Europe's hiring problem is pushing startups to the US

“The fundamental issue is that there’s not one single market,” says Serena Borbotti-Frison, Secretary General of Allied for Startups, a Brussels-based network representing startup associations across Europe. “There are 27 different countries with 27 different labor laws. As you’re scaling, you’re essentially incentivized to go to the U.S. because that’s where the unified market is.”

The capital gap compounds the problem. Companies based in the U.S. raised $932 billion in venture capital between 2016 and 2024, compared to $133 billion for EU companies, according to European Commission data. In that period, only 12 VC funds in the EU raised tickets above $1 billion, against 157 in the U.S.

The fragmentation tax

For U.S. startups expanding into Europe, the first surprise is often how difficult it is to hire someone in another EU country, despite the single market. “You cannot hire who you want from within the union," Borbotti-Frison says. Even for remote roles, Borbotti-Frison explains, if you want to employ someone in Spain, you have to incorporate in Spain and navigate Spanish social security. The free movement of workers exists for individuals, but not for companies trying to build teams.

Margaret Buj, who leads talent acquisition for U.S.-based SaaS company Mixmax and has recruited across Europe for over a decade, sees the friction constantly. “In my current company, we hire contractors only and do not offer Employer of Record arrangements. In practice, that rules out or discourages candidates in countries like France and the Netherlands, where contractor setups are less attractive due to tax treatment and weaker protections. We have had to stop hiring in some of these markets altogether for that reason,” Buj explains.

The contractor model that works smoothly in the U.S. can create complications in European countries. Independent contractors face higher social security contribution burdens, and strict misclassification regulations mean companies risk hefty penalties if working relationships look too much like employment. To expand on Buj’s example, the Netherlands' new 2025 legislation creates a legal presumption of employment for anyone earning below €33 per hour. France has similarly strict criteria around contractor independence.

When hiring a senior product manager in Estonia, Buj's company had to go roughly $30,000 above their standard salary band just to make the contractor model financially viable. "In the U.S., compensation bands translate more directly," she says.

The regulatory complexity also affects who startups can hire. In Germany, candidates on certain visa types, like the EU Blue Card, aren't legally allowed to operate as independent contractors, immediately narrowing the talent pool. In late January 2026, the European Commission announced its first EU Visa Strategy, aimed at improving talent mobility across member states, though implementation details remain to be seen.

“For many non-EU startups, Europe looks like a single market until they try to make their first hire,” says Karen White, Head of Public Policy for EMEA at Deel. “Instead, they’re confronted with entity setup requirements, social security registration, strict classification rules, and compensation structures that vary country by country. On top of that, differing visa regimes and restrictions in several EU countries further restrict hiring and narrow the talent pool. That’s why many companies turn to Employer of Record, as it allows them to hire compliantly in new markets while, in many cases, they work to incorporate and figure out longer-term expansion. Encouragingly, the new EU Visa Strategy signals a shift toward a more coherent, long-term approach for Europe and one that could reduce friction for companies trying to build teams across Europe.”

Time costs compound

In the U.S, most candidates can start within two weeks of accepting a new role. In Europe, it’s often two to three months. The main driver is notice periods. “I’ve had multiple senior backend engineering hires in France and Germany where the hiring manager was ready to move forward quickly, but the start date alone pushed the timeline out by a full quarter," says Buj. "In a fast-scaling startup, that's a major delay."

Under French and German labor law, senior employees commonly have three-month notice periods. Spain requires around 15 days, while many other countries mandate one month minimum. In France, the legal minimum is one month for non-managers and three months for executives.

The extended timelines reflect a different philosophy. European labor law prioritizes worker protections and orderly transitions over hiring speed. Longer notice periods ensure knowledge transfer and allow employers to find replacements. The trade-off is velocity. What might take a quarter in the U.S. can stretch to six months in Europe when building teams across multiple markets.

The equity problem

Equity compensation is standard currency in Silicon Valley, but it often fails to resonate with European candidates outside founder circles.

Buj recalls a senior backend engineer in Spain who was offered a $110,000 base salary plus meaningful equity in an unlisted company. The candidate turned it down for $125,000 elsewhere with little to no equity. "He viewed the equity as uncertain upside rather than real compensation. I see this pattern across Europe. Candidates discount startup equity heavily unless the company is very well-known or late-stage."

Furthermore, tax treatment varies dramatically across the EU. Germany historically taxed stock options as income at exercise, creating a "dry income" problem where employees owed tax on illiquid assets. The Future Financing Act in January 2024 finally allowed taxation deferral until sale for startups, but Germany spent years with what Index Ventures called "the worst stock options policy in Europe."

