Dec 14, 2022

Start-ups - This week the Dutch Senate debated a new bill aimed at making it easier for start-ups to pay employees out in shares. What will this law change and what are the pros and cons? News Why we write on this topic: According to the Techleap report, a change in the law – which would make it easier for start-ups to pay employees out in shares – is going to create tens of thousands of extra jobs for start-ups. What do John Bell, CEO of HighTechXL, and Johan van Erp, start-up officer of the Municipality of Eindhoven, think about this? Current state of affairs John Bell, HighTechXL As a way to compete with salaries that large tech companies offer their employees, it may prove advantageous for start-ups to pay employees in stock options as a supplement to their salaries. At present, employees must pay taxes on these shares because they are considered a form of salary. ”That tax is paid by the employee the day they receive the shares. A major disadvantage, said John Bell, CEO of HighTechXL . “Much of the incentive to pay an employee out in shares is lost that way. Plus, there’s a lot of risk involved. The chances that you will pay taxes but never get to sell your shares are fairly high. Not all start-ups become successful by a long shot.” “If you are working at a start-up, however, you don’t always have that kind of money. Holding shares in a company does not mean that you also have that money in your account,” adds Johan van Erp, start-up officer at the Municipality of Eindhoven. The situation after the change As of 1 January, a start-up employee is no longer required to pay that tax on the very first day, but is allowed to opt to do that at the time they can sell their shares. While it is a step in the right direction, it is not the law that they had hoped for at the High Tech XL incubator. Bell: “The word ‘can‘ is very important here. Under the new law, you still have to pay taxes from the moment you can sell your shares, even if you don’t sell them.” Let’s say an employee has five percent of shares in a start-up as a supplement to their regular salary. After three years, an investor steps in, but the employee decides to keep their shares because they expect them to become more valuable. Although the employee does not sell those shares, they still have to pay taxes. Especially for deep-tech start-ups, paying taxes at an early stage poses a huge disadvantage, Bell points out. In those situations, it often takes a long time for a company to turn a profit, while they need a lot of funding. “So, then it’s a disadvantage that employees have to pay taxes from the moment investors come on board, when it could be years before their shares actually yield anything.” Start-ups that have impact prefer to be based in North Brabant or South Holland – Innovation Origins Last week, Techleap published the Dutch Startup Employment Report 2022. Its conclusion? Dutch tech start-ups are doing exceedingly well. Downsides of the change There are also plenty of arguments against the change in the law. For example, the Dutch PvDA (Labour Party,) GroenLinks (Green Left) and the SP (Socialist Party) voted against it when the proposal came before the House of Representatives in June this year. “If you don’t need to pay tax until you sell your shares, you postpone the tax payment considerably. Imagine that a company grows really fast and becomes worth, say, ten million euros, then you’ll receive untaxed growth capital. Some political parties see that as an undesirable outcome.” Attracting talent within context of tech giants’ dominance Still, Bell sees equity as one of the few ways for start-ups to be able to recruit and retain talent. “Look at the Brainport region. There are a gigantic companies there that need a huge pool of talent. For a start-up, it is extremely difficult to attract people against that backdrop of the dominance of tech giants.” Johan van Erp, Municipality of Eindhoven Johan van Erp, start-up officer at the Municipality of Eindhoven, also acknowledges this. “Entrepreneurs express that they find it difficult to attract and retain talent in a region where there are a number of very big players. What you tend to see is that employees often enjoy working at a start-up. You can grow with them, work in a small team where there is ample room for your own input. But after a few years, the novelty wears off and people want some security. Start-ups are not always able to offer that. With this change in the law, start-ups will be able to offer a modicum of security after all.” According to the Netherlands Startup Employment Report 2022 published by Techleap, the change will create tens of thousands of extra jobs at start-ups over the coming years. Although Van Erp is keen on the change in the law, he finds it difficult to say whether the new amendment will really help address this problem. Bell also sees it as a step in the right direction, but as far as he is concerned, the Netherlands, like France, England and Israel, should have gone all the way. “It will only really benefit start-ups if their employees only have to pay taxes on their shares once they sell them.” The Dutch Senate will vote on the proposal on December 20. Cover photo: Manquette of the temporary plenary room of the Senate. 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