US entrepreneurs in Europe beware!
Published by MartinVarsavsky.net in Entrepreneurship with No Comments
While not all Americans love Europe, many, mostly from the Blue States, do. People in San Francisco or New York City dream of spending part of their life in Italy, France, UK or Spain, and some do make it over. Not many go to the extreme of moving over here and giving up their US nationalities as I did. But after 9 years of being a tech entrepreneur in Europe and being forced to choose between Spanish or US citizenship, I chose Spanish and stayed in Madrid. As a tech entrepreneur, I found Europe, in general, and Spain, in particular, to be a fertile ground for me. The European market is huge, bigger actually than the US market. And over here, I built Viatel in the UK, Jazztel and Ya.com in Spain, Einsteinet in Germany (the only company that I sold at a big loss) and now Fon.
Europe is great for an American tech entrepreneur because wealth here is better distributed, people are more educated and there are less competitors. Since being an entrepreneur is not very well regarded over here, US entrepreneurs find more open niches; but on the negative side, the market in Europe is much less homogeneous than in USA, local cultures make it hard to launch pan European products and there are all sorts of taxes, market distorsions and restrictions that surprise a US entrepreneur.
So let´s go over the caveats. The first one that I would like to focus on, one that is particularly brutal, is the issue of unlimited personal liability of the entrepreneur. On the rest of the article I will refer to laws in Spain, but I do believe that what I am about to tell you about Spain applies to most of the rest of Continental Europe as well.
USA has a lenient view of failure. Failure in America is not seen as a lifelong chronic disease but as a test of character. VCs in the States look for people who have had a combination of successes and failures, as they are more prepared to deal with the tough realities of business life. In Europe, however, failure is seen as just that, failure, a stigma that stays with you for the rest of your life. So far, I have never managed a business that had to liquidate. In all cases, even during the crash of 2002, I was able to refinance, renegotiate and keep companies going. Even at Einsteinet we were able to preserve most of the jobs. We sold the company at a loss, but the loss was limited to the capital invested by myself and my partners mostly at Goldman Sachs. Recently, thanks to the crisis, I have been hearing horror stories of what happens to entrepreneurs who fail in this Continent vis a vis personal liability. It is not nice.
The basic problem for start up entrepreneurs in Spain (and probably most Continental European countries) is that there is no such thing as “bankruptcy”, in the legal sense of the word. This is a huge problem for start ups because, as we know, most of them fail. So, for example, if you start a company in Europe, try hard for five years to make it, but run out of money in the end, the company is not perceived as a bankrupt company in the American sense of the word. In Europe going bankrupt is the same as firing all the employees and you as the founder, PERSONALLY owe the money that has to be paid to the employees for letting them go, even if the business has done nothing wrong. I know, it sounds crazy, but this is the case. So Spain, for example, had a construction boom for the last 5 years that ended in a bust, and now entrepreneurs are having to close down businesses. But when they do, they have to sell their home or do whatever to pay the severance pay of the employees. Because in this case not only the employees can sue you (through the Seguridad Social) and force you to sell your home, car, and deprive your own family of whatever they need, but if you don’t have money to pay now, they can hunt you down for the rest of your life. You never recover, you can never declare bankruptcy. You can never start anew. If you start a new business and begin to do well, whatever you make then goes to pay for your past losses in your past business. Spanish law ties your future endeavors to your past endeavors. You never get a clean slate. If you had say 1000 employees, which is what I have had in my other companies, you could owe tens of millions of euros for the rest of your life to them. Even though you did not do anything wrong other than failing to generate a profit, you are held personally liable for poor market conditions. This is an enormous risk for a start up entrepreneur. A risk that grows larger, the longer you are in business, as severance liabilities are not related in any way to employee performance and only related to their duration with the company.
