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Minister’s Minimum Wage Plans Would Be Fatal For Germany’s Startup Scene

Minister’s Minimum Wage Plans Would Be Fatal For Germany’s Startup Scene

 This is a guest column from Christoph Gerlinger of the German Startups Group

The startup scene is an important engine for Germany as a business location. In Berlin alone, more than 60,000 workers are employed in the fledgling digital economy, which has also created an estimated 100,000 jobs through the multiplier effect. In no other industry has the creation of new jobs been as strong as in information and telecommunications technology.

This idea has taken hold with top politicians from both parties in Germany’s coalition government, the Social Democrats (SPD) and the Christian Democratic Union (CDU, together with its Bavarian sister party, the CSU) of Angela Merkel. In recent months, several of them – from Transport Minister Alexander Dobrindt and Economics Minister Sigmar Gabriel to Finance Minister Wolfgang Schäuble and Chancellor Merkel herself – have spoken of a commitment to developing the startup scene and its digital pioneers.

The proposed federal minimum wage of €8.50 per hour – which would also apply to interns, known in German as Praktikanten – would have fatal consequences for the startup scene. In nearly every startup, these Praktikanten are working for less money or are waiving part of a full salary, and mostly for longer periods than the proposed minimum wage exemption of six weeks.

In young Internet companies, for example, the amount of salary is usually not the decisive factor for would-be employees. Rather, it is non-pecuniary criteria such as creative tasks, flat hierarchies, higher degrees of freedom, a steep learning curve, numerous opportunities to have a real impact on a company, the prospect of lucrative permanent employment with the same criteria, and last but not least existing or potential holdings in the kinds of growing companies that regularly produce young Internet millionaires, even in Germany.

These are the reasons why some highly-qualified graduates happily choose an internship at a startup over a well-paid permanent position in the traditional economy. In this way they can take their first footsteps in the digital world, which brings with it the chance to start their own business.

The decision to go for such a placement is almost always made by someone who knows the score and can make a clear judgement. The paternalism of politicians is not needed in any way. The most highly-qualified candidates are not at any risk of being exploited, as Labour Minister Andrea Nahles probably assumes, but rather, they often have a job offer from a strategy consulting company, investment bank or law firm on the table or are even giving up such a job which they have lined up in order to work for a startup.

Young startups also do not often have a cushion of capital that allows them to straight away pay market rates for top notch talent in product development and winning market share. That does not happen for some time. A minimum wage would therefore not be effective at all.

Indeed, with the proposed minimum wage, they simply could not employ as many people and the startup project would be made utterly impossible. Often the founders and managing directors pay themselves no wage initially, or only a very small amount to cover the cost of living, which in view of the resulting workload – usually more than 40 hours per week – would also work out as less than €8.50 per hour. Merely excluding university students working as Praktikanten for six weeks or less from the minimum wage is not going to be of much help to the startup scene. Believing that such an exception would be effective is completely unrealistic.

Managing directors should be excluded from the minimum wage and Praktikanten too for up to six months, the exception should not be dependent on whether it is a course-related internship and investment opportunities and options to purchase company shares should be included in an appropriate manner in the calculation of hourly pay.

The introduction of the minimum wage without such exceptions and arrangements would be doing the German economy and employees in Germany themselves a disservice. The startups which had not yet established themselves as stable businesses would immediately be forced to move abroad, and new startups would no longer look at this country as a good place to set up shop. In this way, politicians, out of supposedly noble motives, would be squandering the massive opportunities for the sustainable development of a globally-relevant innovation hub, which would mean throwing away job creation and direct government income from the creation of wealth, such as tax revenue from the individual assets of founders.

If the supposed political advocates of the startup scene, Ministers Dobrindt, Gabriel and Schäuble and Chancellor Merkel, are not determined to stop Minister Nahles’ plan in its current form, they would expose their expressions of support to the startup scene as the mere payment of lip service.

Christoph Gerlinger is the founder and CEO of the German Startups Group Berlin AG, a young Berlin-based venture capital provider. He previously founded two startups himself, building them up to around 200 employees before taking them to the stock market.

 

About Christoph Gerlinger

Christoph Gerlinger
Christoph Gerlinger is the founder and CEO of the German Startups Group Berlin AG, a young Berlin-based venture capital provider. He previously founded two startups himself, building them up to around 200 employees before taking them to the stock market.

31 comments

  1. What a narrow perspective.

    People have to pay rent and bills. Unpaid internships and underpaid jobs are a sure way to keep those out of the creative, charity, arts and tech sectors who do not have the privilege of meeting their costs through familial wealth. No wonder these industries are far from diverse, but rather dominated by white, middle-class kids who can afford to work for next to nothing because daddy still pays the rent. Or they know how to navigate the crazy Arbeitsagentur bureaucracy to get an Aufstocken top-up on their meagre income which shifts the burden to the taxpayer; increasingly SOP in Berlin’s freelance culture although no one is comfortable talking about that. How about you own up to your claims to meritocracy and opportunity, tech, and open your industry to those from less privileged backgrounds by actually paying them for their labour?

