Options — powerful startup recruitment, motivation and retention tool
Big competitors have one major advantage over startups — they can almost always outbid startups in employee salaries and benefits. However, startups do have a powerful tool at their disposal for turning the tables on the giants and hiring top talent — stock options. Options are critical not only for hiring great team members, but also for retaining and motivating them over time when building and scaling the business.
Baltics are a model for the rest of EU
Baltic founders are fortunate because Estonia, Latvia and Lithuania are considered to be the top startup-friendly jurisdictions in the world when it comes to option regulations. Index Ventures predicts that the Baltic startup ecosystem will bloom thanks, among other factors, to the favourable stock option regulation by the Baltic governments. Index Ventures is spearheading the effort with its support of the NotOptional movement to push other EU countries to follow the example of Baltics in employee options regulation.
Founders pay just capital gains taxes with a proper option plan
If the option plan is properly established and structured, employees are only responsible for paying capital gains taxes on the profits from sale of the options shares. Laws in all three Baltic countries virtually exempt the exercise of stock options from taxes if the period between the grant and exercise is at least 36 months (12 months in Latvia). Hence, employees are required to pay tax only when they sell the shares and receive gain (e.g., upon exit events). This makes options a powerful tool for Baltic startups to recruit, motivate and retain world class talent.
Multiple benefits of option plans
Stock options allow employees to immediately take an ownership interest in the startup with the right, but not obligation, to buy shares at an agreed-upon date and price (often a low nominal price). This improves motivation and esprit de core amongst the team. Options are usually vested on a three or four year schedule, motivating the talent to stick with the startup through often turbulent initial years of growth. If the startup is later acquired (M&A) or goes public (IPO) the shares can significantly increase in value as we have seen with new millionaires minted through success stories at Skype, Pipedrive, Fortumo, GrabCad and others. Stock options allow startup employees to benefit from their investment of hard work and extra efforts by participating in the company’s financial success.
Overview of options laws in the Baltics
Change Ventures has chosen the pan-Baltic law firm COBALT, with offices in Tallinn, Riga, Vilnius and Minsk, to be its primary legal partner in advising us on various aspects of investment transactions. COBALT has reviewed the current laws and regulations related to stock options in the Baltics. With their help we have prepared a simplified overview for founders in Estonia, Latvia and Lithuania regarding options regulations in the Baltics.
Please see the Change Ventures Baltic Stock Options Guide on our website under Resources together with other helpful articles, podcasts and materials hand picked and curated by us for founders.