EU countries are relaxing rules on stock options, but employees still avoid them
In contrast to Silicon Valley, European startup employees are not known for earning millions from the company’s stock.
Stock options policies in Europe are a major barrier to the tech growth and that has to be changed.
Employees stock options are issued by many companies. For example, startups use them to hire talented they need because they cannot afford to pay them more in cash.
The situation is especially difficult in Europe where the policy doesn’t give a chance for companies to issue employees stock options. That causes problems for many companies but for the startups, it is maybe the biggest.
Recently, the campaign Not Optional published a letter where stated:
“Without delay, we call on legislators to fix the patchy, inconsistent and often punitive rules that govern employee ownership — the practice of giving staff options to acquire a slice of the company they’re working for.”
Some European countries started to relax rules on employee stock options. France is one of them, but employees still favor cash.
This country recently exposes a list of changes to rules on employee stock options to meet a request from French startups. Their aim is to compete with US competitors and big companies in recruiting staff.
France is changing a set of rules, for example, the price at which the companies ( including foreign companies) can offer them to employees. The goal is to make France one of the most friendly areas for startups in Europe.
Difficulties in implementation employee stock option rules and availability of capital, are reasons why European have problems to create large tech businesses. That’s the reason for staying behind the US but the EU wants to keep up. There is a strong campaign for changes in employee stock options in Europe now.
According to Not Optional, a campaign is supported by 500 European founders and they are lobbying new stock options policy across the continent.
They recognize employee stock options policy as a major drawback to European tech growth. Due to the problems with the fund-raising, issuing employee stock options can be a great opportunity. Well, recently many countries declared changes, France isn’t the only one.
Ireland changed some of its stock option practices, also, the new Finnish government is examining changes on how stock options are taxed. The German Startups Association has started a campaign to lobby for changes too. As a confirmation that employee stock options are on the Brussels agenda – Thierry Breton, the European Commissioner for Internal Market and Services, discussed stock options in Commission hearings.
Do employees want stock options instead of cash?
Many European tech employees are, however, at best doubtful about stock options, according to Sifted. The employees don’t have positive responses. Maybe it’s surprising how they have a lack of trust but someone has to educate them, to explain the benefits of having the company’s stock. For that to do isn’t enough just yelling that “we are all shareholders of the company”. It isn’t complicated.
So, let’s start.
Understanding employee stock options
Let’s see how the employee stock options work.
Companies give stock options through a contract that provides employees the right to buy a set number of shares of the company stock at a pre-set price.
The right to buy is commonly called exercise, and a pre-set price is the grant price.
There is one important characteristic connected to employee stock options – time, the offers don’t last forever. Employees have a strict period to exercise the stock options before the date of expiration. Also, the employer could require that an employee must exercise the options within a defined period after leaving the company.
The number of options that the company could give to its employees is different from company to company. Also, not all employees will get the same number of stock options. It depends on status, rank, seniority.
How do they work
For example, you got a new job at a new firm. Besides your salary, you will receive stock options, as part of the payments. Let’s say you will receive stock options for 10.000 shares of your new company’s stock. You and the company are both obliged to sign the contract that describes the terms of the stock options.
There will define the grant date. That is the date your options are available for you to buy. This means your stock options begin to vest. But you will not get all of your stock options immediately when you start working for a company. The options vest gradually. That period is known as the vesting period and it can last several years, for example. So, let’s say the vesting period is 5 years. This means it will take 5 years before you have the right to buy all 10.000 shares. But you’ll have access to some of your stock options before those 5 years are up. 1/5 of your options will likely vest each year over that 5-year vesting period. So, after 3 years of employment, for example, you will have the right to exercise 6.000 options.
But your contract may contain one important part – a milestone. The clause that you have to stay for at least one year with the company to have a chance to get any of your stock options. When you reach the first milestone you will receive your first 1/5 of your stock options. After that, it is possible to get every month some amount of them, usually, they are the same. For example, the rest of the 8.000 shares you’ll obtain in 48 parts each month.
But if you leave the company before reaching the milestone for the first year, you won’t get any options.
How to exercise
After your stock options vest once, you can exercise them. What does it mean? You can buy them. Until you do that, the options don’t have any value. The price of your stock options is part of the contract mentioned above. That is a so-called strike price or grant price or exercise price. This price never depends on how the company is doing. It will always stay the same.
For example, after your 5-years vesting period, you have 10.000 stock options with a strike price of $2. If you want to exercise (buy) all of your options you’ll have to pay $20.000. When you buy all your stock options you are the owner and you can do with them whatever you want. You can sell them, keep them (only if you think the price will go up) but remember, you have to pay fees, taxes, and commissions when you are buying or selling the options.
There are some ways to exercise your stock options without spending cash. For example, you can make a buy-and-sell action. To do this, you’ll buy your options and quickly sell them through a brokerage. Another strategy is the exercise-and-sell-to-cover transaction.
Practically, you have to sell enough shares to cover your buying of all shares and keep the rest. But be aware, your stock options have an expiration date. So, read the contract carefully. Usually, options expire 10 years from the grant date. After that date, they are useless if you don’t exercise them.
It is good to exercise options when the price is lower than the same stock on the market. For example, your stock options’ strike price is $2 but the same stock is traded at $4 on the market. Just sell them and make a profit. It is obvious, if you have some clue or expectation that your company’s stock price will grow, you can hold them as long as you want and sell them at the most favorable moment. It isn’t forbidden to sell them on the market.
But you should wait if the price of your company’s stock is lower than your exercise price. In such a case, don’t exercise them because you might lose your money. Just wait for the price to increase before exercising.