‘We are going to create the best environment for startups in Europe’

Spain is months away from having a startup law. The country's government tells us it wants the 'radical' ecosystem support package to level up the whole region...

Spain’s government is gearing up to pass the country’s first ever startup law.

A draft law agreed by ministers was presented to the parliament last month. The process of debating and agreeing the details of this startup ecosystem support framework is expected to take between six and nine months. So — if all goes to plan — Spain will finally get a startup law before the end of this year.

The package of support looks substantial — covering key areas like tax breaks for investors, talent incentives like stock options and a new digital nomad visa to attract international tech workers, among other measures aimed at cutting red tape and shrinking the time and cost of starting up in Spain.

The startup law (aka ley de startups) is just one piece of a wider, 10-year strategy the country’s coalition government has been working on since 2020 — setting out an ambitious plan to transform and futureproof the economic fortunes of the Southern European nation by making it a Mediterranean paradise for entrepreneurs, plenty of whom flock to cities like Barcelona and Madrid already (if more for the climate and food than the burocracia).

Spain’s government talks in terms of a true levelling up agenda — emphasising that state support for entrepreneurs to scale disruptive ideas into mainstream platforms must go hand-in-hand with broader progressive policies aimed at ensuring digital scaling doesn’t just dial up societal inequality— whether around regional, socioeconomic or gender divides. Although that component of the España Nación Emprendedora strategy is, inevitably, going to be a slower burn, hence the decade-long lens.

In the near term, the startup law will be one of the first major deliverables of the strategy. And this key piece of the digital transformation puzzle is fully focused on entrepreneurs and investors.

TechCrunch caught up with the high commissioner for Spain Entrepreneurial Nation, Francisco Polo, for an update on what’s been agreed in the draft text of the startup law — and to get his views on some of the early feedback from the ecosystem.

This interview has been lightly edited for clarity.

TechCrunch: Now the draft startup law is with the Parliament, are you confident this support package contains everything the ecosystem needs to thrive and grow?

Polo: We consider that the draft for the startup ecosystem law that was approved on December 10 actually represents a revolution — for the attraction of investment and the attraction of talent. And for us, for the high commissioner, this is a confirmation that Spain is becoming one of the best countries in Europe for startups. So we are very excited to see this law being passed in Parliament, and to have it in full force in order to keep fulfilling the different measures that we have included in the Spain Entrepreneurial Nation strategy that we talked about a few months ago.

TechCrunch: So there’s nothing else you were hoping to include — obviously there could also be some amendments that come through the parliamentary process. But, at this point, you’re pretty happy with the package?

Polo: Yeah, because looking at the full picture, it’s actually the first time in our history that we’re going to have a specific legal framework for startups. It happens to be that this new legal framework for startups is going to become one of the most ambitious in Europe.

I mean, of course, there is always room for improvement — but we consider that the law as it is right now is extremely ambitious. And it’s going to really become a great tool for the attraction of investment and talent.

TechCrunch: Are you expecting many amendments to come through the parliamentary process? Is there anything that’s likely to cause much debate? Or is there really a strong consensus over these proposals?

Polo: One of the main things that makes this law pretty solid is that it comes from a dialogue that we held with the different sectors of innovative entrepreneurship. So it’s a very solid law and everything that went in it really reflects the long conversations that we held with innovative entrepreneurship in Spain. So we are not expecting big amendments to the law — because we also have a majority to pass the law. It should pass in very, very close terms as it has passed as a draft to the parliament.

TechCrunch: Do you an idea of how quickly that might happen — in terms of getting the law onto the statute books?

Polo: So the parliament is going to be leading on this and they have the full direction on how long it’s going to take. But according to what we are hearing from Parliament, it’s going to take between six and nine months. So it’s going to be between June and September of the current year.

What I understand is that the law is going to be under the general regime. So at the moment that it goes public on Boletín Oficial d’estado it will be in full force.

