3 ideas on how German lawmakers could help startups in the area of Human Resources

Most people agree by now that startups over the long term create new industries, jobs and wealth and their success therefore is in most people’s interest. However, during the early phases of their creation, they are different from more established companies and this should be somewhat reflected in certain laws.

To me, startups are fragile constructs being run and financed with a high risk / high reward mindset (please note the difference between a startup and a newly founded business in general as outlined by Paul Graham which I am also using here, see link) . Most people joining startups are aware of the risk that comes with working in such a fragile setup and still do and enjoy it … be it for the thrill of it, the financial and career opportunities or just because they like the work in early chaos.

Startups typically have cash at hand for the next 6 to 12 months and have to achieve major progress to justify a next additional investments. Every hiring decision in a startup therefore is critical and both opportunity and risk at the same time. Personell makes up the dominating majority of a startups cost structure, but at the same time it is one of the hardest to make adjustments to and correct earlier mistakes.

This blog post tries to outline 3 simple ideas of what our government could do to make startups more flexible with regards to Human Resources — the most critical asset a startups has to build up — and thus maybe increase overall success rates for startups and employees alike!

Please note: I am not an HR expert nor a lawyer, these are more general thoughts for discussion resulting from personal experiences over the last couple of years. In addition, this would need a precise definition for which companies (growth startups) such adjusted laws would apply for to prevent misuse.

Tax incentives on employee options

Employee participation via so called ESOPs (employee stock option plans) is really complicated in Germany, mainly due to a complicated tax scheme. This same tax scheme also makes it also partially unattractive to the employees, because once those options actually turn into real money (and that is a big IF EVER!) they are treated like a regular salary and have to be taxed as such. Obviously, a lot of people prefer a higher continuous salary instead of a big fictional payout which then leads to maximum taxation in the year of allocation.

Thomas Grota published a nice blog post on some concepts and backgrounds of ESOPs a couple of months ago — see here.

Recommendation: Create a tax incentive on employee participation programs in startups, making it more attractive to join and stay with high risk early stage companies.

More flexible employee terminations

No entrepreneur enjoys setting people free, especially when this is less a result of an employees performance but of the general risk of a lack of flexibility associated with retaining the person or (even worse) an overall struggle of the company. Such a phase of struggle and restructuring happens to almost every company and the current laws force you to make bad decisions, e.g. basically starting with terminating everybody in their probation period instead of making decision based on who will be most helpful it getting the company to survive or back on track. At the same time, startups can not get themselves into legal disputes with former employees because this is (a) a major distraction and (b) a risk for any future fundraising process … so they are mainly forced to play by todays rules (which I understand to be quite strict once you pass the 10 employee threshold).

The current system basically forces (good and thoughtful) entrepreneurs terminate all those employees at the end of their probation period where there is doubt if they will be able to meet the demands and requirements of the startup in the future. This is both bad for the company and the employees.

Recommendation: Increase flexibility with regards to adjustment of staff over the first couple of years in high growth startups, especially in times of organizational restructuring during troublesome times.

Protection from workers’ councils (Betriebsrat)

This might sound absurd, but I’ve heard and seen it happen around early stage startups. There should be a protection for growth focussed startups being harassed with a small subset of employees forming a workers’ council (Betriebsrat). Otherwise this is the beginning of the end…

Recommendation: Just make a law to prevent it in the first couple of years. Simple as that.

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