Bureaucratic Blunder: Backtracking on the Loi Macron for startups

October 21, 2016


As Gilda Radner on Saturday Night Live used to say, “It’s alwaaaayyyys somethin’.” Or for you millenials in the audience, “Here we go again.” (Kanye West). [We Gen Xers usually reach for Homer Simpson in these instances].

Hey French legislators, you’ve got to be kidding me. After the praise we heaped on you for implementing the Loi Macron (the Macron Law) — notably its lucidity on stock grants — now barely a year later you threaten to reverse course.

I’ve long bemoaned the challenges of granting equity to employees in a French startup. As VCs, we like the notion of equity compensation in our portfolio companies because it improves alignment between shareholders and personnel toward the company’s success and can represent an affordable way to hire talented, driven people without an unwieldy up-front cash outlay. Unfortunately, the French tax code made most equity instruments either unappealingly costly or exposed to risk of being requalified as wages with penalties.

The Loi Macron provided a welcome reprieve

The Loi Macron enabled companies to expeditiously grant free shares to any employee of up to 10% of the capital without overly onerous conditions. The 2-year minimum vesting and holding duration struck me as fitting quite reasonably within the time horizon of most venture investments. Additionally, the Macron legislation alleviated the tax burden of free share grants, specifically reducing the employer’s social charges from 30 to 20% on the instrument. For the employee, the social charge contribution was eliminated entirely, leaving only a capital gains tax on the employee’s profit from the shares.

Although it would be misleading to call it a bargain (remember most countries don’t levy a 20% social charge rate on equity grants), at least the Loi Macron’s clarity made the granting of free shares one of the most straightforward tools for incentivizing employees with equity.

Now the French parliament has adopted an amendment which will reverse course on the most appealing components of the Macron Law, namely reneging on both: i) the reduction in social charges and ii) the taxation of profits from share grants as capital gains rather than as ordinary income.

To add insult to injury, the government may apply its decision retroactively

It’s important to clarify that this amendment is not yet definitive. Furthermore, SMEs may purportedly be excluded from the revisions, provided that they never paid a dividend. And thank goodness, the Pigeon movement is poised to take flight again.

Of course one can hold endless debate on the appropriate tax rate and whether social charges should be assessed on equity. The core problem, in my opinion, is the uncertainty this creates. Inconsistency, unpredictability, and an omnipresent threat of retroactive application should the politicians have a change of heart… How can a company manoeuvre in such an environment ?

The ability to grant equity in order to align and incentivize stakeholders is a critical component in creating innovative companies. Unpredictability slows decision making, whereas innovation requires agility. Building hurdles of complexity impedes the building of businesses.

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posted in venture capital by mark bivens

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