TechCrunch: So 2022 looks like it will be a very important year for startups in Spain…

Polo: Absolutely. For us, the most important thing about the startup law — there are different measures that I will be glad to talk about — but if you see the full picture, the different elements that we include in the law, stock options, visas, the non resident tax system, carried interest and the other measures, some of them they are even better than different regimes that we have in our environment in Europe. Others equal the countries that we have around us. But the whole law becomes a revolution, actually, not only for Spain but for entrepreneurs across the world because we are creating a new international hub for startups.

TechCrunch: In order to be able to access the support package a local startup must be an innovative business that’s up to five years old (or seven in biotech); making up to €5 million in revenue; and have at least 60% of its employees in Spain. Why did you draw the lines there? There has been some criticism that the definition of a startup is too narrow…

Polo: One of the drivers of our work as the high commissioner is working with data and the data that we are using is that is the knowledge that the average startup lasts between three to five years — before it goes under or before it is acquired by another company.

This is sample data that we use — that we extracted from business data analysis. But also we have a more specific number in Spain. In Spain, the average lifespan of a startup is 2.7 years. So five years should be enough timespan in order to really adjust to what the startup is and to leave room for a startup to start and to grow enough in order to go to the next step. So we really believe that according to data, it’s a good timespan.

TechCrunch: But some startup groups and entrepreneurs have said the definition is too restrictive — including criticising the exclusion of serial entrepreneurs after, I think, three exits,  which they argue means it’s punishing the most experienced/determined or even the best entrepreneurs. What do you say to that kind of push back?

Polo: That’s something that we could get to a common ground on, because the actual point of the law is to particularly allow serial entrepreneurs to create different startups. So this is something that we understand could be a point that [the text of the law better reflects] when it’s passed in parliament, because the point is to allow student entrepreneurs to start as many startups as they as they can.

Because the point of the law — and the point of the strategy — is to have the strongest startup ecosystem so it has good repercussions on the greater economy of Spain. So that’s the point and if that’s something that needs to be corrected, we are aligned with that ambition.

TechCrunch: There have also been some concerns around the certification process — and whether having only one body, Enisa, doing that will create a bottleneck. Is that something you’re at all worried about?

Polo: We prefer instead of worrying to actually work on the on the subject — and of course, on paper, when you see something like this, as I say on paper, I think that it’s a legitimate preoccupation to be worried about if Enisa is going to be able [to cope with the workload].

What we are doing and what Enisa is doing is getting ready in order to be able to respond to the demand of qualifying the different companies that are going to apply to them to be able to use the benefits of the new Spain startup ecosystem law. And this is something that is not brand new in the world — meaning that countries like Israel or Italy have very similar systems. And they work perfectly. So we are just doing the work and I know firsthand that Enisa is taking this very seriously so that it doesn’t become a bottleneck for startups.

Francisco Polo, high commissioner for Spain Entrepreneurial Nation Strategy

Francisco Polo, high commissioner for Spain Entrepreneurial Nation (Image Credits: Complejo de la Moncloa)

TechCrunch: The Economic and Social Council of Spain (CES) has also made a number of criticisms of the startup law — including arguing it’s too narrowly focused on startups as limited companies, excluding other options like co-ops and limited liability labor companies. That’s an interesting point, considering the wider goal you have for the Entrepreneurial Nation Strategy to benefit the whole of Spain, not just narrowly uplift a digital elite. Do you think the CES critique has any important points?

Polo: On this we want to go back to the point of this law. We are creating the first startup law in the history of Spain and that’s the point — we want to create a law that is specific for startups.

It has been historically called for by the startup sector in Spain. So that’s why we have put the focus here. If we are creating a startup ecosystem law we are focusing on helping startups to have a better environment to succeed. So that’s the focus.

We should not mix up the goal of the startup law with the broad vision of the strategy. The strategy, of course, has a broader vision than the law. Because this strategy wants to work with the startup ecosystem, with the different driving sectors of the Spanish economy — and we also have specific measures in order to close the different social divides that we have in Spain.

