The Make-or-Break Policies that Will Determine the Future of European Tech

Will European entrepreneurs soar or be left in the dust? These regulations could make or break startups.

Entrepreneurship and government policymaking. Two different concepts, similar in fundamental ways. Both operate with the goal of solving real problems in society and preventing new ones — sometimes with triumphant results, other times with failure. And yet, one of them moves toward its goals through lengthy, meticulous, careful processes on an extremely large scale. The other does so by making itself as lean and agile as possible, always thinking five years ahead.

On December 6th we hosted a select group of founders, policymakers, legal experts and entrepreneurs to discuss policies affecting startups in Germany. The discussions from that evening and the report we published with Allied for Startups are the foundations for this article.

The truth is: Neither successful policymaking nor true entrepreneurship can exist without the other. As European innovators, we’re talking about this now because our continent’s tech sector — and all the potentially world-changing seeds of ideas contained therein — is at a crossroads.

Europe lags behind giants like the US and China in both the sheer number of innovative companies and in market growth. Fragmented by nature, Europe is an especially challenging case in building an ideal environment for international businesses to thrive. If recent history (read: the last few years) teaches us anything, it’s that the cause of Europe’s slower growth isn’t from lack of entrepreneurial ambition or investors. On the contrary, it’s from the many barriers that slow the pace of development for these new companies — from existing, country-specific tax laws to proposed liability regulations that could crush startups before they have a chance to start at all.

Facing the truth about fair regulation

A recent white paper published by jointly by Allied for Startups and Silicon Allee, The Impact of Regulation on the Tech Sector, saw over 180 European investors giving their anonymous input on the topic. Members of Berlin’s tech ecosystem also weighed in at an event after the white paper was published, echoing the sentiments of the paper. Results make clear that European tech could experience major growth — if only it was afforded the right conditions. Most of the proposed regulations in Europe that affect startups tend to be unnecessarily reactive instead of strategic. Policymakers draft legislation with the intention of limiting large companies, but they often forget that these strict laws also apply to growing startups with fewer resources and less global influence. It’s a pattern that shouldn’t have began in the first place, but now it needs to be broken.

The white paper touched on several hot topics that could be deciding factors in European tech success, including digital taxation and liability. The further discussion surrounding the paper also dove into the areas of contracts and stock options. Addressing all these challenges through strategic, proportionate and fair regulations could allow Europe to grow into its full innovation potential.

More specifically, the members of the startup ecosystem must come together to convince policymakers of the following:

Taxation and contract regulation should be proportionate and as standardized as possible to aid entrepreneurs in their focus on innovation. It should not result in the siphoning of vital resources into accounting and legal matters.

“In Europe, fragmentation is always a problem. Every time a startup wants to expand or roll out to a different geographical location, they face the burden of researching and complying with local regulations,” said a member of legal council for a large European VC. “It would be great if, on an EU level, there would be a policy that allows for certain exemptions if the transactions are small or if you’re just starting out. That would facilitate the pan-European movement of startups.”

Anyone who has founded or worked for a company whose businesses crosses borders understands the headache and resource drain of compliance. Now, proposed digital taxation is even more of a threat for startups whose initial revenue is crucial for future success.

One promising idea is that government could allow startups to self-regulate up until a certain point. A serial entrepreneur and policy expert agreed. “Right now in Germany, people are being educated to be tax advisors and not entrepreneurs,” he said. “Policymakers should de-regulate at the early stages, which promotes more innovation and helps grow more successful companies.”

The same goes for writing contracts. The current EU proposal for digital contract regulation would put a serious damper on startups’ ability to write quick and effective contracts between suppliers (e.g. contracts between a food delivery service and the restaurants they work with). The current, passive stance from government — especially in digital and online services — continues to make more sense for companies whose business models rely heavily on contracts and who are trying to tap into new markets as quickly as possible.

Copyright liability regulation should be predictable and manageable to allow disruptive digital companies to thrive. It should not be so heavy-handed that it kills the very foundation of existing startups that rely on digital content for their business models.

