Founder equity is simple until someone leaves, an investor asks for reverse vesting, the option pool is too small, and an employee discovers their stock options are taxable before they can sell anything.
For European startups, equity planning is harder than copying a US template. The language may look familiar: vesting, cliff, ESOP, option pool, 83(b), strike price, good leaver, bad leaver. The tax and legal mechanics are not the same.
This guide explains founder vesting, the limits of the 83(b) election in Europe, and how startups should think about ESOP Portugal Spain Germany structures before fundraising or hiring senior talent.
The Short Version
- Founder shares should be subject to vesting or leaver mechanics. Investors want protection if a founder leaves early with a large stake.
- 83(b) is US-specific. Do not tell European founders or employees to file an 83(b) unless they are dealing with US restricted stock and US tax advice confirms it.
- Option tax is country-specific. Portugal, Spain, and Germany have different regimes, incentives, tax timing, and plan-design constraints.
- ESOP is not one thing. It may mean real shares, stock options, phantom shares, VSOP, growth shares, or contractual bonus rights depending on jurisdiction.
- Investors care about documentation. The option pool must match board/shareholder approvals, grant letters, cap table, and employment records.
1. Founder Vesting: Why Investors Ask for It
Founder vesting protects the company from dead equity. If a founder owns 35% of the company and leaves after six months, the remaining team is stuck with a large inactive shareholder. New investors will ask why the person no longer building the business owns more than the people carrying it.
The usual answer is vesting. Founders receive or keep their shares over time, subject to leaver provisions. In many European companies, this is implemented through reverse vesting: the founder owns shares, but the company or other shareholders can repurchase unvested shares if the founder leaves.
Typical founder vesting terms
- Four-year vesting: A common baseline for venture-backed startups.
- One-year cliff: No vesting until the first anniversary, then a catch-up.
- Monthly or quarterly vesting: After the cliff, equity vests gradually.
- Good leaver / bad leaver: Different treatment depending on why the founder leaves.
- Acceleration: Partial or full vesting on sale, termination without cause, or double-trigger events.
2. 83(b) Election: The European Caveat
US startup advice talks constantly about 83(b) elections. The basic idea: a US taxpayer who receives restricted stock can elect to be taxed at grant rather than as the stock vests, usually within 30 days.
That does not mean Europe has an 83(b). There is no single EU-wide equivalent. Some countries have startup equity regimes, deferrals, exemptions, or preferential treatment. Others tax options or shares at grant, vesting, exercise, sale, or on exit from tax residence.
What to say instead of "file an 83(b)"
- What is the taxpayer's country of residence?
- Is the company issuing shares, options, phantom rights, or contractual bonus rights?
- When does local law tax the benefit?
- Is there a startup-specific incentive regime?
- What happens if the employee moves country before exercise or sale?
- Does the plan create dry tax, where tax is due before liquidity?
3. Portugal, Spain, and Germany
Portugal
Portugal introduced a startup and scaleup framework through Law No. 21/2023, including a more favourable tax regime for qualifying equity compensation plans. Startup Portugal describes the regime under Article 43-C of the Tax Benefits Statute as applying to plans offering securities such as shares, options, or equivalent rights to employees or corporate body members of legally recognised startups.
Qualifying plans may benefit from deferred taxation and an effective 14% rate on capital gains, because only 50% of the gain is taxed at 28%. Tax can be triggered on sale, gratuitous transfer, or loss of Portuguese tax residence.
Spain
Spain can be attractive for founders and executives, but stock option taxation is technical. Employment-related stock option gains may be treated as employment income, with timing and sourcing affected by grant, vesting, exercise, residence, and special regimes.
Germany
Germany has historically leaned heavily on virtual stock option plans because real share options can create tax and corporate-law friction. Germany has also improved tax treatment for employee equity through Section 19a of the German Income Tax Act and related reforms, but eligibility and exit treatment remain technical.
4. Option Pool Size and Fundraising
Investors often ask for an option pool before or during a priced round. Around seed and Series A, a 10-15% pool may be common, but the right number depends on hiring needs, seniority, market, and current grants.
The important negotiation is whether the pool increase is included in the pre-money valuation. If yes, the founders are usually diluted by the pool before the new investor's money arrives.
- List planned hires for the next 18-24 months.
- Estimate grant ranges by seniority and market.
- Subtract already granted and promised awards.
- Check whether refresh grants are expected.
- Model founder dilution at pre-money and post-money pool sizes.
Authoritative Sources
- Startup Portugal: new stock options regime for startups
- KPMG: Portugal startup and scaleup tax/legal regimes
- Baker McKenzie: tax treatment of employee equity awards in startups
- IRS: election to report vesting of property in the year of transfer
Legal Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Equity compensation tax treatment varies by jurisdiction, participant residence, plan design, and company status. Consult qualified legal and tax advisors before granting or exercising equity.
Reviewed by Outlex Legal Team
This content was reviewed by qualified legal professionals with experience advising European startups on compliance, contracts, and corporate matters. Outlex is backed by a major Portuguese law firm with expertise across EU jurisdictions.
Last updated: 2026-06-17
