Why Employee Equity Matters

European Straits #107

Dear all,

I just flew back from the Bay Area, where I spent two days participating in the Social Science Foo Camp organized by O’Reilly, Sage, the Alfred P. Sloan Foundation, and Facebook.

I already wrote about Foo Camp in this . However, this one was slightly different in two respects. First, the venue was not O’Reilly’s campus in Sebastopol, but Facebook’s MPK 21 building in Menlo Park—which created a bit of controversy, considering the context. And the crowd was different: fewer technologists, almost no venture capitalists, but a large group of social scientists from all disciplines—including several friends and mentors, well-known authors, and at least one Nobel Prize recipient! Needless to say I seized the opportunity to test some ideas I’ve been working on such as the future of social democracy and Europe’s once again becoming a developing economy. Stay tuned 😉!

Why employee equity matters

Being in the Bay Area was also the opportunity to have a few meetings with people working in the tech industry. And I couldn’t help but notice that one topic comes up again and again in those discussions: how much employee equity matters in the political economy of Silicon Valley.

For the European startup community, employee equity is only beginning to be considered seriously. One reason is that we haven’t yet built a first generation of immensely successful tech companies that have the potential to lift everyone else up. In practical terms, that means very few people in Europe have gotten rich thanks to employee equity. If you live here, like I do, it’s highly improbable that you know anyone that became a millionaire because they joined a tech startup early and got awarded a large chunk of stock options at a relatively low valuation. (Here’s one example: Juul’s $12B exit!)

Because there are so few exits, stock options remain a very abstract concept for most people working in tech startups in Europe. Sure, we have mechanisms to allocate equity to employees. But because those mechanisms rarely translate into sizeable amounts of money, nobody really cares about them: neither the founders, who are unable to make an equity argument to attract the most talented employees, nor the employees themselves, who don’t include equity in the equation of how much they can count on making by joining a startup.

Thus the situation in Europe is radically different from that in Silicon Valley. There, exits are not uncommon and employee equity generates wealth for many early employees that go on to become founders themselves and/or angel investors in other startups. Indeed, a few months ago someone told me that “talent liquidity” was probably the key factor that explains Silicon Valley’s thriving as a startup community. It’s not enough to have a large pool of talent. You also need a high volume of activity in the market—that is, talent moving around instead of being locked up.

Concretely, this means that once a Silicon Valley startup reaches escape velocity, allocating equity to employees makes it easier for its founders to hire the best talent they can find, which in turn makes it easier to convince VC firms to invest. It’s not the salary that attracts those early employees (even if that does need to match the cost of living in the Bay Area). Rather it’s the equity and the vision. Because the startup that wants to hire you is entering the phase of exponential growth, being part of that growth means that your options could turn into millions as the valuation grows accordingly.

In other words, employee equity is critically important because startups are driven by increasing returns to scale. In traditional companies, allocating shares to employees promotes the idea that everyone is interested in maximizing shareholder value, but it doesn’t really translate into those employees making fortunes: the growth of the company will be linear (at best) rather than exponential. On the other hand, a tech company is all about increasing returns to scale, so success means a very big success with a high valuation that turns into substantive rewards for everyone—both shareholders and employees.

Beyond the lack of exits, increasing talent liquidity in Europe currently faces three obstacles:

  • There’s no such thing as a single European market for talent. French engineers work in France while German engineers work in Germany. Some of them might have moved to London, mostly because of the English language. But talent doesn’t move freely all across Europe, which obviously makes it harder to sustain liquidity. Europe is a market fragmented by language and culture, for talent just like for everything else.

  • Even if talent was willing to move around, it’s difficult to manage employee equity at a pan-European level. The rules are different from one country to another, and it doesn’t even matter that the company was incorporated in a certain country. When it comes to stock options and other mechanisms, the rules are those enforced in the country where the employee resides. This is a headache for companies, which spend a lot of time and money on compliance, and for employees, who can be taxed at rates that can rise to 60% and beyond.

  • Finally, increasing liquidity and rewarding employees with valuable equity is not even a current policy goal. Most European policymakers don’t really know the difference large tech companies and startup communities. More than once we’ve heard French ministers encourage US companies to invest in France because engineers here are “cheap” (!) and “loyal” (!). What better proof is there that too few people understand the importance of talent liquidity?

Fortunately, many people are working on it. Our good friends (and shareholders) at Index Ventures have launched a vast, long-term effort at lobbying national governments and the European Commission so as to make it easier to reward European talent with stock options. You can read more by visiting the #NotOptional website: Europe’s startups need talent to thrive. Help us make it happen. Also have a look at this comprehensive list of resources: Rewarding Talent.

At The Family, we’ve recently brought on Florent Artaud, formerly at La Ruche Qui Dit Oui !, to launch a subsidiary specialized in assisting founders who want to share value with their team. Here are a few sources about what Florent is working on at Ekwity:

On the map

🇨🇿 Later today I’ll be in a plane to Prague, where I’ll be participating in a panel on the future of work as part of the Digital Czech Republic 2019. By coincidence, it’s also the dates when my colleagues at The Family will visit Prague as part of our European Tour. If you’re a local entrepreneur or investor, make sure to attend my cofounder Oussama Ammar’s talk on Thursday and/or connect with my colleague Hugo Amsellem. Also joining us will be our friend Ian Hathaway, an economist based in London who’s currently co-writing a book on startup communities with Brad Feld.

🇺🇸 I’ll be in the US again at the end of the month, in New York (Feb. 23-26), Washington, DC (Feb. 26-March 1), and Philadelphia (March 1-2). If you’re based in New York, you can attend the Hedge talk I’ll be doing at Columbia University’s School of International and Public Affairs on February 26. Here’s the link with all the details: Fireside chat with Nicolas Colin, author of Hedge. Also, if you’re in any of the three cities and would like to meet, please simply reply to this message!

📕I’ve been talking a lot about Hedge at SocSci Foo Camp and was pleased to meet several participants who told me they had read (and liked) the book! Don’t forget to buy your own copy by visiting the relevant Amazon website depending on where you are: 🇺🇸US, 🇬🇧UK, 🇫🇷FR, 🇩🇪DE, 🇮🇹IT, 🇪🇸ES.

The Internet and its enemies

😠 We should all be angry about how many governments are moving towards making it mandatory for tech companies to monitor and, in some cases, filter the content shared by users of their platforms. I know that it’s not obvious for everyone, particularly given the real challenges that our societies desperately need to address. But the limited liability of Internet service providers is a principle that has made it possible for tech entrepreneurs to solve many problems that were previously unapproachable. We shouldn’t back down from affirming and enforcing it.

Here are a few readings that more fully explain my concern for the future of the Internet and tech entrepreneurship:

Warm regards (from London, UK),