BREAKING: Isaiah Baril-Dore, Index Ventures: UK expands EMI stock option scheme for startups

0:00Hello and welcome back to the Scaling Europe show. I'm Seb Johnson. Today I've got an amazing guest, VP at Index focused on compensation and talent. Isaiah, how are you doing today?

0:08Isaiah Baril-Dore:I am doing great. Psyched to be here. Tell us a bit about your role and what you do at Index. Well, I have been at Index for about two and a half years. I am part of the talent and strategist team. And my focus is specifically on compensation, equity, stock options. and so for that reason it's exciting day today with the news that's announced in the US but my role really focuses on anything from helping our European founders navigate tax-efficient schemes which is which is relevant through to San Francisco based AI startups hiring researchers through to working with our founders on pre IPO perhaps sort of everything in between both here and and in the US.

0:50And it must be a pretty crazy time to be in this role, given that the compensation world has just changed drastically in the last three or four years. But before we get into that, which I do want to get into, tell me about the news. What's happened today?

1:03Isaiah Baril-Dore:Amazing. Well, officially today, the UK has officially enacted the new budget, which includes changes to the tax-efficient stock option scheme called EMI. The major changes are based on headcount cap which is increasing from 200 to 500 or 250 to 500 excuse me gross assets from 30 million to 120 the option lifespan from 10 years to 15 years and the sort of pool cap from six or from three to six million so all incredibly exciting changes which officially go live go live today amazing let's go what does that mean for operators today in Europe in the UK Aceroy and founders, what are the real changes that it's going to make to people's compensation?

1:48Exactly.

1:49Isaiah Baril-Dore:Well, maybe before that, I'll go back in time because I think, you know, Rome wasn't built in a day. And sort of like this sort of celebratory moment of this change, it's really due to almost a decade of sort of policy work and advocacy around stock options. Index was part of the not optional campaign that we kicked off back in 2017, 2018, really working with our portfolio founders, startup associations, policymakers to sort of lobby to increase both visibility of the challenges of stock option regimes across Europe and the UK and advocate for changes. And so since that policy has been launched, we've seen incredible changes in Germany, for example, which went from maybe the lowest on the list all the way to matching the US.

2:34Isaiah Baril-Dore:We've seen sort of Austria, France, Netherlands, Spain, all increase their regimes. And the UK at the time was a forerunner. They had had one of the most competitive schemes across the UK and Europe. And, you know, I think I think it just hadn't kept up with with the changes in what was happening in the market. And so these changes, I think, really do support sort of this next wave of, you know, companies that are starting in the UK, which is exciting. I would say, like, the key things really are that a few things are happening. One is that companies are raising larger rounds to compete for talent and pay for compute.

3:11Isaiah Baril-Dore:They are staying private longer. And a few of these things have actually led to companies falling out of EMI and having to switch to different vehicles, which the UK has vehicles for, whether it's CSOP or growth shares, but it just creates more complexity. And I think to run effective stock option programs, simplicity is key. And so that I think like we will see a whole batch of companies that either historically were not eligible or have since left will now reissue options that are that are EMI, which is exciting. And what's great about EMI? For those who don't know, why is it a great scheme and why is it great that it's expanding?

3:48Isaiah Baril-Dore:OK, it's a great question. So I think one is around the timing of the taxation. And the key for that is that historically stock options that are unapproved, i.e. not in a tax efficient scheme, you often pay tax either at grant or at more commonly at exercise. And the idea is that's like dry taxation, right? You're paying tax on an asset that's not liquid. EMI is amazing because it kicks the tax bill out until liquidity, which is key. So you actually pay the tax when the vehicle is worth something. Next is around the actual tax rate, recognizing it as capital gains. This is a sort of risky asset.

4:25Isaiah Baril-Dore:And the idea that this asset should be taxed at capital gains makes sense. If you've worked in a startup, you know that risk. And the key also is around sort of eligibility. Like more companies with slightly larger headcounts, longer time periods of sense creation are eligible. It's just better for the ecosystem in a wave where there are new startups raising larger rounds, but potentially are no less risky than they were at a smaller round 10 years ago. Amazing. And so what this really means is that there's going to be more companies who can take part in EMI. And EMI fundamentally means that there is better tax benefits for operators and workers and employees at these companies.

