Start-up founding: Successful with employee participation

Employee participation in start-ups contributes to sustainable success and should be promoted in Germany. This is the conclusion of a study published in June 2020 by the Bundesverband Deutsche Startups eV. Find out which ones here opportunities for starting a company lie in employee participation and why it is also worth revising the current standards in Germany.

Common types of employee participation in Germany

If company founders become self-employed, they can give their employees a share in the success of their start-up through employee participation. In Germany come at the foundation three types of employee participation in question: “real” shares, “real” share options (ESOP) and “virtual” share options (VSOP).

1. Real Shares

With real shares, the employees are made shareholders of the start-up. They all enjoy it in German corporate law regulated rights and obligations.

2. Real Share Options (ESOP)

True share options allow employees to own shares in a company at a later time to buy. This participation option offers a transparent overview of ownership. If the company is sold or the start-up goes public, employees can exercise their options.

3. Virtual Share Options (VSOP)

Virtual Shares only represent a contractually agreed claim for payment of a variable sum in the event of an exit This is a purely private law agreement that does not fall under company law. These sometimes legally complex constructions are not so easy to understand and are therefore less popular with employees than, for example, real shares.

For a detailed design of these investments, it is advisable to consult a management consultancy or business start-up consultancy. You can also apply for funding for this.

Positive effects of employee share ownership on a company start-up

Attractive employee participation schemes are the key to attracting talent from abroad and keeping employees in Germany. Employee participation motivates and ensures identification and recognition. They are more than just a strong financial incentive, because they encourage employees to identify with the start-up and its long-term corporate goals. In this way, valuable specialists can be attracted and retained. Another aspect speaks in favor of an attractive financial participation of the employees in the company: The proceeds from employee participation demonstrably migrate back into the start-up ecosystem and thus fuel it. According to the study, more than a third of employees invest the financial resources in founding their own start-up, others invest in existing companies.

Poor framework conditions for employee participation in Germany

Unlike in other countries, the framework conditions in Germany are not suitable for countering the global “war for talent”. Having the best minds in the team is a decisive factor in the success of a business start-up. Employee shareholdings in start-ups are part of the standard in an international context. In Germany, however, the right incentives are still missing, from which not only employees and founders, but the entire start-up ecosystem and even the entire German economy can benefit. According to the study, the main reasons for the unfavorable starting situation are the largely uncompetitive international tax framework and regulatory and administrative hurdles.

Suggestions for improvement for German employee participation programs

In order to make Germany an internationally attractive ecosystem for innovation and participation, the study four suggestions submitted:

1. Create your own share class

A new share class in GmbH law should be specifically tailored to the requirements of participation programs. In this way, employees can participate in a GmbH as shareholders in a very practical way. Such employee shares should be able to be transferred easily, quickly and inexpensively and issued digitally.

2. Tax fairly

As is customary internationally, the pecuniary benefit from the employee shares should only be taxable when liquid funds have flowed after a sale. They should be taxed uniformly as capital gains, as these are not monthly salaries, but income from company investments.

3. Allowances for reinvestment

In order to let the start-up ecosystem fuel itself, reinvestments of proceeds from employee participation should be promoted with allowances. Tax-free collection makes it easier for employees to become self-employed later and to invest these funds as founders or investors in founding their own company or, alternatively, to support an existing start-up.

4. Create a transparent evaluation process

The tax assessment of a start-up in Germany is still difficult today. Unpredictable tax requirements and the resulting risks unsettle many employees. Simple, neutral and cost-effective valuation methods should be introduced for start-ups and employee shares in order to effectively reduce these uncertainties about a possible tax burden.

Conclusion: A successful start-up is not without employee participation

Employee participation programs provide employees with interesting financial incentives, promote their motivation and identification with the company, and attract talent. Not only individual start-ups benefit from this, but the entire start-up ecosystem and Germany as a business location. In order for Germany to be able to keep up with international competition in the future, however, it is necessary to set some administrative and tax decisions. The appropriate steps are shown in the study. Hopefully it will be implemented quickly!

Further information: PDF download (external link) of the study by the Federal Association of German Startups