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Employee ownership in Europe: evolution, trends, and future expectations

patricia-borlovan

Patricia Borlovan

· 4 min read
Employee ownership in Europe: evolution, trends, and future expectations
Understanding the Dynamics of Employee Ownership in Europe

In Europe, employee share ownership (ESOP) has grown significantly in recent years regarding the ownership stake held by employees and the number of companies offering ESOP schemes.

In 2021, European companies with ESOP plans held 3.13% of their capital in employee ownership, up from 2.34% in 2006. Large European companies with ESOP schemes also increased from 63% in 2006 to 88% in 2021.

2021 EFES SURVEY REPORT - % of European companies having employee share plans 2006 - 2021

Source: 2021 EFES SURVEY REPORT

One reason might be the different economic policies adopted by the UK and continental Europe.

The UK has offered stronger incentives to promote equity ownership, while continental Europe has hesitated. This has led to a divergence in the democratization rate of employee stock option plans, with the UK having a higher rate than continental Europe.

2021 EFES SURVEY REPORT - democratisation rate of employee share ownership in Europe 2007 - 2021

Source: 2021 EFES SURVEY REPORT

Another reason for the decline in the democratization rate of equity ownership is the particular employment dynamic in large French companies.

Over the past ten years, employment in large French companies has grown faster than in Germany and the UK. This employment growth has occurred mainly abroad, and the extension of ESO schemes has not been able to keep pace.

Equity ownership plans in European companies

Employee share ownership (ESO) in large European companies has increased significantly over the past thirty years, from 10% of all listed companies in 1990 to 86.6% in 2017, according to the European Employee Share Ownership Policy.

This growth has been driven by several factors, including the desire to align the interests of employees and shareholders and to create a more engaged and productive workforce. The plans are typically implemented in a top-down structure, starting with executive directors and senior managers and then gradually expanding to other groups of employees.

European Employee Share Ownership Policy

Source: European Employee Share Ownership Policy

Equity ownership plans in startups and small businesses

In contrast to the strong development of employee share ownership in European listed companies, ESO in SMEs is virtually nonexistent. In 2017, there were only 300 majority-employee-owned SMEs in Europe, compared to some 10,000 ESOP companies in the USA.

There are several reasons for this difference.

One reason is that startups often need more financial resources and may need help to implement and manage equity ownership. Another reason is that some countries or local communities may be reluctant to give up company control because they grew up learning that companies are better privately owned.

Another barrier to equity ownership in Europe is the need for a common ground and supporting legislation. In the USA, there are tax and other incentives that promote ESO. However, there is very little incentive legislation in Europe, which often looks different from one country to another.

In 1992, the European Council recognized that dedicated incentive legislation is the key success factor for developing employee share ownership. Since then, European countries with incentive legislation have increased from 15 to 20, where the Baltic states have the most favorable environment to support startups' implementation and usage of a stock option plan.

Here is what the current situation looks like from multiple factors, according to the research of Index Ventures:

Source of data: Index Ventures

Source of data: Index Ventures

The lack of legislation has led to a geographically unbalanced development of ESO in Europe, with a significant lag between leading (North/Western) and lagging (South/Eastern) European countries.

This gap is detrimental to both employees and employers, as it leads to negative discrimination and thwarts the mobility of workers within the EU.

European companies having employee share plans in 2017

Source: European Employee Share Ownership Policy

Despite the challenges and the lack of a unified European standard for implementing an employee stock option plan, Europe has a growing interest in equity ownership.

According to research by Index Ventures, several countries have or already introduced new legislation or a new approach to ESOP, such as Latvia in January 2021 and Lithuania in February 2020.

Equity ownership in funding rounds

Seed rounds

Setting aside 10% of the company's equity for employee stock options at the seed round is common practice.

It’s because early-stage companies often have limited cash resources, and stock options can be a valuable way to attract and retain top talent. However, some accelerators, such as Y Combinator and The Family, now advocate for a larger % ESOP size of 20%.

The debate is necessary to attract top talent in competitive industries.

Index Venture — ESOP analysis: How ESOP top-ups cam dilute existing shareholders

Source: Index Venture — ESOP analysis

Series A and beyond

In the US, ESOPs have increased from 10% at seed to 15% at Series A.

The equity ownership plans then grow with each funding round, reaching 20% or even 25% by Series D. This ensures that employees have a meaningful stake in the company as it grows and becomes more successful.

Source: Index Venture — ESOP analysis

In Europe, ESOPs remain at 10% throughout all funding rounds.

It’s a critical issue in the European startup ecosystem, as European employees end up with only half as much ownership in later stages compared to their US counterparts.

Index Venture — ESOP analysis: Projected ESOP size in the next generation of successful European startups

Source: Index Venture — ESOP analysis

The right ESOP size for your company will depend on several factors, including the industry you are in, the stage of your company, and the composition of your founding team.

Source: How much equity should you expect from an early-stage startup?

Source: How much equity should you expect from an early-stage startup?

However, a good rule of thumb is to aim for an ESOP size of 10-15% at seed and to increase the ESOP size with each funding round.

When a founder or cofounders of a startup are planning how to divide the ownership of their company, they need to consider three main groups and the industry’s best practices: the founders (75%), the employees (10%), and the investors (15%).

Future thoughts

With the proliferation of startup communities and the venture capital landscape in multiple areas of Europe, the need for a unified framework is becoming more and more stringent.

“Bulgaria just passed legislation formalizing the use of ESOP programs in a new type of business entity focused on startups. Founders need to understand that ESOP allows you to motivate, hire and retain strong talent that won’t be incentivised by just instant monetary rewards like salaries.

People want to have a stake in something that is going to become bigger, and ESOP allows them to invest in their own future – one that they can control. And because it’s such a powerful tool, founders can also keep the discipline of burning cash early on to a minimum, so that they can maximize their chance of bigger success.”

Says Hristo Borisov, the co-founder and CEO of Payhawk.

Additionally, the need for more education on why implementing an employee stock option plan is beneficial for your startup companies also requires more effort, according to our community of investors.

“General awareness for both founders and team members could boost adoption. Founders should learn that having a smaller share of a bigger pie is ultimately better. Team members should understand that ESOP is not a given, i.e. it does not come for everyone by default. So you should prove your commitment and dedication first and then qualify for this shared ownership instrument.”

Says Svetozar Georgiev, Co-Founder at Telerik and Partner at Eleven Ventures.

“To increase ESOP adoption, we need a shift in the ESOP perception. ESOP is an investment opportunity and gives you ownership of what you build.

To achieve it, we need more transparency and education around successful exits and how they would help create long-term wealth creation for employee-owners. We might also need some changes in the legal and tax framework.”

Says Hristo Pentchev, Site Lead and Director of Product Development Operations and Technical Programs at Leanplum, a CleverTap company.

If you want to learn more about implementing an employee stock option plan for your company, take a look at the complete employee stock option guides and our dedicated equity management solution — Nimity.

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