How can employees be motivated and made more committed to their work? How can a company become more attractive to talented employees? Why does this form of benefit have an incentive effect on employees, and how can it contribute to the development of the European startup world? The answer to this question is provided by a solution that has long been widespread in Silicon Valley: employee ownership benefits.
To better understand the essence of employee ownership benefits, it is worth first approaching the issue from the startup side: why is it beneficial for them to give employees an ownership stake? An early-stage startup obviously cannot compete with the salaries offered by major tech companies such as Google or Meta. Yet startups need the best talent during the growth phase. From the employee side, however, joining a startup may involve much more risk, and employment there may be less stable. Therefore, in order to attract more talented employees, it is worth offering them a slice of the cake, making the job offer more appealing.
Of course, this opportunity benefits not only startups, but also employees. If an employee joins the company at an early stage and receives an ownership stake, they feel much more connected to the company: it motivates them to perform higher-quality work, and as the value of the company grows, they may also increase their own wealth. This is an extra benefit and experience-gaining opportunity that companies that have already reached multinational scale cannot offer. This method is visibly beneficial for the entire startup ecosystem, as it is increasingly common that, in the event of an exit, former employees use the capital they have acquired to become founders themselves, or even mentors. As the ecosystem grows, granting employees ownership stakes is becoming more widespread, which can be linked to two reasons. The first is that, as the economy grows and develops, exit events naturally occur, and seeing the significant income opportunities that come with them, talented people also find it worthwhile to join an early-stage startup.
The other reason may be that investors and entrepreneurs have also undergone a change in mindset. Based on current trends, company leaders are beginning to prioritise the growth of their business, meaning the increase in company value, while founders are placing less importance on the size of their ownership stake in the company. Leaders have started to support the idea of growing the company shoulder to shoulder with the best people, even if this means their ownership stake becomes smaller. In other words: less is sometimes more, and it is better to have a small stake in a large company than a large stake in a small company. Although it would be bold to seek a direct causal relationship between the spread of employee ownership stakes and the current regulations enabling them, the countries with the most successful startup ecosystems are generally those where employee ownership acquisition has been approached according to a modern mindset, such as the United Kingdom or Estonia.
In the United Kingdom, for example, an Enterprise Management Incentive, or EMI, system operates. Its essence is that favourable employee share-based benefits are available only to companies with gross assets of less than GBP 30 million and fewer than 250 employees, while employees are provided with favourable tax conditions in the event of exit. This genuinely helps smaller companies attract and retain talent. In addition, from April this year, Great Britain is introducing significant reforms to the company share option plan in order to make it available to scale-ups as well, alongside the already existing and successful EMI, which focuses on smaller startups.
The question arises, however: where do Central Europe and Hungary stand? As far as regulation is concerned, processes have also started in Austria, for example, to make this growth and operational opportunity more accessible and attractive for Austrian businesses and employees. Negotiations have intensified on the new “FlexKap” corporate form package and the related proposal on the reform of taxation of stock options. The proposal is expected to introduce an informal, non-voting share option framework under which taxation would arise only upon a liquidity event. Although it may seem that Hungary is lagging behind Western European and Baltic countries in terms of regulation, the legislator created the possibility of employee partial ownership very early, within the framework of Act XLIV of 1992 on the Employee Share Ownership Programme. The Employee Share Ownership Programme, or ESOP, is a benefit tool through which employees can receive benefits in addition to their wages, with more favourable taxation. The employer provides the benefit upon the achievement of predetermined goals, thereby incentivising the employee. Its disadvantage, however, is that the participants in the programme do not necessarily become owners of the company, and setting up the organisation is time-consuming and costly. Its greatest disadvantage is that a limited liability company cannot directly launch an ESOP, meaning that most startups are excluded from using this option.
It is therefore clear that although entrepreneurial willingness to support employee ownership acquisition and thereby build well-functioning teams is continuously growing in Europe, the fine-tuning of the legislation is still very much ongoing. At the same time, the data show that Europe is also beginning to recognise the opportunity in this form of benefit, as the average employee ownership stake among late-stage startups has increased from 12% in 2017 to 16% this year. We look forward to seeing what changes we will encounter in the near future and what results they will bring.