The Index Ventures experience

Our insight

The untapped potential of employee stock options

At Index Ventures, we’re proud to back the most ambitious entrepreneurs, and support them on their journey to realize their vision.

We were born in Europe more than 20 years ago, and today we have feet firmly planted on both sides of the Atlantic. From our hubs in London and San Francisco, we use our deep knowledge to invest in outstanding startups. We have 160 companies in our portfolio, equally split between Europe and the US.

World-changing tech companies can start anywhere – but we recognise Silicon Valley’s sophisticated model of scaling and investing in startups as second to none. We adapt and apply best practices from Silicon Valley to our startups in Europe, to prime them for success.

One of the key ingredients is employee ownership. In Silicon Valley, employee stock option grants have helped attract the world’s best talent to small startups with limited cash, but near limitless potential. The result is that these startups have the people they need to succeed early on.

In Europe, employee ownership is less common – and there has been no clear playbook for startups to follow. This is exacerbated by the complexities of doing business on a continent made up of 30 different countries, all with different cultural norms, regulations, tax incentives, and so on.

This handbook is designed to help European founders make critical decisions. Who do you offer stock options to? How many? When? How do you adapt your policy as you grow, and as you move into different geographies? How can you ensure employees understand the scheme?

We’ve included the basic information you need to design your stock option plan and policies, ready-to-use allocation models, and advice from those who’ve been through it – plus our own perspective as investors. You’ll also find case studies from Index portfolio companies throughout the book, demonstrating the range of best practice. Founders and executives from the likes of Farfetch and Elastic share their approaches to employee ownership, their successes and their mistakes, and the valuable lessons they’ve learned in the process.

We chose to open-source our work, so you can read or download the entire Rewarding Talent handbook from our website at: www.indexventures.com/rewarding-talent

Alongside this handbook, we’ve developed the OptionPlan tool, which will help you determine option allocations for your entire team, whether you’re at seed stage or Series A.

You can also find it on our website at: www.indexventures.com/optionplan

Our take

Bringing employee ownership to Europe

At Index, we believe that a fresh approach to employee ownership is key to creating European tech giants on the scale of Google or Amazon. Until then, too much of Europe’s top talent will simply join the European arms of US firms, relocate, or stick to lower-risk corporate jobs.

In the US, option grants are driven by intense competition for talent. There are established benchmarks for option grants to employees at all stages and levels. Thousands of employees across hundreds of startups have benefited financially following company exits. Many have been inspired to become founders or angel investors themselves, creating a virtuous cycle of innovation and startup activity.

Europe has seen fewer exits, and option grant benchmarks haven’t been available, so founders have been forced to make up their own rules. But competition for talent is heating up, and with more high- profile exits, individuals are more willing to exchange cash for stock options, especially in major tech hubs.

We therefore expect the next generation of European startups to offer options more widely to employees. By staying ahead of this trend, startups can attract and retain the best talent out there. However, this must be coupled with changes in national policies, which encourage the use of stock options across the continent.

The methodology

How we put this handbook together

This handbook is based on what we believe is the most extensive research ever conducted on employee stock options in European startups, which included:

  • Cap table analysis by funding round across 73 companies in the Index European portfolio

  • Analysis of over 4,000 individual option grants from more than 200 startups across Europe and the US, supported by Option Impact from Advanced HR

  • In-depth interviews with founders, CFOs and executives of 27 Index-backed European companies from seed stage to post-IPO

  • Survey on ESOP practices completed by executives from 53 European startups and former startups, representing over 11,000 total employees

  • Review of regulatory and tax policy in the US and key European and global markets, supported by Taylor Wessing, Wilson Sonsini, and several other law firms

Introduction to this edition

There was a tremendous response from the European startup ecosystem when the original Rewarding Talent handbook and OptionPlan app were released in December 2017. One year on, it has become the ‘playbook’ for European entrepreneurs. We are now delighted to release this updated and expanded edition.

Recognising that startups need to hire and motivate top talent right from the outset, we have expanded our research and recommendations to cover equity allocations for seed companies. We have also added a new case study from Elastic. Guidance on topics including retention grants and strategic advisors has been enriched.

