The issue remains, however, that startups operate on a lean budget. They can’t compete with the high salaries and prestige offered by corporate competitors, and sometimes struggle to pull in the best people as a result. Designing an attractive employee share scheme tackles this head-on.
With employee equity, startups can incentivise employees without damaging cashflow. And because employee outcomes are tied to the success of the business, it keeps them engaged long-term, too.
Every country has unique rules and regulations for share schemes, so working out what’s best for your employees in each market is no mean feat. In this article, we’ll explain how employee equity works in Sweden.
Sweden is known for being progressive. It’s pro-business: Sweden has a low corporate tax rate, and its strong social system means employers don’t have to worry about paying pensions, which are covered by the state. It’s also pro-worker: the labour market is highly regulated, with about 70% of Swedes belonging to a union.
So it’s surprising that in Not Optional’s ranking of the ‘friendliness’ of employee share options in 24 European nations, Sweden only came in 12th. Of the six criteria Not Optional assesses against, Sweden ranked low on three:
The good news is that recent regulation addresses some of these issues, and looks set to make Sweden a friendlier landscape for employee equity schemes. In particular, the issues around strike price have been eased by the introduction of Qualified Employee Stock Options (QESOs) and, as of 2022, the extension of QESOs to a wider range of businesses and employees.
Managing bureaucracy remains a challenge, thanks to strict rules around the creation and maintenance of a register of shareholders. Managed offline, these registers are a time-intensive administrative task, but Capdesk’s equity management platform reduces the work considerably.
To date, Swedish businesses have typically used warrants for their employee equity schemes. Warrants are a kind of share option and work in the same way: businesses issue warrants to employees, who buy them at market value. Employees can then buy their shares at a fixed price, known as the strike price, at a later date.
In 2018, new tax regulations were introduced which enabled businesses to offer QESOs instead. QESOs offer a number of benefits to both businesses and employees.
The first is that QESOs enable the business to give share options to employees for free. Employees have to buy warrants, usually paying 5-20% of the share price at the point of purchase. QESOs, however, don’t require any initial investment by the employee. Instead, the employee can purchase their QESOs for an agreed strike price at a fixed expiration date between three and ten years in the future.
The second is that QESOs are taxed at a lower rate than warrants. Warrants (and share options more generally) are taxed as salary in Sweden. Employees pay c.50% income tax, and the business pays c.31% in social security contributions. With QESOs, tax calculations are based on the increased value of the shares and are taxed as capital gains. The tax rate is generally 25% for shares, and 30% for warrants, if they’re sold instead of exercised.
Initially, QESOs were created as a way to enable small, early-stage companies to incentivise employees in a more tax-efficient way. But as of January 2022, the range of businesses able to offer QESOs to their employees has widened.
QESOs aren’t a silver bullet, however, and there are some potential downsides you should take into account when setting up your programme. QESOs vest differently to normal share options, which are typically awarded incrementally over a period of four years. By contrast, QESO legislation requires options to fully vest on one specific date between three and ten years from issuance. If the employee leaves before this date, the options are void and worth nothing. This could limit their usefulness as an employee incentive, as it means talent is either tied in long-term, or loses out entirely.
However you choose to structure your employee equity plan, you’ll need to maintain your register of shareholders in line with Swedish law, updating it any time an employee exercises their warrants or QESOs.
A register of shareholders is a list that shows who owns shares in the company. According to the Swedish Companies Act (ABL), all limited companies must have a register of shareholders. The register of shareholders needs to be updated immediately when changes are made, for instance when new shareholders are added, or shares are sold.
The register must include the following:
How Capdesk supports customers in Sweden
Capdesk minimises the administrative work of maintaining a register of shareholders. Our digital shareholder register is easily set up to comply with the ABL, as shares are numbered automatically. Customers can view their company register on Capdesk at any time, and export it as needed for their filings.
Capdesk also makes it possible to create equity schemes using options, warrants or QESOs. Vesting schedules on Capdesk are completely customisable – simply choose the vesting intervals and increments needed for your scheme. If you’re using QESOs, you can set the cliff date on which they’ll vest. Even better, your employees can see and track the value of their equity in their own secure dashboard.
Additional sources used in this article:
The Ultimate Guide to Stock Options in Swedish Startups Startuptools.org
About registers of shareholders Euroclear.com
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