So that’s why the startup law is focused on startups, because we needed a specific framework for them in order to have better tools to attract the investment they need, and better tools in order to also attract and retain and develop the talent that they need in order to turn Spain — and take the first steps into turning Spain — into a startup nation.

TechCrunch: On the investor side, the response has been positive but there too there are calls for the government to go even further — even though 2021 was a record year for VC investment in Spain. Do you think the parliament will resist pressure to be more generous to investors?

Polo: We really believe that there are great measures for investors in this law. I could start, for example, with carried interest. One of the main things that we are achieving — well, I should say that there are three main things for investors, I think that’s important first — the first is carried interest.

As you know, carried interest was not legally defined in Spanish law. So this generated a lot of uncertainty for investment funds to come to Spain. So, with this law, this is going to totally change. We’re going to have a full definition of carried interest. So the first achievement with this law is that we’re going to have legal certainty.

When you have this legal certainty and a tax treatment that is reasonable, you want to have more VC funds than others coming to Spain and accelerate the investments that we need in Spain in order to close the gap with other European countries. So that’s one of the main points.

And actually, in the regime for carried interest, we are generalizing the regime that they have in Vizcaya to the whole country. So we’re going to have a really attractive regime for carried interest. So this is the first of three things.

The second is something that has been also been called for for a very long time: That is the identification for international investors. So here what we did was remove red tape.

Before this law, what was needed to become an investor in Spain if you were an international investor was to obtain an NIE: Número de Identidad de Extranjero. This was something that was actually complicated to obtain. So we changed the criteria — and with the startup law the only thing that is going to be needed is the NIF (Número de Identificación Fiscal). Which is much simpler. It’s a leaner procedure in order to get it.

Third — and this is particularly important — we will have a new framework for the deductions on investment. There is an improvement. So the deduction percentage that you can have when you invest in a startup goes from the current 30% to 50%. And the maximum base for this deduction goes from €60,000 to €100,000.

These numbers are not by chance. We wanted on this topic to equal — or to be on par — with what we believe is one of the best regimes for business angels in in Europe that is the SEIS, the seed enterprise investment system in the U.K. What they have is a deduction of 50% for £100,000. So we are equaling the system that they have in the U.K. So this is going to be a huge revolution for business angels and investors.

And we are also allowing this deduction for the founders of the company. So it’s also going to be great for the entrepreneurs who invest in their own companies.

We really believe it’s a great package that is going to help Spain to stand out among international competitors and send a very clear message for VC funds and for business angels in Europe and in the world to invest in Spain and in Spanish startups.

TechCrunch: How quickly — on the investment side — do you expect the law to have an impact? Perhaps it’s already having an effect as investors are aware it’s coming so might be changing investment behavior ahead of time…

Polo: Well, as you know, law and legal framework, it’s only a part of the whole list of features that allow business investment or business angel investment or other funds to invest in Spanish startups. So we have been working on different items that we need to be working on in order to show that it’s really worth it to invest in Spanish companies. So this is going to accelerate the path that we’re recording — as you were mentioning, last year, we again surpassed the records of the previous year in terms of investment in Spanish startups. And this is the goal of the whole strategy — to accelerate this path, in order to close the gap with other European countries. So Spain in 10 years becomes the main country in the mainland Europe, in terms of investment in startups.

TechCrunch: So you you want to overtake France’s level of startup investment within a decade, for example?

Polo: Our goal? Yeah, we are extremely ambitious on the investment goal. And yes, we want to close the gap with France and Germany in the next ten years.

TechCrunch: In the near term what are you projecting — in terms of the acceleration of the volume of investment into Spain — over the next, say, five years? Do you have figures on that?

Polo: We don’t have figures on that because there are so many factors that affect investment that we cannot make that kind of prospection. But what we are actually doing is cutting the red tape, creating a better legal framework for startup investments in Spain, and generating the investments that need to be done in the ecosystem in order to accelerate that.

