European tech brain drain ‘risk number one’ ahead of IPO

A brain drain of European tech talent is the biggest risk factor facing Klarna as the Swedish payments company nears its next initial public offering, according to CEO Sebastian Siemiatkowski.

In a wide-ranging interview with CNBC this week, Siemiatkowski said Europe’s unfavorable rules on employee stock options — a common form of equity compensation that tech firms provide to their staff — could lead to a loss of talent. of Klarna to US tech giants such as Google, Apple AND Meta.

As Klarna – which is known for its popular buy-now, pay-later plans – prepares for its IPO, Europe’s lack of attractiveness as a place for the best and brightest to work has become a much more prominent fear, Siemiatkowski told CNBC.

“When we looked at IPO risks, what’s the number one risk in my opinion? Our compensation,” said Siemiatkowski, who is approaching his 20th year as CEO of the financial technology firm. He was referring to the company’s risk factors, which are a common element of IPO prospectus filings.

Compared to a basket of its publicly listed peers, Klarna offers just one-fifth of its equity as a share of its revenue, according to a study obtained by CNBC, which the company paid consulting firm Compensia to produce. However, the study also showed that Klarna’s publicly listed peers offer six times more than its equity amount.

Siemiatkowski said there are a number of obstacles blocking Klarna and its European tech peers from offering workers in the region more favorable employee option plans, including costs that erode the value of the shares they are awarded when they join.

In the UK and Sweden, he explained, workers’ social security payments deducted from their share awards are “uncovered”, meaning staff at companies in these countries will lose more than people at the firms , say, in Germany and Italy where there is concrete. hat in place.

The higher a firm’s stock price, the more it has to pay for employee benefits, making it difficult for companies to plan spending effectively. Britain and Sweden also calculate social benefits on the present value of employee equity after the sale in liquidity events such as an IPO.

“It’s not that companies aren’t willing to pay it,” Siemiatkowski said. “The biggest issue is the lack of predictability. If the staff cost is completely tied to my stock price, and that has implications for my PNL [profit and loss] … has cost implications for the company. It makes planning impossible.”

Last year, Siemiatkowski signaled more clearly Klarna’s ambitions to go public soon. In an interview with CNBC’s “Closing Bell,” he said a 2024 listing was “not impossible.” In August, Bloomberg reported that Klarna was close to being chosen Goldman Sachs as lead underwriter for its 2025 IPO.

Siemiatkowski declined to comment on where the company will go public and said nothing has yet been confirmed as of yet. However, when it does go public, Klarna will be among the first big fintech names to successfully debut on a stock exchange in several years.

affirmone of Klarna’s closest US competitors went public in 2021. Afterpay, another Klarna competitor, was acquired by Jack Dorsey’s payments company Block in 2021 for 29 billion dollars.

A study by venture capital firm Index Ventures last year found that, on average, employees at late-stage European startups own about 10% of the companies they work for, compared with 20% in the US.

Out of a selection of 24 countries, the United Kingdom ranks highly overall. However, it does a poorer job when it comes to the administration burdens associated with handling these plans. Sweden, meanwhile, fares worse, performing poorly on factors such as plan reach and strike price, the Index study said.

Asked if he was concerned that Klarna employees might leave the company for a US tech firm, Siemiakowski said it was a “risk”, especially as the firm is expanding aggressively in the US.

“The more prominent we become in the US market, the more people see us and know us — and the more their LinkedIn inbox will be flooded with offers from others,” Siemiatkowski told CNBC.

He added that, in Europe, there is “unfortunately a feeling that you shouldn’t pay so much for really talented people”, especially when it comes to people working in the financial services industry.

“There’s more of that feeling than in the US, and that’s unfortunately hurting competition,” the Klarna co-founder said. “If they approach you Googlethey will arrange your visa. They will transfer you to the U.S. These issues that were there, are no longer there.”

“The talent pool is very mobile today,” he added, noting that it’s now easier for staff to work remotely from a region that’s outside of a company’s physical office space.