Giving options in European startups

The author is a serial entrepreneur, micro-angel and co-founder of Weekdone weekly employee status reporting service. To try out Weekdone for free to be up to date with your team’s progress, register here

This week the CEO of one of the companies I’m involved with came to the board with a question of finalizing the option table of his team. While there is a lot written on options from the US startups perspective, I believe Europe is somewhat different in it’s history, culture, employee mindset and actual earn-outs like exits. Since this question comes up a lot, here are my thoughts specifically for Europe.

Expectations and motivation

Be direct with asking your employees, what motivates them and how options will affect their work. What are their expectations? Does it motivate them at all, does it make a difference? Quite often I’ve seen people accept options, saying “well I can take them” but not being really too positive about that. Stock is expensive to give out. If it does not provide additional motivation, you’d better spend some more money on salaries, new fussball table for the office and some kickass team parties.

What is the value they put on 0.1%, 1% or 5% of stock? It might sound like a trick question, but ask “is there a difference between if I give you 1% or 2% of stock?” Do they value it any differently? As a founder, if your gut feeling is that by raising the option amount there is no difference in how the person will act, choose the lowest possible option amount. [I use percentages here, what you really should do is talk of discrete number of shares.]

Asking “if I give you this amount, would you be willing to take less salary and how much” is another good test to see if they put some value to the equity. Ask them: “If I give you 1% (or 10k shares), how much do you calculate that is in real money for you?”

Besides asking the employees, ask yourself very clearly, why are you giving the options and what are the outcomes? Do you expect people to work longer hours? Take less salary? Feel more energized and have a better team spirit?

What I’ve seen a lot in European startups is the dilution of the option table, while at the same time seeing employees giving no actual value to the stock they get. They do accept it but don’t act any differently. In that case, forget it or limit it to really tiny amounts. Just doing because it works in the US is not a good enough reason.

Fewer exits, lower valuations

Equity has value when you can sell it at the end of the day. European exit market, be it acquisitions, mergers or IPO’s, lags strongly behind the buzzing action in the US. Be honest with both yourself and your employees about the chances of getting money out from the options. It is a lottery, even if a lottery which outcomes they and you can affect.

For whichever country you are in, discuss how many exits there have been let’s say last year and calculate your potential from that.

Talk also about the valuations in your country: not in the US, not the stuff you see on Angellist and Techcrunch. How much cash has been paid for companies in your country in the recent years? It is true that European startup valuations are lower, both at angel, seed and series A levels than in US, especially if you compare yourself to the top US startups that drive the high valuations and get a lot of press.

While as founders and angels we all shoot for the exits, we must be realistic about what our statistical chances are.

We talk a lot about European employees being more motivated by salaries and working conditions. Often the European founders who spend their days reading the US tech press live in an imaginary world, forgetting that the actual market is different in Europe. Don’t lie to yourself. Don’t lie to your employees and co-founders.

Your experience?

Please tell in the comments, what has your experience been as an European founder giving or and employee receiving stock and options? Any pitfalls to avoid or common mistakes? What are the differences to the US that you see in your European country in how people receiving stock take it? What are your suggestions?

edit: Follow comments on Hacker News here.

The author is a serial entrepreneur, micro-angel and co-founder of Weekdone weekly employee status reporting service. To try out Weekdone for free to be up to date with your team’s progress, register here

9 Comments

  1. I have worked for several  german startups.
    The general feeling about options usually is:
    Nice surplus if it ever sales well.
    One feels a bit more integrated with the company.
    But in the end it doesn’t make a big difference.

    Options don’t integrate you if all decisions are made without you.
    They aren’t worth much money if you never see it.

    The way employees are treated every day is much more important than special occasions (parties, …) or options.
    The overall package should be consistent.

    Ole

  2. Hi, you want to hear it, you get it ;-)

    There are big problems for european startups following my experience:

    1) There ain’t no VC in Europe, not a single cent.

    That’s the truth. Everything you can find which looks like a VC company, any people who want to “consult” you are just simulators.

    They’re simulating VC because they’re receiving state funding for doing so. You’ll never get a dime from them, ignore them or you will waste a lot of time which can and will kill you.

    If you want to get money to do anything, go fishing for the gamblers. After years of failure in trying to receive money, this is the result, this is how we succeeded to find some millions. Of course the problem with the gamblers is that they want to play: so be aware of the fact, that your “investor” is your biggest enemy who fights you and your success.

    And be aware of the fact that at least 70% of your time will be necessary to find and receive money. The gamblers never will fulfill their side of the contract, instead you will for sure face a blackmail instead of the expected tranche of money. You have to be tricky to deal with that.

