Sunday, June 28, 2009

Translating Jesus Encinar post on "what is needed in Spain to incentive technological startups development"

I have Jesus Encinar blog as one of my blog list which I follow regularly. I find some of his entries light but also he does make very interesting points specially when taking about the mix of spanish legal and political system and company / technology startups development
I also know Jesus and I always find very interesting when we have the chance to chat about some of these topics
I have taken the liberty of preparing a summarize translation of his post from Tuesday June 23rd
Your can read the original fully and in Spanish on
For the original and full text in Spanish from Jesus Encinar

Jesus basically comments that what governments in Spain do (both nationally, regionally and locally) may give them piece of mind but it does not really help tech startups take off. Many of the politicians do talk about why we don't have innovation, why Spain is not like the Nordic countries and they mainly remember the topic when crisis come and their economic pillars (aka real state and tourism) suffer (and they are 2 sectors very much affected by any economical crisis). Popular measures such as creating innovation centers (which usually become just a way to find cheap space at the most) and subvenciones (public aid), which creates just companies specialized on getting them
Those measures don't work and just creates houses with cardboard pillars

Jesus list 3 basic, simple and very effective actions that governments could take to help companies (my note here is that there are simple but it requires to fight unions, the overall socialism mentality of the majority of the Spaniards and basically you won't get votes on the short term). Those measures are:

1) Tax schemes that allow entrepreneurs to create stock options plans for their employees. What in the US and in the Nordic countries is simple and a powerful way to both attrach and engage talent, in Spain is an activity full of labor risks and which requires tons of work. If as of today you want to create an
options plans for your employees, and the company happen to do well and gets sold, the investors will pay 18% for the capital increments. But employees will have to tribute this as additional "salary" so it is taxed as your normal income. If you happen to do well in the company and have a good salary you may end up paying up to 43% for those benefits
Put those 2 together and obviously it makes almost impossible in Spain to create such plans (My personal note here aka to attract talent, an item which I continually mention on some of my posts)

2) Labor contracts that easily broken if the business does not work. While in the US if you have a good idea your obsession is to hire as fast as possible and execute, execute, in Spain you think twice about any additional hiring, as you prefer temporal contracts or family (which you have a level of confidence to treat it differently if things turn to worse) instead of creating technology related employment. If things go wrong and the business does not end it up working and you have to fire the people hired, the company and yours as a manager have serious responsibilities in terms of paying
compensations. We should have a startup labour contract with lesser demands in terms of compensations for companies that are just created and are in the red. The employees that join such companies can't be motivated by potential compensations but because of their stock options. Today you can't do neither one

3) Pay back VAT monthly to companies on their initial years

The greatest of all hypocrisies related to startups from the government point of view is how the tac authorities steal money (yes Jesus uses the word stealing and I do agree with him here 100%) from small companies that have not managed yet to make any money and to take their head above the water. When the money is not yours and you take it, it is defined as robery

Part of the financing means that an entrepreneur may obtain go directly to pay the VAT (that he/she shouldn't) not to mention that the government takes 1% for a capital increase that you manage to get!!!

Companies find themselves they can compensate their VAT if they are steal losing money (when you really need to) and that they have to pay VAT for invoices they may not have yet see any money from. This kills companies and Jesus mention how it almost killed in the past. You may be waiting for 6-9 months to get your VAT paid (with no penalties) when you have to pay within a month or you face penalties

My personal note, this is even worse today as big companies do play with small companies and in Spain they may pay you in 180 days or longer!! BTW this should be the fourth measure that the government should take making payments to companies under 1 Mio eur mandatory in 90 days or less)

Instead of spending the money of financial aid (subvenciones) it would be much easier to pay back on a monthly basis the VAT that young companies still on the read may have paid

The public administration can't promote innovation and entrepeneurship on the technology front by creating regional centers (spend), technology parks (spend) or public aid (spend). The best they could do is to eliminate all the obstacles that today we face as entrepaneurs when trying to make our dream true

1 comment:

  1. Regarding the second point, more than the firing costs (which in a startup with a high employee rotation, shouldn't be very high), the high taxes and social costs of each employee have to be taken into account. You can see a further explanation in Martin Varsavsky's blog.