  2. And while we’re at it, let’s bring back child labor and slavery. In the case of child labor many of the kids really enjoyed working and supporting their families opposed to going to school all the time. They only did it partly for the money but mostly for the respect of their peers and the knowledge of being part of something bigger.

    And for the slaves? I mean helllllooo, free food and accommodation and being part of the greater good for the company, whats not to love?

    Now replace “food” and “accommodation” with “club mate” and “foosball table” and you kind of end up in your standard intern exploitation scheme.

    Internships are made to be a teaching environment with a strong “hands-on” approach. Using Interns instead of full-term employees not only shits on the interns but also on the full-term employees which have to live with ever decreasing salaries.

    If you’re a founder and can’t afford to pay proper salaries, pay in shares. Unwilling/-able to do so? Well, I guess you’re out of luck then, deal with it.

  3. This is absurd. These startups are taking advantage of young students/workers. If you’re startup can’t afford to pay people 8.50€/hour than you’re doing something wrong, particularly when, as in most cases, the interns are doing vital and necessary work. I would also point out that your statement that “highly-qualified graduates happily choose an internship at a startup over a well-paid permanent position in the traditional economy” is total BS. There’s no choice involved. People ‘choose’ an internship because the vast majority of firms hiring use the internship system as a way to get free labor for work that should be salaried, so there aren’t enough real jobs out there. Show me someone who chooses an internship over a well-paid permanent position and I’ll show you someone who’s being supported by their parents.

    “The paternalism of politicians is not needed in any way.” The paternalism of your attitude isn’t needed either.

  4. People take internships because they can’t get full-time jobs in this economy. And there are some startups that take investors’ money and use it to party and fly 1st class around the world… and then hire unpaid or underpaid interns to do the real work.

  5. The wage differential between Berlin and places like London, Paris or San Francisco will still be massive, even with a minimum wage. If a so-called tech startup is only managing to get by with loads of interns that are paid 450 Euros a month (or even less), there’s probably not much of an actual value-added – just undercutting prices of competitors (that in some cases still pay proper wages). As a society, we need to get away from this thinking that there is any inherent value to “keeping people busy” that justifies just about everything, even if the pay and working conditions are horrible.

  6. And this, ladies and gents, is the reason why vulture capitalists will be the first up against the wall when the revolution comes.

  7. So the German startup scene can only survive if it can continue to depend on underpaid or not-paid-at-all pseudo-employees? Sure many interesting projects start out without a budget. But if it’s progressed to a point where it’s no longer a small group of founders (presumably with some other existing financial backing) trying to get something going, but actually getting “outside” people on board who don’t have this kind of backing and thus *depend* on some kind of income, they should be paid adequately. Otherwise what you are doing is simply exploitation.

    Of course these people get on board of interesting startups because it’s exciting, but I doubt very much that if you ask any of them that they are happily foregoing an income just to be there (which is what the article alleges). Especially in Berlin, most of this is only possible at all because the cost of living is (still) pretty low, and those people are probably still partly funded by their parents or other sources. You’d have to be pretty naive to assume that they simply survive on no money at all. That money has to come from somewhere. If startups can only work on this kind of foundation, that startup scene is pretty broken.

    To me, this article translates suspiciously as “we wanna continue exploiting people for our profit, and now the government is getting into our way, boohoo”.

  8. I think I am going to get sick.

    This, ladies and gentlemen, is why the argument that seniority or experience requirements for job positions are completely useless stands a chance in serious consideration. you can found two companies and get more than 200 employees around and take a company in the stock market and still not know a peanut of management, human resources, strategic long term planning, and the responsibility of keeping a clear break-even line based on proper wages for your talent.

    This guy has clearly never been in an entry-level position in this economy. I would not trust a dime of funding to be allocated by this guy ever. If you can’t count with being able to pay your commitments, specially to your employees, you should not be hiring. No intern should fund your company with free work, unless you give them a generous stock package from your air-worth shares. Go back to your garage please.

  9. This is an important precedent, mostly for the spending power it gives to the people living in startup ecosystems. What will happen when the increasing cost of living is no longer met by the extremely low wages in Berlin? Bubbles start bursting – people get scared – and everyone blames everyone else. Just pay your people. And interns, buy stuff. It’s the way of capitalism.

  10. If building a business only works by exploiting a lot of people – well, how is our system (capitalism) supposed to work? Dear Mr. Knight, I do not agree with your point of view. Not at all.

  11. Maybe you should admit that your business model is rubbish if you see yourself unable to pay such a low minimum wage.

  12. this makes perfeclty sense.