    All contracts you write on paper are not worth the price of the ink they’re written with. There is no way to sue your “investor”, because with which money? And everyone knows that.

    Maybe the crowd funding possibilities can help there today. This would open a new market in Europe.

    2) You only have enemies.

    There is no culture in Europe to support new enterprises. The opposite is true: everyone in your business will try to kill you.

    They will send spies to your company in any way – as consultants, as applicants to job vacancies. Xing and Linkedin are your friends there – you can see their contact networks if they’re coming from competitors or huge companies with own interests in your business.

    No partner will give you a chance to show your power. There are only political deals, you will learn to hate that word: politics. Your performance is irrelevant, who’s father has the connection wins.

    3) Don’t try it in hostile countries like Germany.

    There not only the other enterprises are enemies; the government itself will kill you. Everything is constructed that Siemens and the Pink T will win in any case, and you can only lose independently of your performance.

    4) The crisis will kill your financing.

    The last time I tried, we sold already 100’000 pieces of our PND, had a customer’s forcast for another million pieces, our break-even was with delivering 70’000 pieces and we had a working sample. But it was 2008, and the crisis killed the financing of our production, so there was no way to deliver according to customer’s orders. This was the end of a 300 Million EUR project, which had a plan to develop to billions.

    While the crisis lasts: better don’t even try!

    5) So the result is: financing first!

    If you get a financing which leads you into generating cash flow, try to get it onto your bank account 100%. If this is not possible, stop your dreams in Europe.

    Go to the Valley, there is VC.

  3. Why does it matter if it’s an European startup as long as it is on the Internet?! You could find VC’s and pitch online, I think…

  4. spike

    As Victor said i don’t understand why would it be necessary to go physically to the valley of your startup is based on Internet ? 

  5. This is a result, too. No one in the Valley will invest in you if you’re not moving your business to there.

    Just try yourself!

  6. Matt

    Juri,

    In response to this post, I think the offer of options during the salary negotiation is an integral part of hiring in a new company. As an owner, I dont think you need to be too concerned with the percentages/share dilution at the onset (if we are talking about an already established company with several rounds of funding in the pocket, thats a different discussion). Option negotiations shows whether the potential employee believes the company is viable or is just looking for a pay check. As we all know, the most complex part of growth is quality resources. An engaged and talented senior architect can do far more at the onset than just another warm body with a modicum of talent.

    However for me, of more interest would be, how do you valuate your companies when making these offers? Running on the assumption that the only capital in a start up is its IP, what is your personal take on defining “current valuation”?

  7. Dev

    @Spike and Victor, I’ve tweeted once”all the big thinkers are left the EU continent for the US” . A guy from Italy i think called me stupid. I am not stupid telling u EU sucks. The acceptation in EU (except UK) is zero. The culture and languages are fragmented. If you wanna start a EU “Google” just do not think it will accepted in EU rather than maybe only your country. EU has 500million consumers where the US only 300million but in the EU you will have only 1 million early-adopters, where the US 100millions early-adopters for your start-up in the early stage of your product or service. EU sucks also because the “VC” are old idiots, bureaucrats whom telling you if you have failed once you are not capable for a business start-up. They will tell you very polite to go find a job. There’s loads of funds sponsored by the government with the same rules and agreement where the sucking EU banks working with. I think you guys better start a local shop and do not dream about scalable businesses. For Europeans are the World only by saying their environment where for the American (also Japanese, Chinese) mentality the World is theirs.
    VC are not investing in local businesses, I think for the European rate you better go to LVC =local venture capital or Informal Investors etc. VC is only for the BIG stuff.

  8. To be fair to the blog owner, here’s an answer to his question ;-)

    We had bad experiences with giving options. We didn’t receive more motivation. But we got a lot of discussion if we’re on the right path in product development.

    Giving options in a startup can lead to the situation you have more owners (or think-to-be-owners).

    When I’m trying again (probably I will), I will refuse to give options. The fact that we’re paying good salaries should be motivation enough.

  9. Good observation by Jüri. 

    I would add one detail that often gets overlooked. When asking your employees the question Jüri proposed “is there a difference between if I give you 1% or 2%” – ensure that you’re ready to give out the maximum 2% when their answer is well aligned with your startup goals. If the maximum you’re actually willing to grant is 1%, then better rephrase the question to “difference between 0.5% – 1%” or something similar.

    Otherwise your employee could anchor his or her mind to the high % you’re not ready to sign but unwittingly represented in your question.

    My experience shows that in most cases it is impossible to fully unanchor one’s mind afterwards and it often leads to bitterness and alley of broken dreams. 

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