Another tool that we have in order to accelerate investment in the Spanish startup ecosystem is the Next Tech Fund, which is going to help Spanish startups become scale-ups which is the real challenge that we have in our country in terms of investment.

So this fund is going to be putting together up to €4BN [half public, half private funds] in order to help Spanish companies go for the rounds that are above €10M. So, as you can see, we understand that the acceleration of investments in Spanish startups and scale-ups is something that has to do with different elements — and we are tackling each and every one of them at the precise time.

What we see is that there’s going to be an acceleration, and we are doing everything that needs to be done in order to see that acceleration. And when it happens we will see the specific numbers.

TechCrunch: How else are you making use of EU coronavirus recovery funding to support growth of the startup ecosystem? 

Polo: The Next Tech Fund is only one of the measures that we are putting together with the EU funds.

Under the Spain Entrepreneurial Nation strategy [which has a budget of €4.2BN until 2023] we have a huge amount of money that is going to be directed to different measures. So you have in there Renace, which is going to be the network between incubators and accelerators. We want to launch also ONE: That is Oficina Nacional Emprendimiento — the one-stop-shop for startups, for investors, for scale-ups and we want to establish as the main point of entrance for anything that relates to this ecosystem.

So there are several measures that are going to be absorbing those EU funds in order to make Spain the startup nation with the highest social impact.

TechCrunch: Once the startup law is passed, how different will life be for entrepreneurs and startups in Spain that qualify for support?

Polo: This is going to be a radical change. In Spain, we know that we have four main challenges for the startup ecosystem. First is investment. Second is talent. Third is scaling up. And fourth is having a full demonstration that Spain is actually an entrepreneurial state.

So on the first two the law is going to have a huge impact. The law is going to become a revolution when it comes to the attraction of investment — thanks to the different tools that I have already mentioned. But it’s also going to be a revolution when it comes to talent. And there, there are three measures that we didn’t talk about yet — which are going to have a huge impact. They are stock options; visas and residence permits; and third, the non-resident tax system.

When it comes to when it comes to stock options, in here, we are really revolutionising a new compensation tool in order to attract and retain talent. The specifics of the new stock option in Spain are that first, we are going from an exemption of €12,000 to an exemption of €50,000. This exemption of €50,000 can be applied during 10 years, making a total amount of €500,000. And what is even more important — and what is going to be make the Spanish stock options quite practical — is that they are going to be considered earned income. The owners of the stock options are only going to pay taxes when they obtained liquidity or after those 10 years.

In addition to all that there’s another fundamental change in the law that is going be great for startups — and it is that the conditions in order to provide stock options to the different workers of the company can be different for different cohorts of workers, which was not a possibility before the startup law.

So in order to sum up when it comes to stock options, we really believe that we have put Spain ahead of countries like the U.K., France, Germany, Italy or Portugal.

The country that we usually take as a reference for stock options when working on this is the U.K. And, as you know, the exemption in the U.K., is of €300,000 (£250,000) and only for three years. The exemption in Spain now is going to be €500,000, and it’s going to be able to be applied for 10 years, which is a huge improvement compared to the one of the most competitive countries that we have around us. And that’s only for stock options.

I also mentioned visas. That’s the second thing that’s going to be a great improvement in order to attract and retain talent. First, in there, we are creating a new visa category that is digital nomads. So we get on par with countries like France, Portugal, Estonia, Croatia, and the Netherlands. So we’re going to allow international workers to work in Spain — to make it easier for them to work from Spain for their companies.

And when it comes also to visas and residence permits, we are also creating a revolution because we are extending the permits. So for entrepreneurs, for example, the current permit in order to stay in Spain is for one year — with the startup law it’s going to be extended to three years. And they will also be able to obtain permanent residence after five years.

For investors it’s also extended. Currently, the period of residence for an investor in Spain is one year — and with the startup law we are also extending this to three years. So there’s also going to be a revolution when it comes to visas and residents permits.

Third, I was mentioning the non resident tax system — so for the people who want to actually stay in Spain, they are going to benefit from a special tax system for the period of the change of residence, and for the following five tax periods.