5:01So they don't have to pay till liquidity. And when they do pay, it's on a lower tax rate.

5:07Isaiah Baril-Dore:Exactly. And I think it's even more, you know, a pain point today where we have, you know, U.S. labs, U.S. companies expanding into the U.K. offering, you know, incredibly outsized comp packages. and early stage startups, even ones that are raising larger rounds and need an edge, right? In a tax efficient scheme, often is that thing that can create a, you know, this real sort of like a wedge for talent where talent right now is like in an intense a war as I've ever seen, I think. That's super interesting. So it becomes almost a competitive edge for smaller startups to be like, hey, yeah, maybe we can't pay you as much, but come to us, our shares, our stock options at EMI, which means lower tax, deferred tax bill, and so actually come with us.

5:53Isaiah Baril-Dore:Exactly. And even think about it in the context of companies that may have started 10 years ago are now sort of riding this AI tailwind and are now can still grant EMI options if they fall within this threshold and sort of capture talent that maybe they would have been unable to do if they had created an EMI plan 10 years ago. And I think for employees who have been at those companies since the beginning, right, their options don't become void at 10 years. They now can expand for the next five years, which is amazing. And it really does sort of like, you know, companies are staying private longer.

6:27Isaiah Baril-Dore:We've seen companies like you don't want to penalize them for trying to time the window for an IPO. Yeah, amazing. And so where does this make the UK rank? I know that you and the team at Index have this amazing framework where you are sort of ranking and judging all kind of companies and their frameworks for how they treat stock options. How does the UK rank across Europe and compared to the US? Well, very exciting. It is 29 out of 30. So 30 being our max score, which makes it the number one of a sort of large developed economy, highest in the G7 and better than the US. I think the key thing is that we think about rating these under a few different aspects.

7:10Isaiah Baril-Dore:One is sort of plan scope, number of companies that can be eligible for it, exercise price, like how steep of discounts there are, is there a safe harbor policy. Around bureaucracy and admin, this is one of the things that really gets caught up in some member states where the actual implementation of the plan is complex. Tax timing and then tax rates for both the company and the individual. And with these changes, our belief is that the UK is moving sort of right up to the top of the list, which is exciting. That's amazing news. And how does Europe perform more generally? Are there great countries across Europe who are also doing this really well?

7:42Are there certain countries that really need to get their act together?

7:44Isaiah Baril-Dore:Of course. I mean, it is one of the there is a different stock option regime in every member state. For example, so Germany is a great example, which historically was one of the lowest ranked member states on our list. And when they released sort of the Future Financing Act a few years ago, they've jumped up, you know, to almost align with the U.S. Traditionally, we see sort of the, you know, Baltics, Estonia, Latvia have incredibly employee friendly stock option regimes. And you actually see that reflected in that there being a culture of stock ops or startups being, you know, created there and flourishing.

8:17Isaiah Baril-Dore:And I think there are a number of, you know, member states that continue to need, you know, I won't call any names, but can follow sort of this, the guidance that we're seeing more broadly. And we're actually hoping, you know, we can talk more about this, but potentially EU Inc. and EU ESOP will be a solving force for this. One thing I will say we have found is that there is a competition aspect of this. I think when we see, you know, Germany, you know, publish a change, Austria is not far behind, right? When we see France, you know, makes their regime better, the UK not far behind in wanting to update their regime.

8:53Isaiah Baril-Dore:And I think there's a real competitive aspect to, I'm not saying that not optional is driving some of these changes, but the ranking system is important in a competitive landscape like this. And it's super interesting. It's almost like one of the drawbacks, I guess. And I've actually seen people raise this criticism of trying to do a single unified approach. Is that, well, if that becomes a unified approach and we have one standard, you sort of lose that competition. But the idea is that if you can, I guess, just have one approach that is the very top, then you'll be all right. Yeah, of course.

9:25Isaiah Baril-Dore:Listen, the rising tide lifts everyone, right? And I think if you can create a unified approach that is born from the best policies that exist, you can create a regime that actually allows talent to move across Europe more easily for you to hire and expand quickly. I mean, access to talent and speed are some of the key things. And, you know, a really fragmented ESOP regime across, you know, every member state is incredibly difficult to navigate. And why is this being so important to Index? You know, like I know that on Index Press, you kind of published reports or books about rewarding talent and you've got the whole like option plan app.

