Funding Disparities

The Compensation Factor

U.S. Startups' Advantage in Salary Offerings

In the competition for scarce AI talent, U.S. startups can typically offer higher salaries due to their larger early-stage funding rounds. Even as global tech layoffs have increased since 2021, AI experts in the U.S. have been attracting compensation packages well above peers, some reaching more than $1 million.

Europe's Response to the AI Talent Gap

Draghi's Report and Proposed EU Investments

Recognizing this gap, Mario Draghi, former Italian Prime Minister and President of the European Central Bank, recently submitted a landmark report on European economic competitiveness aimed at spurring investments in innovative sectors like AI. In the report, Draghi said the EU should raise AI spending to €20 billion annually by 2030. Additionally, he suggested the issuance of common EU debt instruments to fund joint EU-investment projects in the AI sector.

While these may help narrow the financial gap with the U.S., it does not address some of the other critical factors that have helped U.S. startups to outpace global peers. Namely, talent policy.

Critical Factors in U.S. AI Startup Success

The Role of Employee Stock Ownership Plans (ESOPs)

Startup Genome’s comprehensive study of over 100 startup ecosystems reveals that national tax policies for employee stock ownership plans (ESOPs) significantly impacts startup talent attraction. Having better access to talent vastly improves a startup’s likelihood of success. When startups can offer ESOPs to all employees, their scaleup rate – defined a valuation of $50M within four years of founding – is 3.3x the rate of those startups that do not offer ESOPs.

ESOP Taxation Challenges in Europe

In countries where stock options are taxed at vesting rather than at issuance or liquidity events, startups struggle to attract and retain skilled professionals. This is because employees often can't afford the tax liability as startup valuations increase and therefore choose not to participate. More troubling, in these ecosystems, the norm arises that stock options are only for executive-level employees.

U.S. ESOP Policy Advantages

Unfortunately, in many countries, including throughout Europe, stock options are taxed at vesting. This is where U.S. ESOP policy provides significant advantages for GenAI startups compared to other countries. Companies can deduct contributions to the ESOP up to 25% of covered payroll, allowing startups to receive tax benefits while compensating employees with equity. Employees pay no tax on contributions or growth of their ESOP accounts until distribution, enabling tax-deferred growth of employee equity.

European ESOP Policy Variations

Some European countries, like France, have a more generous ESOP policy like the U.S. However, issues arise when a French startup, for example, tries to hire talent from other EU economies due to differing ESOP regimes. Some policymakers have recognized this issue, with proposals for an EU-wide harmonization. But this effort appears to be stalled as it involves reforming multiple national-level tax regimes.

As a result, in addition to offering more compensation, U.S. GenAI startups also promise greater long-term compensation for their employees than most other international startups due to ESOP policy.

The Next Frontier: Global Talent Acquisition through Visa Policies

U.S. Approach to Attracting International AI Experts

To keep up with the GenAI competition, startups will need to source talent from around the world, a fact recognized by both the United States and the European Union. The U.S. has taken steps to streamline visa processes for AI experts, with President Biden signing an executive order in October 2023 to ease immigration rules and expand visa categories for individuals specializing in AI and emerging technologies. Meanwhile, the EU is considering the establishment of an EU-wide platform to facilitate international recruitment, aiming to create a talent pool that supports job placements through partnerships with non-EU countries.

While both regions prioritize attracting global AI talent, their approaches differ. The U.S. focuses on optimizing existing visa categories and processes, whereas the EU proposes a new centralized platform for talent recruitment. However, immigration policies in the EU are likely to remain under national control, with voluntary participation in the proposed talent pool.

U.S. Current Progress and Strategies

In the US, the Department of Homeland Security has taken steps to streamline processing times for visa petitions and applications for individuals working on AI and emerging technologies, but it is too early to tell how effective these efforts have been in securing talent for U.S. startups. Meanwhile in the EU, most countries are pursuing their own strategies in lieu of a bloc-wide agreement.

Challenges in EU Visa Harmonization

“In Europe, recruiting skilled workers from third-countries remains difficult, because each EU Member State applies different rules for visa procedures. Not all countries have a fast-track visa for tech workers, while others apply specific requirements like a minimum salary. At France Digitale, we recommend harmonizing visa requirements and introducing a one-month deadline to process visa applications by third-country professionals hired by startups in the EU,” says Agata Hidalgo: Public Affairs Lead, France Digitale.

The global race for AI talent is intensifying, with the United States currently holding a significant lead over Europe. This advantage stems from several factors, including higher funding availability, more attractive compensation packages, and more favorable ESOP policies. The U.S. has also taken proactive steps to streamline visa processes for AI experts, further enhancing its ability to attract global talent.

Europe, recognizing the growing gap, is making efforts to catch up. Proposals like Draghi's report on increasing AI investments and the consideration of an EU-wide talent recruitment platform show a commitment to narrowing the divide. However, challenges remain, particularly in harmonizing policies across EU member states.