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Why it is so hard for entrepreneurs to get really rich in Europe

Steep taxes that make it costly for start-ups to promise stock options to their employees mean the continent produces far fewer ‘unicorns’ than the US, despite strong traditional sectors

By Edward Robinson  /  Bloomberg Markets

A couple picnics in a park overlooking Berlin on Aug. 19.

Photo: Reuters

Johannes Reck should be feeling pretty groovy. He is the cofounder of one of the hottest start-ups in Berlin. GetYourGuide lets holiday makers book tours online in 150 countries and is on course to increase ticket sales this year by 75 percent. In May, it raised US$484 million from investors and it is now valued at more than US$1 billion.

Reck’s company is precisely the type of unicorn European policymakers want to see more of as they champion entrepreneurship that can kick-start much-needed economic growth. However, he is fuming.

“It’s not even that I am disappointed — I am angry, really angry, because you don’t need to reinvent the wheel here,” said Reck, a 34-year-old German with the wiry build of a marathoner. “It’s not like we are asking politicians to do something unheard of.”

The problem? Reck cannot provide his people with a stake in the future of their venture without incurring crushing costs and hassle.

For decades, tech mavens in the US have used stock options for employees to spur innovation — and unprecedented wealth. Unlike Silicon Valley, where equity incentive plans have become as ubiquitous as foosball tables and midday yoga sessions, the options culture has yet to take root in many European countries.

While some lawmakers are taking action to loosen restrictions on pay, it is going to be hard to close the gap when income inequality is becoming a more urgent issue on both sides of the Atlantic.

European consumers and lawmakers have long decried outsize paydays as unfair and vulgar. A few years ago, the Netherlands capped bonuses for bankers, money managers and other financial professionals at 20 percent of their base salaries.

Entrepreneurs must navigate onerous tax rates and restrictions that often make equity sharing and options more trouble than they are worth.

When employees in Germany exercise options, they have to pay income tax on the difference between the fair market value and the strike price, and that rate runs from 14 to 47.5 percent. They also have to pay a 25 percent capital-gains tax on additional profits when they sell their shares.

In contrast, US employees typically pay a 0 to 20 percent rate on capital gains when options are redeemed, though they might have to pay additional levies when they are exercised, depending on the timing and the type of equity incentive program.

Germany and 14 other countries, including Sweden and the Netherlands, are more burdensome than the US regarding options, according to a study last year by Index Ventures, a venture capital firm in London and Silicon Valley.

For entrepreneurs and venture capitalists, the problem is not just about attracting top talent. The compensation bind might also be a big reason why Europe does not produce world-beating tech companies at the same level as the US.

Other forces are at work, too. Even though they are part of the EU, member states remain a fragmented collection of markets that cannot muster the borderless scale achieved in the US. Plus, there is the widely shared belief that European business culture simply does not tolerate the experimentation and inevitable failures that are par for the course in, say, Silicon Valley.

While governments across the EU have devoted hundreds of millions of euros to venture capital-style programs to invest in start-ups, the one tool entrepreneurs truly want remains out of reach.

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