Ask any startup leader what their most valuable asset is, and they’ll point to their people. Why? Because it’s impossible to succeed as a scaling business without the right team.But attracting and retaining the right talent is getting harder. As the global skills shortage worsens, employees find themselves with more leverage – and in the wake of the pandemic their priorities have shifted. Today’s startup workforce expects to be recognized and rewarded for their long-term contribution to company growth.
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 incentivize 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.
The state of employee equity 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 labor 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:
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Plan scope: Can all employees and company types benefit from favorable treatment of share options?
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Strike price: Can options be offered at a strike price below last-round valuation, without adverse tax treatment – reflecting that they are illiquid, high-risk, and non-preferred?
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Minority shareholders and bureaucracy: When option holders exercise, they become minority shareholders, who may need to be consulted on various company decisions; does this make share options unattractive to companies? How does this affect the treatment of leavers? And how much administrative burden and cost is associated with creating and maintaining the plan?
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 Carta's equity management platform reduces the work considerably.
Warrants vs Qualified Employee Stock Options (QESOs) in Sweden
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 incentivize 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 program. 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.
The Swedish register of shareholders
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:
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A unique number for each share (the shares must be presented in number sequence)
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The name, personal ID number and postal address of each shareholder
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The class each share belongs to (if shares have been issued in different classes)
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Confirmation of whether share certificates have been issued
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Confirmation of whether the share is covered by reservation
How Carta supports customers in Sweden
Carta 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 the platform at any time, and export it as needed for their filings.Carta also makes it possible to create equity schemes using options, warrants or QESOs. Vesting schedules on Carta are completely customizable – 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.