And even if you are lucky enough not to go bankrupt in Europe there are other conditions that dissuade an entrepreneur from starting a business. One of the reasons of the higher unemploymentin Europe than in America is the extremely high social charges. These are 50% higher than in the States. In Spain, a starting level employee who takes home 1000 euros after taxes costs the entrepreneur almost twice as much. In Europe the government takes so much money in between the entrepreneur and the employee that, while take home pay is many times absurdly low, employee cost is generally high. And not only are social charges very high, but salaries are deceiving because, by law, in Spain and in general in Europe you are forced to pay employees 13 or sometimes 14 months for 11 months of work (a year minus a month of mandatory vacation plus an extra month or sometimes two of a mandatory state bonus regardless of performance). So if you are an American entrepreneur and you come to Europe and find out that there are no stock options and bonuses and want to pay them as I have done, you should realize that, even though it appears that there isn´t additional compensation, in reality there are hidden forms of compensation such as extra months and accumulated liabilities through mandatory severance and these are secured by none other than your own children´s college funds, your home and your car. And this is not all.
In Europe for example, medical doctors play a hard to explain role in business. If, in America, the ghosts for entrepreneurs are injury lawyers, in Spain, France and Italy they are medical doctors. How? If a person does not feel like working, they go to a friendly doctor who declares them “depressed” and they can stop working and still get full paid for up to 18 months. At Sybilla, a company that I invested in, we now have many of such employees, all declared depressed by their friendly doctor, and company productivity is seriously suffering. Interestingly the same law does not apply to entrepreneurs. As an entrepreneur you are not allowed to be depressed. This is illegal. If you are nobody pays you. And even when your business fails, you, the entrepreneur (or admistrador in Spain), are not allowed to collect unemployment insurance even if you contributed to the Seguridad Social. In Spain and some other countries entrepreneurs are presumed guilty by default and, in case of failure, everything is seen as their fault even if they truly had a case of mental illness. Mental illness or depression cannot get an entrepreneur away from his obligations to pay, but very commonly gets employees away from their obligation to work.
So while some European countries do have great advantages to start businesses among them, no capital gains tax on businesses owned and sold in over 5 years, starting a business in Europe is riddled with danger. Having built businesses in the States as well, I know that USA has its negative aspects. One would be the “legal tax” of doing business. Legal expenditures for the average business in Europe are in my experience 70% less than in USA. Moreover in Europe you don´t need to worry about frivolous lawsuits nor insure yourself against them. But in Europe we have all sorts of entrepreneur obstacles such as net worth taxes, which are as high as 2% of your global net worth per year, we have a medical system in cahoots with employees, we have social charges that are twice as high, and lifetime liability for business failure.
So what do European entrepreneurs do? Many times they find loopholes but these loopholes even though they are sometimes legal, because we live in the black and white world of Napoleonic laws, they are pathetic to say the least. For example in some case entrepreneurs in Spain are not the legal administrators of their business but find instead people with no net worth to take the job so if things go wrong they are off the hook. And I heard worse things. In some instances, entrepreneurs in the construction industry ask all new employees to sign blank pieces of paper when they join so the entrepreneurs can force them to resign without severance should they need to do so. I know that it sounds insane to an American used to courts that interpret the intent of the law that a simple trick like that would work, but in Spain it works. Another common trick that is illegal but almost normal is that when employees want to resign for their own reasons they ask the entrepreneur to fire them so they can collect unemployment insurance. Another one is that employees who are collecting unemployment insurance offer to work for cash pay but not on the books so there´s no proof that they are working and collecting unemployment and entrepreneurs go along because they save social charges. And this is but a small list of tricks, illegal maneuvers and loopholes that the system of rigid laws, high social charges, and forced severance has created. So when you see unemployment statistics in Europe they tend to be inflated in the sense that there are a lot of people in Europe who are both working and collecting unemployment insurance. The problem is that the employment statistics are also inflated in the sense that there are a lot of fake sick people in Europe who are supposedly employed but who are not working.