10:07You've been a key proponent of the non-optional campaign. Like why have you and Index prioritized this as something that you think is really important? it?

10:17Isaiah Baril-Dore:I mean, talent is is the number one thing that makes startups successful. We've always believed that. And I think in order to capture the best talent, you need to have systems in place that allow startups to do this easily and quickly and compete with some of the more traditional, you know, employment, employment routes. And so, you know, stock options we've always believed are the number one vehicle to do that, right? It creates a shared incentive between investors and employees and founders, it can create this flywheel effect that has been so profound in Silicon Valley where you have employees that receive stock options, are part of an exit, then go on to invest in other companies or start their own company.

10:56Isaiah Baril-Dore:And if you do this over time, you create an ecosystem. And we've seen this come true. And our belief is that creating sort of real regimes that allow this to take place at a low cost and easily are beneficial to the entire ecosystem and to our founders. And I think our belief in talent is sort of everything that this is grounded in. Yeah, and it makes sense. It kind of goes back to your point about rising ties, lift all boats. You know, if you get this right, the ecosystem gets stronger. Your portfolio gets stronger. The founders get stronger. You get more operators, more builders. I have so many examples of of, you know, founders in our in our portfolio who, you know, worked at one of our other startups have gone on and start their own company because they have been, you know, received equity in that company that allows them to start this idea.

11:47Isaiah Baril-Dore:And then they go on to then grant competitive stock options to their teams. And it's sort of this like that is the flywheel. Yeah. Yeah. And that is one of the things I love about the increased rate of secondary sales that we're seeing. you know okay you know liquidity is hard to come by with the closure of the ipo markets but secondary sales you know even last week uh in the revolutes financial report it was announced 2 100 employees participated in their secondary sale last year it's like 2 100 employees from 30 countries and it's like you know that is just transformational you know to a point it gives operators the the financial security to go and build their own if they want to or invest in their own as an angel or just like buy a house you know i mean yeah i mean i think it's um i could not agree more i'm loving seeing this trend of secondary sales particularly when you know potentially the public market isn't isn't a stable right now to enter and i think you know the emi changes support this both in terms of increasing the the length of the option to 15 years and by being more more explicit around like you know the ability to participate in these I say this all the time to our founders.

12:51Isaiah Baril-Dore:And if you talk to any founder who has now sort of reached a later stage, every year that you aren't able to offer some kind of liquidity is a year that you're like potentially losing some trust in your options. Right. Like we see this come to fruition where once you offer a secondary sale, you see people buying into the mission. And, you know, you're able to then sort of attract even greater talent because people see the reality of this, of the actual scheme. And having a plan that allows that, you know, and is seamless is so important. And so is that part of the role that you play is advising founders actually, look, you're Series B, C, D.

13:30There's demand for the shares. Maybe it's time to think about a secondary sale. And, you know, this is how many people should have access and this amount. How does that work?

13:40Isaiah Baril-Dore:Yeah, I wouldn't say we're that explicit. I think it's different for every company, but I do think we share sort of best practice, right? And I think any founder will tell you that, you know, when they've done a secondary sale, it has bolstered the sort of like culture internally and created, I think some people get nervous around like retention. But it actually, in my mind, actually creates sort of like reality to the stock options. So then when you're chasing sort of an even bigger outcome, which is key for sure. yeah it's interesting i had dinner with a friend last night who just was able to participate in a secondary sale at a big startup and now he's like i'm not leaving yeah i would be right this is it even the emotions is like you know even if you don't stay for you know 10 years for the ipo you know you may be more willing to take a shot in an earlier stage startup right um yes why we're seeing this sort of like this incredible movement of talent i think um right now into you know early stage startups.

14:34Isaiah Baril-Dore:And I, you know, the increased scope of EMI makes it even more possible, which is, which is amazing. Absolutely. And what are you seeing across the ecosystem now more broadly? I mean, this is the war for talent is crazy. The biggest thing that founders say to me that is constraining them is access to top talent. It's not capital. It's not customers. It is access to top talent. So can you give a bit of state of the ecosystem in the world of talent reward compensation? Wow. Yeah. I mean, it is a fascinating time to work in venture and even more fascinating to work in comp in venture, I would say.