Regulations have passed recently that side with major publishers to ensure their content doesn’t get reproduced without their express consent. The Googles of the world don’t bear the consequences of this type of regulation, of course. Their sheer size puts them at an advantage.

One startup CEO and founder explained how the regulation impacts his business model, which is essentially built on the permission to reproduce content. “We wouldn’t mind if all publishers who don’t want to be included in a search engine just opt out,” he said. “But unfortunately that’s not on the table [with new regulations]. We have to talk to every copyright holder, and discuss whether they’re fine with us displaying their content to companies. Google is not going to have to negotiate with publishers — they basically just need to send out a contract that says ‘sign or die.’”

The conversation always turns back to how policymakers can’t lump smaller startups in with the tech giants. The rapid pace of innovation today just doesn’t allow for one-size-fits-all legislation anymore.

Tax frameworks and policies dealing with company stock options should be more employee-friendly to attract the world’s best talent. They should not penalize employees or startups for creating equity opportunities.

In their beginning stages, startups don’t always have revenue to pay large salaries. They instead incentivize early employees by offering ownership in the company itself. Good stock option plans allow startups to bring in top talent without spending more than they make.

The problem is that Europe’s fragmented tax laws aren’t conducive to employee-friendly stock options. Companies often find it challenging to create options that are lucrative to those who own them; Germany, for example, is tied for last place in recent rankings of stock-option friendly countries — the main reason being that employees can be taxed immediately for stocks that haven’t yet paid out. Startup valuations tend to fluctuate often — sometimes dramatically — and current frameworks require tax payments on these momentary valuations.

The fact that stock owners become responsible for taxes so early on deflates any potential value of ownership, which then fosters a more conservative approach to startup employment. It essentially deters the world’s brightest minds from working in Europe.

One pan-European VC representative gave her perspective, having worked extensively with option legalities. “The way stock options are being treated here is still quite a bit behind form the US standard, which is much more friendly to the companies and to the employees,” she said. “Here, you still think of equity as something you invest into and less of as a compensation for people who work for startups.”

Notoptional.eu is one example of an initiative with the right idea for moving forward. It’s helping entrepreneurs finding common ground about the need for better stock option regulation in Europe, and then expressing that need to policymakers. The goal is to make them understand the importance of talent access for a thriving economy. Meanwhile, the initiative also encourages companies to make the most out of current laws by creating their own stock plans, guided by the largest ever set of benchmark data on the subject.

Luckily, there are some European entrepreneurs with an ambitious hiring mindset who go the extra mile to navigate current conditions and create optimal stock plans despite the potential punitive regulations.

“It would be helpful if employees can participate in the win of the exit, or in revenue, much more than they can right now in Europe,” said one co-founder who recently co-founded a startup alongside other seasoned entrepreneurs. “We want to make sure we compete with global companies, so we created one of the most employee-friendly stock plans.”

Not everyone has these resources, however, and we still need change at the EU level to make the largest advancements in this area.

Pushing startups forward on the European level

We’re in a make-or-break period for European tech, and in order to grow the talent and ideas that are housed within our borders, we need regulation that promotes innovation. This involves changing the dialogue. Instead of framing regulation in a bad light, the tech and startup community needs to find common ground in our stance.

“We shouldn’t try to build cop-outs for startups in regulation,” said one Berlin-based founder and CEO. “What would be better is to identify principles, then regulate them. That way, startups need only to understand the guiding principles, follow them and know they’ll be fine. I think we have this opportunity right now.”

If you currently work in European tech, care about it or know about it, the community needs you. We owe it to ourselves to make conditions in Europe better for the thriving ecosystem we call home. Just as our entrepreneurial drive compels us to change, build and improve the world — so too should it want to fight for the right environment to do it in.

“We need entrepreneurs who care and realize what’s happening in these obscure and transparent discussions,” said a policy representative for a major international startup. “Ideas need to come from us, because they won’t come from anyone else. We are the community of entrepreneurs.”