The Netherlands taxes stock options when they become tradable, with rates up to 49.5% as income tax. France offers the BSPCE scheme for qualifying startups, which defers taxation until sale and applies reduced rates, but it's limited to companies less than 15 years old with fewer than 250 employees.

The U.K.'s Enterprise Management Incentive (EMI) scheme applies no income tax at grant or exercise, with only capital gains tax at sale, potentially as low as 10%. The Baltic states defer taxation until sale with flat capital gains rates.

According to the Not Optional campaign, seven European countries now match or exceed the U.S. on equity treatment. France, Germany, and the U.K. have all reformed rules in recent years. But the patchwork means what works in London doesn't work in Berlin.

What’s working and what needs to change

Estonia stands out for online incorporation in hours, strong per-capita VC investment, and stock options that defer taxation until sale. With under 1.4 million people, it has produced unicorns like Bolt and Wise, demonstrating that the policy environment can overcome scale disadvantages.

France built a thriving Paris ecosystem through deliberate policy. The BSPCE scheme and targeted incentives helped move the country from minimal presence to one of Europe's top three hubs. Sweden continues producing global successes—Spotify, Klarna, King.com—with straightforward incorporation and reformed stock option rules.

Borbotti-Frison points to these examples as proof that policy choices matter. Estonia has shown what's possible with the right framework—strong per-capita VC investment, favorable stock option rules, and streamlined incorporation. France has built a thriving ecosystem through deliberate support.

At the company level, Spotify scaled to billions while keeping its headquarters in Stockholm. Adyen built a global business from Amsterdam. Revolut grew to 30 million users from London. These companies navigated fragmentation by raising substantial capital, hiring experienced operators, and localizing compensation strategies country by country.

The reform gaining the most momentum is the '28th Regime.' In her January 2026 Davos speech, European Commission President Ursula von der Leyen committed to moving forward with the proposal, which she called 'EU Inc.' The plan would create a European company structure with a single set of rules applying across the EU, allowing entrepreneurs to register a company in any member state within 48 hours, fully online, with the same capital regime throughout the bloc. Like Delaware for U.S. companies, it would offer a single set of rules for employment, taxation, and equity across the EU. Harmonizing stock option taxation would eliminate situations where identical equity packages are attractive in the U.K. but unappealing in Germany.

“What we’re seeing now from the European Commission is a real acknowledgment of the challenges startups and scaleups face in Europe, and a strong shift in policy awareness, not just in Brussels, but across many member states,” says White. “The potential of an ambitious EU Inc would be a massive step forward. Europe doesn’t lack talent or ambition; that’s never been the problem. It’s always lacked a unified operating framework. If the changes on the horizon deliver real momentum, they could provide the impetus startups need to thrive. Do that, and Europe could become the best place in the world to build and scale a company.”

These changes face political hurdles as member states guard sovereignty over labor law and taxation. But urgency is growing as companies continue relocating.

The mobility myth

Language matters more than companies expect. While English is common in tech, Buj notes that customer-facing and senior product roles require comfortable English for daily work. "I've seen strong candidates in parts of Southern and Eastern Europe who were technically capable but not comfortable operating in fluent English with customers and teams. That removes them from consideration."

Additionally, relocation within Europe hits a snag. Cross-border moves involve different tax systems, social security, and school systems. Even when companies offer support, candidates often decline due to family constraints.

“Many U.S. founders assume Europe can be treated like one hiring market with one playbook," says Buj. "In reality, every country has different notice periods, worker protections, tax treatments, equity perceptions, and contracting norms. Your U.S. compensation model won't translate cleanly, and your hiring speed will be slower."

The trade-offs Europe makes

The European model offers advantages, while worker protections that slow hiring also reduce turnover. Three-month notice periods cut both ways—exits are slower, but employees are less likely to leave for slightly better offers. Healthcare not tied to employment removes one barrier to startup employment that American workers face. Quality of life factors like shorter commutes, social safety nets, and work-life balance attract senior talent with families.

The question isn't whether the European model is objectively better or worse, but whether the current system serves Europe's stated goal of building a competitive startup ecosystem.

The competitive stakes

The relocations aren't complete departures. Most companies retain R&D in Europe while moving holding companies and executive teams to the U.S. This "flip" structure captures value creation in American entities while keeping operations European—arguably the worst outcome for European competitiveness.

Momentum is building, and the appointment of Ekaterina Zaharieva as the EU's first Commissioner for Startups signals political attention. "We have everything we need," Borbotti-Frison says. The question is whether Europe is willing to make the political choices to unify the framework and let that talent and capital flow efficiently.

Europe has the technical talent, university research, and capital formation to compete globally. What it lacks is a unified framework to let that talent and capital flow across borders. Companies that succeed in Europe today do so despite the fragmentation, not because of it. With the right reforms, European startups could scale at home with the same velocity they currently find only by relocating.