Now here is an extreme example. The ultimate American start up, the Hewlett Packard, the company that started in a garage would be illegal in Europe. In Europe everything is regulated. People cannot legally work in a garage. In Germany for example there is legislation that defines what a workplace is. I know that it´s hard to believe but there are even laws that do not allow employees to work further than a few meters away from a window so unless this famous garage has a lot of windows already working in a garage can get your business close. Moreover there is almost a concept of bondage involved in the employee company relationship with a set of rights that creep in and build over time that go against the basic principle of the start up namely of trying new business concepts that may fail. Even eager start up employees who understand that a start up has risks and want to be part of the adventure are not allowed to waive any of these rights. If an employee wanted to sign a piece of paper that said “I declare that I know this is a start up and we don´t have money in this new company to get an office and I accept to work in this garage and I renounce my rights to a window” a government inspector could come and close the whole company anyway. In general I would say that in Europe the concept of trying things out just does not exist, if you try you are liable, if you try you have to behave as an established business. There´s no concept of an incubating business in temporary start up conditions. The moment you are in business you have to abide by the rules of business and this rules are against start ups.
Bottom line, if you are a US entrepreneur or a US company thinking of opening up a branch in Europe you have to learn that while the market here is huge that Europe is a whole new world when it gets to the rules of the game of starting a business. Think less of stock options which in any case are frequently illegal or taxable when they are given out even when they are out of the money, less of bonuses because bonuses are already part of employee compensation and instead interview very very well before you hire because firing is tough and lack of productivity is not reason. In Europe it is not illegal to ask personal questions in an interview, indeed interviewing is much easier in Europe than in America, what is harder is to lay people off. Even if you have a sales person who has been unable to close a single contract it is illegal in Europe to argue that you are laying off this person because he or she produced no sales. In Europe, a sales people are not supposed to sell, they are supposed to show up for work and if they fail to maek sales the fault always, invariably lies with the entrepreneur. When the entrepreneur fires this person it is always a wrongful dismissal that must be compensated for.
Now, to end on a positive note, I can say that in my 13 years of building businesses and managing people in Europe my personal experience has been good. While in one of my portfolio companies there is a high number of people who declared themselves depressed this has only happened with one of the managers who ever reported directly to me. Also, because I never had to close a business, I was not caught personally owing a lot of money to former employees. Employee morale at Fon for example is great and I have not seen any cases of people abusing the system. Moreover, in Spain, and in Europe in genera, there are fortunately very many highly ethical people who don´t abuse the system even if they could. As a result there are many successful entrepreneurs and successful businesses in Europe. But, overall I would say that European society is not business friendly and especially not start up entrepreneur friendly. If you come over, create jobs and do succeed don´t expect the recognition that you get in the States. In Europe, as an entrepreneur, you are much less likely to be seen as an engine of economic growth and more as a person who gained unfair advantage over average folk who are struggling to make ends meet. And, if you are American, even more so. So American entrepreneurs coming to Europe, beware!
Follow Martin Varsavsky on Twitter: twitter.com/martinvars
yomismito on December 9, 2008 ·
#1 I have never suffered a “bankrupt” situation in any of my companies, but I think Alex (first comment) is right. I’m not an expert, but as far as I know, when the “capital social” of your company drops under a limit you MUST declare your company as “bankrupt” (I don’t know if this is the actual word…). I you don’t do this, then the “administrador” must deal with the debts.
In addition, I think this article by Martin is a bit demagogic and pessimistic: it seems that he has made a “cocktail” of negative features of European legislation related to entrepeneurship, choosing the worst from each country and describing as ordinary illegal incidents that are infrequent:
entrepreneurs in the construction industry ask all new employees to sign blank pieces of paper when they join so the entrepreneurs can force them to resign without severance should they need to do so
Jack on December 9, 2008 ·
I’ve been in business in Chile for several years after coming from Canada and found your description of business conditions in Spain in part very similar to what I’ve found here, and in some cases even more horrific!
The collusion between doctors and employees who might not wish to work is something I’ve seen here, too, although I’m at a loss to say how wide spread it is.
