Why Britain’s Start-Ups Are Struggling to Attract Top Tech Talent

Guy Podjarny, founder of the cybersecurity firm Snyk, understands the challenges of establishing a business in the UK. Launched in 2015 across London and Tel Aviv, Podjarny capitalized on the Enterprise Management Incentive (EMI) scheme to lure top talent to his cash-strapped start-up. The EMI allowed Snyk to provide tax-efficient equity options, giving its UK employees a stake in the company’s success.

Ironically, despite Snyk’s impressive valuation of $7.4 billion today, Podjarny faces significant hurdles with his new venture, Tessl—an AI-driven software development platform founded last year. Despite securing $125 million in funding, Tessl is restricted by the EMI due to the outdated £30 million asset cap, unchanged since 2012.

This situation represents a critical challenge for the UK’s start-up landscape. British start-ups are at a disadvantage in the global competition for talent, struggling without crucial support for scaling their businesses. While the UK government promotes the idea of creating a homegrown Silicon Valley, it appears to overlook how minor policy adjustments could immediately enhance the tech industry’s potential.

To advance, the EMI requires modernization to keep pace with current technological demands. The existing requirements—10 years, 250 employees, and £30 million in assets—were established when exit timelines were shorter. Today, AI start-ups demand substantial funding due to computing costs and competitive salaries, while average exit times have exceeded 12 years. Tom Leathes, CEO of car marketplace Motorway, has been a strong advocate for updates to the EMI to protect long-term employees from potential financial pitfalls.

Moreover, the EMI’s complex regulations hinder employers from allowing employees to access their equity stakes in a tax-efficient manner via secondary sales. This situation forces employees into a risky, long-term wait for a single exit that may not occur. Attractive EMI options not only help retain existing staff but are also vital in recruiting top talent. When candidates evaluate between large corporations and nimble start-ups, outdated equity incentives can detract from the appeal of Britain’s most promising enterprises.

Fortunately, solutions could be directly implemented: increasing the asset threshold to £200 million, expanding employee limits to 1,000, extending EMI durations to 15 years, and permitting modifications for secondary share sales. These changes could drastically enhance the dynamics for the UK’s boldest companies.

Additionally, the UK needs to prioritize software investment incentives alongside physical infrastructure. The current full expensing policy allows companies to deduct capital expenditures from tax, projected to increase investment by £3 billion per year, according to the Office for Budget Responsibility. However, in an increasingly digital economy, prioritizing software over machinery would yield numerous benefits: stimulate large corporations’ productivity, accelerate technology adoption, and provide start-ups with revenue from domestic markets rather than relying primarily on international clients.

Finally, reducing cross-border barriers for startups is essential. The EU Inc petition, which has garnered support from over 16,000 tech leaders, advocates for a unified pan-European legal entity. Collaborations with the European Commission are under development, with proposals anticipated early next year—presenting a significant opportunity for regulatory harmony. Similarly, expediting and simplifying start-up visa processes, ensuring mutual stock option recognition, and avoiding penalties for international employee mobility are crucial steps toward easing operational friction.

The implications are significant. Nations that successfully cultivate and retain leading technology firms will shape the economic landscape for the foreseeable future. The UK boasts considerable strengths, from outstanding universities to a vibrant tech ecosystem. However, these advantages risk being undermined by outdated policies that do not reflect today’s realities. Addressing these challenges requires no major legal changes or new expenditure—merely the acknowledgment that ambitious companies like Tessl are assets to the UK economy.

Hannah Seal is a partner at Index Ventures, a prominent venture capital firm.