One of the reason is that less outsourcing and less investments are made by startups.
- potatolicious 14y ago

andyshora 14y ago

I joined a promising startup 18 months ago as the 3rd developer, employee #6, and was promised vast riches in the very near future. I was promised a decent amount of preferred stock options which 'would make me rich', and joined on a salary about £15k less than I could have earned at an established company down the road. Over the next few months, while the company size went from 6 to 20, and the board were organising the stock options scheme, I was still highly motivated by the favourable options which had yet to be sorted out. A year in, and I was given a very very small fraction of the 11% option pool, which would amount to less than 0.1% of the total shares, which was also subject to dilution. At this point I had all of the speculation previously made by my superiors denied, my importance to the company was downgraded, and I struggled to negotiate a raise in salary that would bring me up to what I'd call an average salary. This whole procedure was very demoralising, I would have been happy with no options and a decent salary to start with, and all of the speculation of how many billions the company would get acquired for in a years' time would not have bothered me in the slightest. After all, we had no customers, had not launched a product, and I was a key developer. Needless to say I left shortly after to start my own company. When I left, they offered to 'do something' about the options and give me the raise I wanted, but at that point for me the damage had been done, and I no longer had the ambition to work there. I didn't execute any of the options that had already vested, and used this £300 to start my business. From my own experience and speaking with a lot of other startup employees in the UK, I believe we care more about the starting salary, and absolutely have to treat options as a bonus. Not only because of the dampened IPO/acquisition outlook in Europe, which i think many startup employees are unaware of, but because startups are a smaller part of our economy. In London for example, 'Tech City' is right next to THE city, where my friends work. You've got guys earning nothing at a startup, working and meeting for drinks, and living with friends who work at banks down the road. I would imagine the US startup scene feels much more like a microcosm, and because we are yet to have that level of separation in culture and circles we socialise in, the difference in lifestyle a salary gives you is a lot more noticeable. I regret not adapting this mentality from the start, and when we hire our first employee, I will certainly make sure the reason they are taking the job is not the millions they are guaranteed to make in a few years' time.

Swizec 14y ago

ville 14y ago

"When will people get the message about grey text on light backgrounds?"