I’ve had several exasperating moments when I’ve almost been driven to simply close up shop and get out of business due to the excessive demands placed on businesses by various agencies such as the Inspeccion de Trabajo who take on a very paternalistic role to “protect the weaker person in the contrace”, but go so far as to impose conditions so stringent that it actually discourages people from hiring others.
Imagine that you want to hire a gardener to work a few hours a week at home, you need to have a written contract, the gardner has to sign in to work and sign-out when they leave and if an inspector happens by and discovers this isn’t done the person who hired them is liable for a fine. If there’s an error made by the employee and he writes over the error to correct it, the employer can be fined for each instance unless a convoluted process is undertaken to report the error and change it.
In a society where the level of employment is a constant concen to have agencies which produce regulations that cause potential employers to avoid hiring, seems ridiculous, but, that’s nothing new when politics and life mix.
Florian on December 9, 2008 ·
In germany at least you can fire employees if they have been ill for some time and a limited liability company ( GmbH) should protect most of your assets. Is the situation in spain that horrible?
Libo on December 9, 2008 ·
S.p.a (Societa’ per Azioni) in Italy will not involve personally the entrepreneurs; albeit it requires a quite big share capital: 120.000 euro.
In Denmark, part of the EU and where I live and work now, you can fire people as you like. When you get fired here you get 1.200 a month from the working union. It’s a liberal country with huge social security… It’s a very nice mix. If I was you I would give it a try… not warm like Spain although.
The rest you say make me quite sad and willing to unsubscribe your RSS feed that I have been following daily for the last 3 years. Why should it be legal to work in a garage with no enough windows and air? Do I have to ask the people working for me to ruin their healt because we are a start-up, when they don’t have any share of the company? I can’t believe workers in the States give their life for companies they don’t own.
Why should I be worried about my “own children´s college funds” when I don’t need them: I pay taxes for almost 50% of my incomes and that gives me free excellent university and hospitals.
Overall Martin I don’t really believe that the US model is stronger and better than the EU. This last markets crisis might be a symptom. But I would like your opinion I am not an expert.
Mike on December 9, 2008 ·
While I agree with your post in its meaning, as it’s true that being an entrepreneur in Europe is way harder as you face many more hurdles than in the US, in Spain the ‘sociedad limitada’ shields the shareholders and managers from responsibility, of course unless they act in bad faith or miss-manage the company.
While you run the company, you need to keep a tab on the employment running costs, that is, how much severance pay you should pay to every employee should you have to shut down the next month. As with any other payment you have to make, your responsibility is to know well in advance the time when the company will run out of money. You cannot count on intangibles such as VC funding on your outlook, as they can pull out of a deal minutes before signing it – and this is precisely the mistake many startups do.
If you plan and run your business with diligence, your employees will be given their fair compensation, and will not be able to sue you on a personal level, as you’d need to have shown gross negligence for this to be successful. And if you were negligent, you deserve to be sued!
Miguel Ángel Uriondo on December 9, 2008 ·
I can understand your reasons, but I don´t agree with all of them.
It´s true that the welfare statism sounds weird in the States, and is not necessarily good for entrepreneurs. It´s true that it can be a hurdle for the companies and I cannot dispute the fact that a significant number of workers take as much advantage of the system as they can.
About depression, I doubt that a lot of people can be interested in faking that in Spain. In fact, you have shown us perfectly what kind of taboo being depressed is. I know real depressed people, even the prone to suicide type, that are too afraid of asking for the leave because of their fear to be left behind forever in the company and treated as con men. I´m sure you won´t have that problem in the next years, because after reading your opinions on the issue, all your employees will be willing to fake jollyness for a long time, whether they feel it or not. Morale up or you are a traitor to the start-up spirit!
(We have a different issue going on with public workers, much of whom can fake all kind of illness forever. That kind of fakery pros get the perfect deal, because they cannot get fired and institutions get use to be constantly without them).
