The case for boosting Swedish VC incentives

In a discussion piece published on Swedish newspaper Dagens Industri's website, Swedish Venture Capital & Private Equity Association (SVCA) chair Elisabeth Thand Ringqvist argued that the country's government must reduce taxes on employee stock options.

Northzone's Hans Otterling, Creandum's Staffan Helgesson and several Swedish entrepreneurs are also signatories to the article, which points out that, under current rules, employee stock options can be taxed as high as 67%.

The high rate makes sense if stock options are used as a bonus or incentive schemes for financial services professionals already on substantial salaries, but less so when it is used in lieu of salary for employees of pre-revenue startups.

Paying employees in stock is a key tool for startups, which are often cash-strapped for the first few years.

Entrepreneurs take on substantial risk when trying to build a successful company and the potential reward of a hefty payout from realising shares once a startup has made it big is one of the reasons staff and management are willing to forego salaries in the short term.

Into the wild
Sweden has a good record on unicorns, but most companies are in the herd of ‘wildebeests' at best, which do not reach valuations of $100m, let alone $1bn. While Stockholm often ranks as one of the hottest startup cities in the world, entrepreneurs and VCs in the Nordic region often lament the relatively high cost of living in the city.

The country does not need additional hurdles to attracting top talent to the city, and the high level of tax on options will undoubtedly feature prominently in the cons column of any entrepreneur considering joining a Swedish startup.

As the SVCA pointed out in its article, companies younger than five years account for 46% of all new jobs in Sweden. This is particularly poignant considering Sweden has one of the highest levels of youth unemployment in Europe.

While taxing stock options at a higher rate might be popular with the public when it comes to curbing the income of financial services professionals, concessions could be made for startups.

Staff and management of small and young companies take on a much larger personal risk when starting from scratch and the contribution of a single person undoubtedly has much more influence on the performance of a startup than it would in a 10,000-employee bank.

The Swedish startup scene, and the VCs that enable it, have been among Sweden's best exports in recent years and have improved the country's profile. Perhaps now is the time for that contribution to be acknowledged and supported with concrete improvements by the government.

Motivation gap
Recent analysis by venture firm Atomico, which looked at tech-company funding in Europe, showed a substantial funding gap between Europe and the US, particularly in later funding rounds.

In funding rounds from series-B and onwards, the amount of cash raised from non-European investors increases substantially, suggesting European funds are either unwilling or unable to provide the large amounts of capital – often $40m and up – raised in later rounds.

Indeed, while the US creates three times as many billion-dollar companies, the venture fund market has raised five times as much capital compared to their counterparts in Europe.

Furthermore, US VCs have proved willing to plug that gap. European funds should therefore be careful not to let the opportunity to cash in on the huge amount of potential value available in later-stage investments pass them by, given the current red-hot market for tech startups.

With the Nordic region among the hottest startup hubs in Europe, it is perhaps no wonder that regional players have spotted the opportunities available.

EQT's recently announced $500m tech fund will likely be an active player in the European later-stage rounds, but the funding gap remains unfilled and there could be a great opportunity for tech-savvy GPs and VCs with strong demand for their funds to cash in on the global unicorn hunt.

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