    Also it is exactly the same rethorics that was faced in the debates for the abolistion of child labor a century ago.

    The author of this article has simply no concept of social progress.

  13. If you cannot pay your long-term interns the minimum wage, then your company is underfunded. Not paying interns who work for you in the longer term a minimum salary so they can cover their living expenses is essentially having them (and society, who pays them “Wohngeld” or maybe even “Hartz IV”) fund your company.

    To put this in perspective, I was an intern in Silicon Valley for the whole year of 2003 (things might have changed there now as well, idk) when the market there hit rock-bottom and every week, at least one company on the street our company was on shut down. And we were still paid 10$ an hour plus overtime and weekend bonusses because otherwise, no intern would be willing to work for the company for such a long period because they simply could not afford it.

  14. Thank you for this valuable article: it’s refreshing to see a VC acknowledge so explicitly that his business model depends on having workers assume as much risk as possible on his behalf, with no expectation of a return.

    If a business idea is predicated on the assumption of free labour, that business idea is terrible, and should not even be given the opportunity to fail. And if Mr Gerlinger’s competitive advantage is based solely on having young people gamble their time for his benefit, then Germany should let him take his ball away, and be glad to see the back of him.

  15. The post defends this position: “a startup cannot just afford paying minimum wages, it would soon run out of cash, and employees are well aware of that; therefore, a legal minimum wage will kill the startup scene”.

    Yes, but that’s not all. A minimum wage is a countermeasure against labour exploitation of those who are coerced to accept inhumane wages. [This is a protectionist measure indeed, but it is so because it protects those workers without sufficient bargaining power to achieve a decent salary] “But startups do not coerce anybody! Unpaid employees do not need any protection, they could as well work for a transnational company for high figures, and they just choose the startup in absolute freedom, because they expect larger returns coming in the future, as they will participate of the success of the company.” –you would justify.

    That’s true, and that’s indeed the point… “expect larger returns coming in the future”. This may mean stock options, phantom shares, bonuses, whatever: wages in kind. Startup employees don’t work for free, they work for a future larger payment (delayed, risky and uncertain, nonetheless). A fair startup founder would share part of their future profits if the employees correspond by sharing part of the owner’s risk. They would give their employees the same amount of equity as if they were a (small) BA who invests an equivalent amount of money to the wage the are relinquishing today (using the same multiplier, yet introducing vesting clauses and so on).

    Let’s reformulate then the position statement: “The new minimum wage German law should accept a fair compensation in kind (including equity compensation) as a suitable replacement for direct, monetary payments”.

    • Actual equity compensation for interns (or probably even middle management) in a German GmbH is a hypothetical option only, based on the laws applying to GmbHs. So, first those laws would need to be changed – which is probably a good idea, independent of this problem.

  16. The minimum wage for interns will in fact only apply for the minority for interns: those who already have a university degree and prior work experience. The minimum wage does not apply for interns while they study.
    And even for interns, a mothly wage between 1.300 – and 1.400 Euro for people with a solid education and work experience from several other internships is not too high. Also: Do you only want to employ interns who can live off the money they get from their parents? I think especially the startup scene should aim at being more inclusive and not only work with people who don’t need to work because they get money from their families.

    We have a comment on the minimum wage for interns over at EDITION F if you’re interested: https://editionf.com/ende-generation-praktikum

  17. Thank you for the feedback, all. Starting a lively debate is something we had in mind with this guest column.

    Certainly, we all wish that everyone earns as much money as possible, but if we take an unapologetic look at reality, many startups cannot afford to pay a minimum wage initially. Yes, venture capital can change this situation, but it is no secret that there just is not enough of that around for all startups to benefit.

    The simple truth is that the minimum wage plans will not lead to a situation in which the same amount of Praktikanten will earn more money (which would be a scenario, believe it or not, about which we would be more than happy), but to rather a situation in which there will be a lot less interns hired. The minimum wage plans would then simply be a means to deprive young, ambitious people of the chance to learn new things, make new experiences and contacts, prove themselves, so they will become regular employees, and partake in the success story of a promising startup. We can see no benefit in that. A different solution – one that does not assume that one size fits all – has to be found; otherwise, the minimum wage plans will do more bad than good.

    • It is anything but “the simple truth” that a minimum wage will necessarily increase unemployment:

      http://www.economist.com/news/finance-and-economics/21567072-evidence-mounting-moderate-minimum-wages-can-do-more-good-harm

      There’s no need to look far for a counterexample, either: the UK has had a minimum wage since 1999, yet there is still a thriving market for intern placements, and London’s startup scene, strangely, does not seem to have disappeared overnight. Junior jobs still exist; people still make connections, and learn things while at work; startup ideas both clever and stupid succeed and fail. Why didn’t the minimum wage destroy our nascent tech sector, if your claim here is “the simple truth”?