It´s good to be a wealth and intelligent entrepreneur very dedicated to the employment creation, Martin, but I learnt some time ago, and by the hard way, that depression is not a choice and that being as happy and productive as we are is a big luck we shouldn´t abuse of. Taking care of people, not only of business, even when is not the most productive or even clever thing to do, is what makes a difference in Europe, too.
About the garage working, I assume you forgot about the public iniciatives going on in Spain, dedicated to lend cheap office space to the young start-up entrepreneurs. Can it get better? No doubt, but we all know a lot of guys working at those spaces.
Luis on December 9, 2008 ·
Nice to discover that somewhere we still have the old “martin varsavskys” webpage. Hidden in the english site.
Nice, interesting a “readable” comments…
I run a start up. Actually im: “not the legal administrators of their business but find instead people with no net worth to take the job”
I took a lot or risks when i accepted the job and always tried to do my best to do everything legal and stay away from trouble.
But as you say things are different here in spain. My second employee and his lawyer made it clear. They almost made me close.
I also had a “inspector de la seguridad social” who was received in our office by a “non legal” worker.
But i could get over it, i pay huge taxes for my employees but im still here, and getting bigger.
What im trying to say is, if you feel you can do it, nothing of this will stop you. And if they do stop you, just look for another market. Isnt earth our playground?
cheers and sorry for my english
ps: just to make it clear: my second employee spoke to a lawyer because he was not earning what in the “convenio colectivo de trabajadores” was the minimum. He never spoke about the “convenio” in the interview. Neither i knew anything about it. He was payed what we negotiated.
The “ilegal worker” was there only for the day and for a specific reason. Incredibly wen i assisted to the “sitación” they understood the situation and no fine was payed. Yeah!
Max Navarro on December 9, 2008 ·
I am sorry but I think you had a misunderstanding on bankruptcy laws in Spain. What you said is true in the case of failing the repayment of a mortgage, which is I think a much worse case, but not in the case of the entrepeneur, unless, as supra commented, there was probe of mismanagement or fraud.
On the rest, having worked in several EU countries and in Canada, I completely agree with you.
PabloS on December 10, 2008 ·
that’s it. I am formally depresed and want my 18 paid months off work!!!!. No seriusly, my boss told me today about one lady in the office, she usually takes arroud 6 months per year because our desks are not designed for left-handed persons and that produces her back/neck pain.
I’ve seen her desk today, and honestly, there is enough space to place the monitor in the left.. or right, or even floating in the middle. Nobody could do nothing with her, not even HR, since it is a medical issue. Amazing. and sometimes I have a minor cold and feel guilty for working from home.
Paul RODTS on December 10, 2008 ·
Maybe it is this way in Spain,
but I think there is a big difference between ‘latin/greek Europe’, anglo-saxon, germanic, scandinavian and old-eastern Europe.
In my country Belgium, there is much more misuse of doctors and social security in latin Belgium then in germanic Belgium.
There is also more syndicalism and strike-readyness in the south then in the north. Big differences also in unemployment stats : circa 18 % in latin Belgium and around 6 % in germanic Belgium..
But that’s the result of this cultural rift, if you are an entrepreneur, where do you want to invest : where people are motivated, or where people are sickish ?
Prem on December 10, 2008 ·
As already pointed out by other comments, S.L. (Sociedad Limitadad), in other words, Limited liability I believe will never involve personal assets. You would only be liable in you are a Sole Trader and decide to start employing people. In that case, yes, you are liable with your assets. Again, if you are a Sole Trader I don’t think you are liable with your own home (because you supposedly NEED to live somewhere, and you can’t give up your own home and live in a street).
Again, I’m not an expert, but this article is certainly pessimistic, and its contents feel wrong to me.
I don’t think it reflects reality.
FernandoG on December 10, 2008 ·
Martín, your best post in a lot of time. I also feel the pain!
I just wanna make a couple of points clear. I hope they help to understand what Martín says:
1. It is true that in Spain you can protect your personal assets with a “Sociedad Limitada” entity. However, a judge can still declare that there was mismanagement or fraud and declare you liable… with all the assets you have now and in the future. And usually they don’t need much to declare mismanagement. They seem to think: you have failed, so you must have mismanaged, so you pay!.
