Can Equity Compensation Rules Save European Venture Capital?

Does the legal environment affect venture capital financing in Europe? Listening to commentators across the spectrum, the answer is a resounding yes. Industry actors and policymakers routinely cite the fragmentation of European law and its heavy regulatory layers as major reasons why European firms struggle to compete internationally. For this reason, harmonisation and deregulation tend to be considered some of the most effective ways to unlock the European Union’s startup potential.

Particular attention has recently been given to employee share ownership plans (ESOPs), whereby employees are granted options to buy shares in the company at favourable terms. ESOPs are the incentive fuel that helps align employees’ interests with the company’s success. Therefore, whether firms can adopt ESOPs cheaply and efficiently should, in theory, be a key predictor of their ability to raise capital. For instance, taxing employees when they sell their shares rather than when the options are granted makes ESOPs more attractive. Likewise, allowing flexibility in setting the strike price—that is, the price at which ESOP beneficiaries can acquire shares in the company by exercising their options—enables startups to craft bespoke incentive packages suited to their needs.

While several European countries already offer favourable ESOP regimes, others make their adoption difficult and costly and, in doing so, likely prevent and discourage companies from implementing these plans. EU law would thus benefit from a reform package improving ESOP rules to the benefit of innovative companies. This narrative has been widely endorsed both across industry circles and by policymakers.

Challenging this common wisdom, a recent working paper by Casimiro Nigro, co-written with Yifat Aran, finds that legal factors, although relevant, may actually play a secondary role in startups’ adoption of ESOPs. Other (perhaps more unexpected) factors, such as startups’ dependence on legal advisors, appear to be far more influential. Moreover, not all legal features are created equal. Flexibility in determining the strike price, in particular, may matter considerably more than other legal levers such as taxation. The result is a more nuanced picture than the broad claims typically made in policy debates.

Beyond its relevance in the context of ESOPs, the paper is a powerful reminder of two important factors for successful legislative reform in Europe. First, empirical research plays a fundamental role in determining how the EU’s political priorities can best be implemented. One of the core European priorities of the day is to restore the competitiveness of the European Union, which entails nurturing its startup ecosystem. Since the Draghi Report, a compelling case has been made for improving ESOP rules. But what if these rules were not that important after all? European authorities may spend considerable time and resources on a theoretically sensible reform package whose actual economic effect could be negligible. This would ultimately do little to help our startups scale and thrive, while diverting attention away from reforms that might truly benefit companies. This conclusion holds true beyond the specific context of ESOP.

Second, nuance matters when it comes to legislative reform. Some aspects of the law might be worth amending but not others. Maybe granting companies more flexibility in defining the strike price of the options attributed to their employees would meaningfully increase ESOP adoption, whereas adjusting ESOPs’ fiscal regime would not. Corporate law might also be easier to amend politically than tax law and, for this reason, might be worth focusing on as a matter of priority. In short, concluding that the regime of ESOPs should be amended does not mean that all of this regime should be subject to legislative reform. Targeted measures can be just as effective, if not more, than more ambitious reform packages.

The discussion on ESOPs directly resonates with the related “28th regime” project for European companies. Many advocate for the creation of a fully-fledged corporate entity at the European level which would be entirely governed by European law. Such a project would face formidable political barriers and would be unlikely to succeed, as I have explained elsewhere. At the same time, targeted adjustments to existing national corporate laws could be just as effective while carrying far lower political costs. Here again, a nuanced approach to legislative reform will likely deliver the best result.

With calls for harmonisation and deregulation multiplying over the recent period, legislative efforts and policymakers’ attention should focus on initiatives supported by reliable evidence. Academics have a central role to play in collecting and producing such evidence. More research of the kind conducted by Yifat Aran and Casimiro Nigro in their recent working paper would help clarify how European institutions should allocate their legislative efforts.

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Paul Oudin is an Assistant Professor of Law at ESSEC Business School.

This blog is on the discussion of the paper presented at the Fifth LawFin Workshop, Building Europe’s Venture Capital Market: Contractual Transplants, National Challenges, and the Road to a Pan-EU Regime, held online in December 2025.  Visit the event page to explore more conference-related blogs.

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