    • Dear Herr Gerlinger,

      What is your proposition for a solution then? Leave things like they are? In the way the job market is currently skewed, things currently look like it seems more reasonable to have less interns hired. We are talking about the miserable amount of 4080 Euros a year.

      No salary/Stock with voting rights, no work. That is how business behave in the real world.

    • I can only see minimum wage as a positive thing. The pressure on founders to pay their employees will force them to focus their business ideas into products that produce predictable income quickly, and scale up over time. It will force them to produce reasonable business plans and timelines.

      VCs will have to put out more money per company, which means they will pay more attention to the ideas, investing in those that show viable business plans, and avoiding the endless flavour-of-the-month startups that work their employees to death producing trivial iPhone apps that go down after a year or two, taking all of the customers’ data with it.

      There’s no point convincing “young people” to intern at companies that cannot even pay 8.50 an hour. If there’s not enough jobs for them, one hopes that their education is versatile enough that they can get jobs in industries that are not doomed to die when the bubble bursts. German education is generally very good, so I’m not worried about that at all.

      Spin it as you like, minimum wage is a purely a win for the poor and underpaid.

    • As mentioned above, the minimum wage will only apply to people who either have prior work experience or have a degree already. Many students nowadays either gain practical experience while studying or before they even start at university / college. So we are not talking about rookies who haven’t worked on a real life project before. What is the valuable experience that you can give them that would justify working for almost nothing? In a lot of startups, this experience basically means working long hours with minimal guidance and under quite some pressure. This is of course not always the case, but quite often it is. I am not saying it’s not fun to do this for a while, and you do learn to handle things on your own – but the time for this kind of internship is usually when you’re studying or writing your thesis.

      Minimum wage gross salary is about the same as the net income that you used to get being hired right after graduation and assuming tax class 1 at the lower end of the income scale already 10 years ago. Granted, most candidates had diplomas rather than bachelors stillbthen, but the gap is not so big that it would justify employing workers with degrees and/or prior experience a mini job salary for full time work. If you employ someone at this level for 6 weeks, you should be able to tell whether their work is worth your money or not. And if you cannot afford paying them, you are not entitled to profit from their work either. It’s only fair to let them go to companies that are willing to pay them at least an entry-level salary. It’s not like demand in the field is low at the moment…

    • Well… if you pay peanuts, you get monkeys. Your choice.

  18. Before everyone has a breakdown on this topic, I think we need to look at a few angles. Minimum wage is there to protect against exploitation of the work force. It is important and something which is fair and compassionate. I think though that “internships” are different, and need to be looked at a little separately. I am not a fan of large corporations being able to have interns for no pay, as they most defineitly can afford it, and are just using young peoples desire to break into a market, to cut the bottom line. Startups however are very often in a situation where both they and a young person can help each other progress. My thoughts are that a company with under 5 employees, should be able to create a 3 month (no more) contract with a person where by no money is paid, but a clear outline of knowledge share is created. Many of these same early stage startups no doubt are not paying themselves anyway, and it could be an effective way to work together for a more prosperous long term future.

    • The point of internships is to give a student experience in industry, with teams of experienced people doing similar jobs to learn from. It does not mean working your butt off in some broke-ass iPhone widget factory with a bunch of founders who are barely older than you are, while you alone hack together some junky Obj-C, with nobody else to learn from.

      What do you need? If you need an employee, pay them 8.50 an hour. If you don’t want to pay that, get them in as a founder and give them a pile of equity. If you don’t want to pay in money or equity, you’re just looking for some poor sop to do all the work while you burn your VC cash pile on old fashioneds in PBurg.

  19. Can’t take for serious an article full of superlatives, exaggerations and black and white thinking.

    So, what’s a startup? Is it a small company founded by enthusiasts with a great idea which develops sanely and sustainable? Then we discuss it any further. If, on the other hand, it’s just a spin-off or a company on steroids in form of venture capital which goes from zero to 200 employees and on the stock market in two years, well, it’s a different story and I can’t help but thinking of exploitation.

    So, what we would like to do is to allow the first kind of startup to still hire interns for the perfectly friendly small company where people learn from each other and strong bonds are closed early, while protecting the interns from the second kind of startup/enterprise.

    In my opinion this wont be achieved by putting loads of exceptions and special rules into the law text for the minimum wages. As in mathematics and logic, a law is much more powerful if it’s basic and with very few exceptions. It then represents a building block to build something much bigger. In that case why not taking the Ministers by their words when they promise developing the startup scene. Why fighting against a law, when we could fight for grants or assistance from the government? Salary could be split between government and startup, just to come up with a very basic idea. Why not discussing the way funding works? Does it always have to be enormous sums for almost well-established startups?

    Indeed, political work has to be done for making the startup scene flourish. But let’s do it by giving people chances, and not by making the new economy a synonym for exploitation.

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