Startup founders and their investors are appealing to the government to improve conditions for employee shares, so-called ESOPs. In an open letter addressed to the Prime Minister To Peter Fial (ODS) are asking for an extension of the deferral of the tax obligation on employee shares or for greater flexibility in programs that allow employees to own company shares.
Startupists claim that such changes could significantly contribute to the growth of innovative Czech companies and thus the entire economy of the country.
The document was signed by 146 founders of Czech startups and investors in them. Among the signatories are, for example Jakub Havrlant from the Rockaway Capital group, CEO of the Pilulka pharmacy company Martin Kasa or the CEO of ticket seller Kiwi.com Oliver Long.
“In order for our country not to be referred to as an ‘assembly plant’, but to become a ‘brain center’ with a long-term growing economy, we must be able to create products and services with ever higher added value, which is not possible without innovation. And technology startups are companies whose purpose of existence is to innovate, look for new opportunities on the market, and then grow quickly thanks to them,” the authors of the letter write.
In 2022, startups in the Czech Republic employed approximately 150,000 people. Although the Czech Republic is proud of many internationally successful startups, we tend to lag behind in comparison to European countries. While there are currently four startups in the country with a market capitalization of over one billion dollars, the Baltic states comparable to us have nine, Sweden 25 and Israel even 26.
“Our country has a technological tradition, we have quality universities and many smart and hardworking people. Without these people, a successful startup cannot be built, but the founders often cannot offer them the same remuneration at the beginning as large established companies, including foreign ones,” the entrepreneurs state further.
According to them, one of the few ways to attract talented employees is to offer them a financial share in the possible future successful sale of the startup or its entry on the stock exchange in the form of employee shares.
Czech laws complicate the system of employee shares according to the domestic startup scene. In particular, they identify the tax liability for owners of employee shares as a serious problem, which is deferred for a period of ten years from the acquisition of the shares.
However, according to the authors of the letter, this may not be a sufficient period, because the sale of the startup may not take place until then. They are therefore asking that employees never have to pay tax up front on an option or share that still hasn’t been sold.
At present, the situation is such that the employee pays income tax on employee shares at several defined moments. For example, if he sells a share in the company, but also if he leaves the company. The intention is to supplement this legislation approved at the end of 2023 and valid from January 1 of this year.
The authors of the letter also want to change the provision according to which employee stock options are converted into an actual share in the company. According to them, it complicates the ownership structure and thus the functioning of the startup.
The law does not suit startups
Czech startups have been calling for the introduction of a system of employee shares for a long time. The new law, which came into force at the beginning of this year, has already introduced them, but many representatives of technology companies and investors are not happy with it.
That is also why in the first half of April the proposal to change the legal framework of employee share programs was presented by the Government Pirates. If the innovation successfully passes the entire legislative process, it will be effective on January 1, 2025.
The Pirates’ proposal envisages that only the sale of the promised share and cash income from the employee would be taxed. The proposal also works with the fact that the employee in the option program will be viewed as an investor and his income resulting from the appreciation of his share will not be taken as income from a dependent activity.
“We want to improve the environment for startups and the entire ecosystem around them. Every successful Czech company started small, such as the flight search engine Kiwi, the antivirus Avast or the online supermarket Rohlík. We want to support innovation and growth of companies, and our employee share proposition will help them acquire talent. We are ready to modify the proposal and finalize it with the coalition partners,” he said Jakub Michálekchairman of the Pirates parliamentary club.
Key design points
- An employee who receives shares or shares based on participation in the option program is viewed as an investor. If the employee obtains options, the future exercise price of which is set at the level of the market value of the shares at the time of entry into the option program, no income from dependent activity will arise when the option is exercised, and therefore no tax or levy obligation.
- Appreciation above the level of the market value at entry (or the exercise price, if it is higher) is subsequently taxed when selling shares or shares as other income.
- It will not be possible to apply a time test to the sale of shares or shares acquired through the option program, so the appreciation will always be taxed.
- If the option right were granted to the employee at a discount compared to the market price of the shares or shares at the time the employee entered the program, this difference is taxed as income from dependent activity → the already valid and effective rules implemented by the amendment effective from January 1, 2024 will apply.
Companies acknowledge the proposal
“To a certain extent, it is a compromise, but it still has the potential to bring about a fundamental change – this amendment would move the Czech Republic among the top ten countries in Europe in terms of the friendliness of the legal and tax framework towards ESOP schemes,” he said Lukáš Konečný from the Y Soft Ventures fund.
Markéta ParisekHR business partner of the Miton investment fund, is convinced that without clear rules for employee shares, the Czech Republic could significantly lose its competitiveness in the irrepressibly interconnected international labor markets.
“So if we allow ourselves to find ourselves in a situation where the surrounding states establish clear and perhaps even more favorable rules for ESOPs, then there is a realistic risk not only of an outflow of talent, but also of entire companies. Although the proposal is a compromise, it may still mean a shift that would allow our entire startup ecosystem to accelerate,” he claims.
Partner at Presto Ventures Vojta Rocek he believes that there is finally a proposal on the table that the entire startup scene can stand behind. According to him, it responds to the biggest challenges from the previous adjustment, adheres to the key principle of “no tax before cash” and brings a legal framework that can be further built upon.
“It is the first step in the right direction on the way to the competitiveness of the Czech Republic in the global startup ecosystem,” he concludes.