The first change that we’re seeing here is that now it’s going to be applied to all the different stakeholders of the startup ecosystem. So it’s going to be applied to entrepreneurs, to investors, and to skilled professionals. Secondly, we are also improving this system because — at present — you need to be out of Spain for 10 years in order to be able to opt in for this regime. Now we are cutting these 10 years to five years. So this means that a bigger amount of people will be able to access this special tax system. So this is also going to be a revolution.

On this, non resident tax systems, for us, the reference is our neighbor Portugal which did very well — it has reduced tax payment for internationals. And we are, similarly, improving disproportionately the treatment of this tax system in order to attract [talent to Spain].

TechCrunch: I think this component of the startup law has been likened to the existing tax regime for wealthy foreigners — nicknamed the Beckham law, after the footballer, David Beckham — hasn’t it?

Polo: Yeah, it has a lot to do with it — we have special regimes for non-residents. Because we are turning Spain into this entrepreneurial nation that wants to attract high quality talent, we are offering taxing systems that are going to be very attractive for engineers, for designers, and for people who are related to this generation of a new economy that produces higher rates of productivity for the country.

TechCrunch: The startup law also provides for trial licenses for startups in regulated industries — which can apply to test products for, I think, up to a year. Are these essentially regulatory sandboxes? How will they work?

Polo: This is something that is quite new [in Spain]. We have recently started with financial sandboxes. The Ministry of Economy is still working to understand and evaluate how these first sandboxes are helping the financial sector to let startups introduce and market their own products. And what we are doing here [with the startup law] is making very clear that this new tool — the sandbox — will be available for every startup in every different leading sector of the economy. And we are also allowing the different ministries to generate their own sandboxes and particularly incentivizing them to create it. So the specifics of how every sandbox works will be designed by every ministry.

TechCrunch: Now the draft startup law is in the hands of Parliament, I’m curious, what are your priorities as the high commissioner — you’re presumably very focused on the wider entrepreneurial strategy? How’s that going?

Polo: I really appreciate this question because I think it is very important. We really believe that it’s very important to be able to take a step back and look at the full picture. So first, when we have achieved in the most recent years: In 2020, we created for the first time a high commissioner within the presidency that is leading the efforts to turn Spain into the startup nation with the highest social impact. So, first, we have achieved a great deal when it comes to institutionalizing the efforts to make a better environment for startups in Spain.

Second, in February last year, in 2021, the president presented the Spain Entrepreneurial Nation strategy. So we are showing that we have a full ten year plan, that is made up of 50 measures that are going to define how we’re going to build this startup nation. So it’s not only a big name, it’s it’s a full plan. And we are also — third — backing those 50 measures with the EU funds.

So there’s no better guarantee that the different measures included in that strategy are going to be implemented and that they have the resources they need in order to become a reality in the coming months and years.

And fourth, now we have this new startup ecosystem law, which is going to show that we walk the talk, we say that we are going to create the best environment for startups in Europe — and we are taking steps, one after the other, in order to to achieve that.

The startup law is not the first step that we took, as I just said — and it’s not going to be the last. It is one of the 50 measures that we have in the Spain Entrepreneurial Nation strategy. So there is much more to come in the next few years and much more good news for entrepreneurs in Europe and in the world if they want to come to Spain to start their endeavours.

For the next month, we’re going to be following very closely what the parliament is doing, talking to everyone in parliament and also keeping the conversations with the different actors and leaders of the Spanish ecosystem. And we are very confident that the law is going to be to be passed — without major changes — this year. So it’s going to really become a revolution for startups, investors and talent in Spain.

This report was updated with a correction to the figure for the U.K. stock option scheme; initially we had a typo stating it as £30,000 — the correct figure is: €300,000 (or £250,000). We also fixed the spelling of the Renace scheme. Additionally, the Next Tech Fund referenced by Polo will in fact be up to €4BN in size, rather than “more than €4BN” as we were initially told