Incentive scheme: let’s break the 15-year-old ceiling!
France is a startups nation! In fact, they’re much more numerous here than in neighboring countries, though they do still tend to be a lot smaller. Lots of startups, yet few scaleups and mid-size businesses (MSBs), and very few unicorns. France has about 5,800 ISEs compared to Italy’s 8,000, the United Kingdom’s 10,000 and Germany’s 12,500, and only four unicorns compared to the United Kingdom’s 16 and Germany’s nine.
The only genuine form of wealth is people
Essentially, the growth and development of scaleups and ISEs in France depends primarily on their ability to attract, recruit and retain talent. In order to be attractive, they have to compensate for their reduced ability to pay high salaries by offering their employees a greater stake in the company’s capital and a more attractive share in the value created.
There are three types of companies currently recruiting talents today, especially in the tech and digital sectors :
- The young startups that use France’s BSPCE system (“Bons de Souscription de Parts de Créateur d’Entreprise” — startup stock options with special tax privileges) as a way of giving their employees a stake in the business.
- The major groups and American tech companies (e.g. Oracle and Salesforce) that advertise very high starting salaries, generous stock schemes and substantial additional benefits that cannot be put in place by companies that invest their profits in growth and have not yet achieved profitability.
- And falling somewhere between the two are businesses over 15 years old, e.g. scale-ups or MSBs potentially, for whom recruitment is critical to their ability to accelerate their growth but which lack the levers necessary to give their employees a stake in the company.
For the latter group, the French tax system can seriously hamper their growth! As a quick reminder, young startups less than 15 years old can attract talents by allocating BSPCEs, which are taxable for neither the company issuing them nor the employee. Once they’ve been held for three years, the profit made on their sales is are subject to a flat tax at a maximum 30% rate.
However, companies lose their eligibility for the BSPCE scheme once they reach 15 years of age. A hard blow! They then have two options left when it comes to giving their employees a capital stake in the business: issuing stock options or allocating free shares.
A hard blow indeed, as stock options are subject to a much less favorable tax and social security regime than BSPCEs. Companies that issue these options have to pay employer contributions of 7.5% of the value of the stocks on the day of the decision to allocate the options. As for the holder of the stock options, they miss out on the benefits of the favorable tax regime applicable to BSPCEs.
That just leaves the free shares scheme. With these, the level of taxation is similar to that of BSPCEs for the employee, but proves to be extremely dissuasive for the business. In fact, the company is required to pay employer contributions amounting to 20% of the value of the shares.
Let’s consider the example of a rapidly growing 15-year-old company that wants to enable its employees to access 10% of its capital. By issuing free shares, it commits to paying employer contributions amounting to 20% of the value of these shares one or two years later — potentially several million euros it either doesn’t have or which won’t be used to finance its growth.
As you’ve no doubt gathered, companies in activity for over 15 years wanting to give their employees a capital stake find themselves denied access to BSPCEs and instead have only costly schemes left, both discouraging and impeding their ability to attract and retain the talents they so much need. In the same vein, the rule requiring a minimum of 25% of the capital to be held by natural persons for BSPCEs to be issued significantly reduces the eligibility of certain businesses once they’ve been through three or four rounds of the funding.
Though the number of businesses concerned by such restrictions is not so high today, it’s only going to increase as all French tech companies created between 2005 and 2010, which will soon be passing the fateful age of 15 years old, and will thus have to find ways to deal with this new and unfavorable tax situation. If we look at the brand new NEXT40 list, there are at least eight scaleups that are going to be affected by this issue over the next five years, including ContentSquare, Believe, iAdvize, OpenClassRooms, Recommerce, Sendinblue, VadeSecure, TalentSoft and Vestiaire Collective. The list would undoubtedly be longer if we were to add in the 25% criteria.
So let’s alter the conditions companies need to satisfy to be eligible for BSPCEs so that our scaleups can benefit from them. The current rules put startups and longer established scaleups, which offer potential for growth and job creation, on an unequal footing. The alternative schemes (free shares and stock options) are too costly to be implemented on a massive scale. They are seriously hampering the growth and putting a serious brake on the growth of French tech companies and their ability to share the value created with shareholders and employees!
