Following much debate and anticipation, France’s Loi Macron was finally adopted into effect in early August, during a period when many people weren’t paying too much attention. The Macron Law (inheriting not coincidentally the namesake of the Economy Minister whose ideas inspired it) is technically called the law “for growth, activity and equality of economic opportunities.” This piece of legislation had been long heralded by the business community in France for several reasons.
I’m still digesting the vast implications of this law, but so far I’ve seen a lot to like in it (in the unusually twisted spirit of liking government legislation). In fact, I would submit that the Macron Law, through its clarifications and simplifications, makes it a bit less daunting for foreign VCs to invest in French startups.
Here are the two most salient aspects of the Macron Law which I view as positive developments for France’s innovation ecosystem. The following aspects are not only relevant for French startups and VCs, but also for international investors who can appreciate the talent and opportunity residing in France but have been wary of our country’s regulatory complexity.
- The watering down of the ESS Law, sometimes referred to as the Hamon Law
- The clarification and simplification of the tax regime affecting the issuance of free shares
First, do no harm
Let’s discuss the first point first. In its aim to restore power to employees, the Hamon Law requires business leaders to inform their employees of a potential trade sale at least two months in advance and grant employees an effective right of first refusal to preempt the sale of their company to another acquirer. As I’ve written before, this represents a disastrous piece of legislation which ignores the reality of a market economy (for starters, the law presumes that a CEO can control the will of third parties on whether and when to acquire his/her company).
Mercifully, the Macron Law has neutralized some of the more pernicious aspects of the Hamon Law, or at minimum has clarified their practical implementation. For example, companies can now render the 2-month notice requirement inapplicable by establishing periodic, company-wide general communication plans.
I’ve also lamented about the second point before: 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 unappealingly at risk of being audited and re-characterized as wages with penalties.
Letting entrepreneurs reward their employees
Fortunately, the Macron Law addresses one such instrument: free shares, and renders the attribution of free shares to employees much more expeditious. Thanks to the lucidity of this new law, companies can relatively freely grant free shares to any employee of up to 10% of the capital without overly onerous conditions. The principal conditions are that: i) the free shares must vest over a period of at least one year, and ii) the employee receiving them must hold them for at least one year. This total 2-year duration strikes me as fitting quite reasonably within the time horizon of most venture investments.
Additionally, certain conditions can be attached to the free shares, such as maintaining gainful employment in the company (i.e. a vesting component), or performance-based objectives. Furthermore, the taxation burden of free shares has become more palatable, specifically:
- The rate of the employer’s social security contribution is reduced from 30 to 20% and is deferred
- The employee’s social security contribution of 10% is abolished
- Any capital gain realized by the employee can qualify for a further tax reduction depending on duration of ownership
So if you can accept a two-year time horizon, a grant of free shares is one of the most reliable and straightforward instruments to extend an equity incentive to your employees.
Of course, as I’ve mentioned in the past, as an investor I tend to prefer option-like instruments over straight free shares. This is because one of the greatest appeals of free shares – that they’re free – can also be their greatest drawback. Let’s say I invest in a company at a valuation that reflects a price per share of 10€. With options (or warrants), I can grant employees equity that sets the exercise price at 10€, meaning that the employee benefits for every €/share of value creation above 10€. With free shares, however, the employee essentially has an exercise price of 0, meaning that even at a decline in the company value (say, from 10€ to 8€ on a per share basis), the employee is still making a handsome gain since their cost of the share was 0 (it was free). I, on the other hand, have witnessed the company decline below the valuation at the time of my investment. This creates an intrinsic misalignment of incentives. I can try to correct for this by implementing liquidation preferences and the like, but it’s an impure solution.
For the above reason, I still often find myself exploring BSPCE (essentially “founder warrants”) as the equity instrument of choice in our portfolio companies (I’ve already written at length about the other types of equity instruments in France and why I find them unattractive).
Here I’ve highlighted just two aspects of the Macron Law which strike me as particularly helpful for the French startup ecosystem. Like I’ve said before, there are many elements to like, so as legislation goes, it’s a step in the right direction.