Are European Startup Employees Getting Screwed on Equity

Are European startup employees getting screwed relative to their American peers?

Context—when you join a startup and receive equity, it comes with a strike price. This strike price is a representation of the fair market value (FMV) of the equity at the time it was issued. It's the amount you'll have to pay to exercise your right to own the stock.

This FMV is totally separate from the valuation of the company (like the ones you'd read about in TechCrunch or elsewhere). Those company valuations refer to the preferred stock that investors receive, whereas the employees at these startups receive common stock.

So - what does this have to do with European vs American employees?

Well, in the States, the process of assigning an FMV is governed by section 409A of the tax code. It requires that an independent body appraise the private company stock in order to establish "safe harbor" - basically ensuring the IRS accepts the common stock valuation.

We at Carta handle tens of thousands of 409A valuations annually. Our data (shown below) is clear - 𝗺𝗼𝘀𝘁 𝗨𝗦 𝘀𝘁𝗮𝗿𝘁𝘂𝗽 𝗰𝗼𝗺𝗺𝗼𝗻 𝘀𝘁𝗼𝗰𝗸 𝗶𝘀 𝘃𝗮𝗹𝘂𝗲𝗱 𝗯𝗲𝘁𝘄𝗲𝗲𝗻 𝟮𝟬%-𝟰𝟬% 𝗼𝗳 𝘁𝗵𝗲 𝗽𝗿𝗲𝗳𝗲𝗿𝗿𝗲𝗱 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻, depending on the company maturity.

But in Europe, there is no real equivalent to the 409A. So many companies simply take a discount to the preferred valuation and call that the strike price.

𝗜'𝘃𝗲 𝗵𝗲𝗮𝗿𝗱 𝗳𝗿𝗼𝗺 𝗺𝗮𝗻𝘆 𝗳𝗼𝗹𝗸𝘀 𝘁𝗵𝗮𝘁 𝗮 𝗦𝗲𝗿𝗶𝗲𝘀 𝗕 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗶𝗻 𝗘𝘂𝗿𝗼𝗽𝗲 𝗺𝗶𝗴𝗵𝘁 𝗵𝗮𝘃𝗲 𝗮 𝘀𝘁𝗿𝗶𝗸𝗲 𝗽𝗿𝗶𝗰𝗲 𝘁𝗵𝗮𝘁'𝘀 𝟳𝟬% 𝗼𝗳 𝘁𝗵𝗲 𝗽𝗿𝗲𝗳𝗲𝗿𝗿𝗲𝗱 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻.

That's a massive jump. Essentially that means the US employee gets to buy their options at 34 cents on the dollar while the European employee pays 70 cents.

I'll be upfront here - I don't have the best data on European strike prices. And maybe I'm not seeing the full market or am missing some piece of important context (and if I am - educate me in the comments.)

But if this pattern holds true, it means that European startup talent has far less upside in their equity than an equivalent US employee.

Look, I get it. Startup equity is risky at the best of times, most startups fail, etc etc. But that's even more reason to give the employees taking this bet every advantage they can get.

Would love to hear from friends on the other side of the Atlantic!

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#cartadata #409A #startupequity #equity #startups #compensation