15:07Isaiah Baril-Dore:One, because we get access to our portfolio, both in the US, in Europe, and Tel Aviv, and sort of seeing what's happening across the space is fascinating right now. What I would say is that sort of the key principles we've focused on is that at early stage, like equity is still your key differentiator. And I think you need to be even more aggressive than you maybe historically were. Two is that performance management is the moat, truthfully. I think, you know, in order to afford larger stock option grants, you know, you need to be super targeted about who you give it to, right? And I think pulling forward eligibility for your best people, you know, and doing it in a way that is, you know, you're delighting your top talent, you're reinforcing, you're retaining your best people, so they're not picked off by these big labs is so key.

15:55Isaiah Baril-Dore:And three is, I think, like a totally different structure around headcount planning and, you know, organizational structure. You know, We're seeing decisions made around compute costs versus headcount, thinking about the types of talent. I just think you need to be really thoughtful around what was the existing structure that worked 10 years ago may not work today. To that point, is the classic one-year cliff, four-year vest, is that model dying? No, actually. I get asked this a lot. I mean, I think we saw a lot of companies start to do, you know, cute, shorter schedules, no cliffs, you know, back weighted, front weighted.

16:37Isaiah Baril-Dore:I think a lot of that is designed to sort of impact burn rate, truthfully, when you're not growing as fast. I think if you have an incredibly compelling narrative, a great story, a great culture, you know, you can keep your stock option program incredibly simple and you are able to attract the best talent. We've interviewed a founder recently and sort of like, or actually, excuse me, a comp expert. And, you know, they had called out that you really want your equity program to be an MVP, like the minimum viable product that is simple, easy to explain, and people buy into it. And I think, you know, that is the number one thing.

17:14Isaiah Baril-Dore:If you are competitive and simple, you can get great talent. And so to that point, the four-year model works well, you know, evenly vested, one-year cliff? I think so. I think we do see, you know, for certain specific executives or later stage, more creative sort of performance based vesting. But for sort of the average employee joining a startup today, I think simple is better. Got it. Yeah, I mean, it makes sense. It's interesting. The world that you see on X and LinkedIn isn't always reflective. You know, people are saying, you know, there's like I saw someone say two days ago there should be like 10 year vesting plans.

17:48Isaiah Baril-Dore:Yeah, look, I think this is also the thing. I think like, you know, compensation is culture. Like we say this a lot when we talk to founders. And I think, you know, anything you build can work for your company as long as it's aligned to your story and your culture. Right. It's about the behaviors that you tolerate, you reward. And comp is a huge lever to do that in an earlier stage company. company. And I think it depends on the stage, right? OpenAI is a great example. They have foregone their cliff, which makes sense because they believe people can come in and have incremental impact in a very short period of time and then may leave.

18:23Isaiah Baril-Dore:That's fine. They want to de-risk that. Whereas a seed stage startup, maybe you actually need people to be signing up for two to three years and the cliff makes sense. So I think it's a bit around understanding what the trade-offs are and then making the decision that makes sense for your company and that you can stand behind, sort of my view. Amazing. Well, look, it's a great day. It's a good day. It's a great day for the UK to kind of rise to the top. 29 out of 30, not bad. What is that final point then? What's that last thing that the UK needs to do to get 30 out of 30? I think it will be around sort of like the bureaucracy and simplicity.

18:59Isaiah Baril-Dore:I think one of the unknowns right now is around, you know, how the HMRC will navigate sort of all these new larger valuation companies coming in, you know, there still is, people will still be, you know, exceeding and needing to use CSOP or growth shares at some point. So it just creates some complexity. I also think there's always like little areas to improve, like the individual cap has stayed at 250 ,000. You know, there's areas to improve. A perfect 30 out of 30 is hard to achieve. Nice. Well, hopefully we'll get there. Bala Azai, thank you so much for taking the time. Yeah, it's great to see.

19:33Isaiah Baril-Dore:Great to be here. Thanks for having me and appreciate the time. Thank you.