2. When you go to a bank to finance your small company they usually (almost always) require you you assume personally all debts if the company fails to pay. I’ve seen many people losing their home because their company had problems.
However, I still recommend trying. The road is full of obstacles, but the travel is full of fun.
Mike on December 10, 2008 ·
Once upon a time I seriously considered a website that allowed entrepreneurs and businesses to rate their employees. This would eventually, with enough volume, weed out the rotten apples and serial scam artists out there, and improve the rating of good employees.
Of course, the unions would jump on this with lawsuits, so I decided it was just wishful thinking. There are however sites like trabajobasura.com that give free reign to employees’ comments about the companies they work for – IMHO this is an unfair situation.
A serial bad employee should leave a stinking trail behind him. Someone can always end up badly with his boss, but if all his ratings were bad, eventually the true story about him would surface.
Paul RODTS on December 10, 2008 ·
Anyway….Godspeed Martin…I wish you honest and motivated people, and also a bit brighter thoughts…
Prem on December 10, 2008 ·
Thanks Martin, being a European entrepreneur myself this has certainly been an eye-opener
Elliott on December 10, 2008 ·
I do not know the European problems, but I do remember an Italian CEO once telling me that “Now, even in Italy one can get a divorce, but once you hire an employee you have them for life.” Do not think that the USA is without fraud and employee problems. You never managed a company with a significant number of employees in the US. The Long Island Railroad had 97% of its retiring employees also getting disability with reports from their friendly doctors. California has the highest workers’ compensation costs per employee due to fraud. A TV exposé showed how psychologists & psychiatrists routinely approved depression disability for all patients they saw. In 2000, my company in Florida shut down a biomedical laboratory facility that we operated in California. We had to get approval from 27 California government agencies to shut down the facility; not to open it, to close it. You are correct that bankruptcy laws in the US are more lenient. Maybe it is because England used to send its bankrupt debtors to the “colonies” and Australia to get rid of them. In Florida, even in personal bankruptcy, no creditor can get your house [& up to 40 acres of land if it is outside city limits]. Texas is even better: you get to keep your house, horse and rifle!
Jack on December 11, 2008 ·
I’m wondering how many “bad” practices exist in Spain, or elsewhere, simply because that’s what everyone is used to and nobody questions them.
In Chile, as in Spain, a bank will often as for an “aval”, or guarantee from a limited society’s owner for a loan to the company. I had this happen to me not too long ago when I was applying for a loan. What made this ridiculous is that the company owns real estate that is pledged to the bank as security which is valued at over 2 times the value of all our present and planned obligations to the bank!
Since I have had other experiences with banks outside chile, (in Canada), I felt the bank’s position was a totally unnecessary intrusion into my personal situation which also would result in limiting my personal ability to apply for other credit if I might want to.
I simply told the bank that if they wanted my business — which they did, because they came and offered me the loan — they’d have to be content with the existing guarantees. The account manager himmed and hawed, went back to discuss this with “his committee”, and they approved the loan.
This is just one example of several I could give in which I have avoided “customary” costs or obligations, simply because I was not accustomed to them, and insisted that another approach be considered.
Alex on December 30, 2008 ·
Great article and full of useful information. I think the environment in the UK is much better suited for US entrepreneurs. Out of curiosity, could you run a business in let’s say Spain while being registered in the UK? You’d be regulated by UK laws and taxes, what are the drawbacks, which I am sure are many? You could have a small HQ in the UK, and maybe a bigger office for R&D in other european country.
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Alex on December 9, 2008 ·
Umm… I thought that the limiting liability of the “Sociedades Anónimas” and “Limitadas” to the “capital social” was the most important reason to start a business using that form and not the form of an “empresario individual” in which your liability is ilimited.
Sorry for the spanglish as I don’t know the precise terms in English.