You will also find guidance on stock option practice and policies for twelve additional countries, within Europe and beyond.

Finally, we are making specific recommendations for policymakers. We see their role as crucial in helping to create a regulatory environment which fosters entrepreneurship and innovation.

If you have feedback, please reach out to Dominic Jacquesson at talent@indexventures.com

Key findings

A top-level summary

We found big differences in employee ownership between the US and Europe. They are presented throughout this book, but here are a few key points.

  1. European employees own less of the startups they work for than US employees.

    For late-stage companies, they own around 10%, versus 20% in the US.

  2. Employee ownership levels vary much more in Europe than the US.

    In Europe, employee ownership in late-stage startups ranges from 4% to 20%. In the US, ownership is more consistent, as stock option allocation is driven by market forces.

  3. Ownership rules adopted by startups vary between Europe and the US.

    For example, provisions for leavers, and accelerated vesting following a change in control.

  4. In Europe, stock options are executive-biased.

    Two-thirds of stock options are allocated to executives, and one third to employees below executive level. In the US, it’s the reverse.

  5. European employees still don’t expect stock options much of the time.

    US employees joining a tech startup with fewer than 100 staff will expect stock options straight away. This is much less true in Europe, although expectations are steadily rising.

  6. European founders haven’t known how to allocate stock options across their team.

    Benchmarks are available in the US, guiding founders to make compelling grants. These haven’t been available in Europe, where founders have been ‘flying blind’.

  7. European option holders are often disadvantaged.

    In much of Europe, employees need to pay a high strike price, and they will be taxed heavily upon exercise as well as sale. Leavers often get nothing.

  8. There is wide variation in national policy across Europe, with Estonia, the UK, and France most supportive of employee ownership.

    Regulations and tax frameworks are radically different across Europe. Estonia has the most favourable approach of any country reviewed globally. The UK’s EMI scheme and French BSPCE’s are both better than what is available in the US. Other countries, including Germany, lag behind.

  9. Employee ownership correlates to how deeply technical a startup is.

    An AI or enterprise software startup requires more technical know-how than a straightforward e-commerce startup. These employees are at a premium in today’s economies, and more likely to seek stock options.

  10. Salary differences between startups and established companies are narrowing.

    Startups still pay lower cash salaries, but competition for talent is forcing them to narrow the gap. Stock options are ever more important to hire and retain top talent.

At Index, we are focused on helping founders to address these challenges. There has already been a noticeable change in approach since we launched this handbook in December 2017.

We will continue to argue for progressive, pro-innovation thinking from investors and policymakers across the whole of Europe.

Stock options 101

A top-level summary

Options are a special type of contract. They grant the holder the right – but not the obligation – to buy or sell an asset at a set price, on or before a certain date.

In established US practice, stock options grant the holder the right to buy shares (exercise their options) at a set (or strike) price, within a ten-year period.

The option allows the owner to buy a certain number of shares. The right to exercise will vest over a four-year period; typically, there will be a one-year cliff before the holder has any rights, then vesting will be linear, allowing the holder to buy a further 25% of their shares at the end of years one, two, three and four.

If they want to exercise their options, the holder must pay the exercise price (strike price x number of options). In return they will receive ordinary shares in the company. The holder may be able to sell these shares immediately, or retain them in the hope that they will further appreciate in value.

It only makes sense to exercise options if the current share price of the company exceeds the strike price. Exercise requires a cash payment, so the decision to exercise also depends on how long the holder thinks they will have to wait before they can see a cash return by selling the shares. Any tax incurred will also influence this decision.

Stock options are the instrument of choice for employee ownership in US startups. They are better than giving shares to an employee because there is no premium or tax to pay upfront, making them risk-free for both employee and company.

In Europe, the rules and tax treatment of stock options varies widely between countries. In some countries, it still makes sense to use stock options. In others, alternative instruments are used instead. But in each case the purpose remains the same – to incentivise employees, by rewarding them if the company’s value increases.

To keep things simple, we’ve referred to all of these instruments as ‘stock options’ in this handbook, even though their legal status may be very different. These include warrants, Restricted Stock Units (RSU), and virtual stock options.

You’ll find a detailed glossary of legal and financial terminology in the Appendix.

Employee ownership
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