1Start-up Financing

This primer offers a general overview of (i) financing tools of start-ups, (ii) the structuring of corporate governance within a start-up, (iii) the structure of a typical venture capital transaction, (iv) employee participation programs and vesting terms as well as (v) start-up exits and provides answers to the key legal issues arising within the life cycle of a start-up for the following jurisdictions: Austria, Bulgaria, Croatia, Czech Republic, Poland, Romania and Slovenia.

Different chapters and jurisdictions can be selected in the filter box on the right side ➜

Financing General

The typical instruments of start-up financing are: (i) public grants; (ii) convertible investments and shareholder loans; and (iii) equity financing. To a lesser extent, start-ups are financed via hybrid instruments such as participation rights (Genussrechte) and silent partnerships. Equity finance is typically provided via a cash capital increase in combination with capital contributions (Gesellschafterzuschuss). Depending on the start-up’s situation, financing is provided upon satisfaction of milestones / conditions precedents (e.g. minimum turnover figures or availability of product-related features).

Participation rights (Genussrechte) are – in principle – civil law (contractual) relation-ships between the issuer and each subscriber/holder that confer to their holders monetary (property) rights with respect to the issuer, including (most notably) the right to receive dividends and liquidation proceeds. Participation rights can be quite freely structured, subject to general boundaries under Austrian law, e.g. mandatory consumer protection laws (where applicable). Participation rights can qualify, depending on the actual rights conferred, as equity or debt instruments.

Silent partnerships are similar to participation rights, but typically confer more rights (e.g. right to inspect books and records and other information rights).

The typical instruments of start-up financing are: (i) (convertible) loans; (ii) equity financing; and (iii) public grants.
Convertible loans are becoming more popular, especially among angel investors and venture capital funds.
Equity finance is typically provided via a cash capital increase and is a preferred option for venture capital and private equity funds who wish to exercise more control in the start-up.
Depending on the start-up’s situation, financing is provided upon satisfaction of milestones / conditions precedents (e.g. minimum turnover figures or availability of product-related features).
Public grants in the form of non-refundable funds are provided mainly by EU funds, but also by the government or municipalities. In 2015, the Bulgarian State set up a special-purpose joint-stock company – Fund Manager of Financial Instruments in Bulgaria, whose aim is to manage and operate EU funds, thereby to finance start-up companies in Bulgaria.

Besides bootstrapping, the typical instruments of start-up financing are: (i) loans (including shareholder loans and subsidised loans); (ii) public grants; and to a lesser extent (iii) equity financing.

Public grants in the form of non-refundable funds are provided by state agencies, ministries, local and regional self-governments and EU funds.

Equity finance is typically provided by angel investors as well as regional venture capital funds via a share capital increase (povećanje temeljnog kapitala). Depending on the start-up’s situation, financing is provided upon satisfaction of milestones / conditions precedents (e.g. mini-mum turnover figures or availability of product-related features).

The start-up financing market is still developing in Croatia, which is why means of accumulating capital are not readily available.

The first registered Croatian VC fund with a focus on start-ups and SME enterprises started work from 1 June 2019. It has access to at least EUR 42.5m, but is also limited to EUR 50m. In addition, recent changes in the legal framework allowed pension funds to invest in start-ups through VC funds.

The typical instruments of start-up financing are: (i) (convertible) loans and (ii) equity financing. Public grant schemes are less developed and less popular among start-up founders in the Czech Republic.

Equity finance is typically provided via a cash capital increase in combination with equity capital contributions (příplatek mimo základní kapitál). Depending on the start-up’s situation, financing is provided upon satisfaction of milestones / conditions precedents (e.g. minimum turnover figures or availability of product-related features).

Silent partnership (tichá společnost) is – in principle – a civil law (contractual) relationship between the company and a silent partner (investor) when the silent partner provides the contribution to the company and in return is entitled to receive dividends from the company’s business activities. In addition, the silent partner is entitled to inspect the company’s books and records and has other information rights.

The typical instruments of start-up financing are: (i) public grants; (ii) convertible investments and shareholder loans; and (iii) equity financing.  Equity finance is typically provided via a cash capital increase in combination with capital contributions. Depending on the start-up’s situation, financing is provided upon satisfaction of milestones / conditions precedents (e.g. minimum turnover figures or availability of product-related features).

Start-ups are commonly financed by convertible investments, shareholder loans and equity financing. Traditional bank financing is generally not available to start-up companies, as banks usually require a proven track-record and solid collaterals.
Start-ups may seek financing from alternative resources, such as:

• Angel investors, i.e. high-net-worth individuals who invest in new ventures, sometimes creating an investment portfolio with multiple companies in various sectors. They are particularly valuable to new businesses be-cause they bring in “smart money”, com-prising their experience, advice, network and ultimately funds.

• Venture capitalist funds that profession-ally invest large sums of money in new businesses, while helping to build the company so as to increase its valuation, anticipating acquisition or the company going public.

In such cases, investors typically require minority stakes in the start-ups, while some also take over positions on the board of directors or other advisory boards.

The law also recognises the concept of “preferential shares” in joint-stock companies (acțiuni preferențiale cu dividend prioritar fără drept de vot) allowing their holders preferential rights to dividends, but only a right to attend (and not vote) in general meetings. Such shares are used to a lesser extent in practice, given the absence of efficient controlling rights for their holders.

The typical instruments of start-up financing are: (i) grants and subsidies; (ii) convertible in-vestments and shareholder loans; and (iii) equity financing (typically structured as a share capital increase with cash contributions (povečanje osnovnega kapitala z denarnimi vložki)). Later stage start-up companies may also access debt finance, such as micro-loans and loan guarantees, offered on subsidised terms by SID Banka, a state-owned development and export finance bank, through various of its SME support schemes.
In terms of state-sponsored sources of financing, the Slovenian Enterprise Fund (Slovenski podjetniški sklad; “SEF”) provides various investment products, grants and subsidies, such as convertible loans, equity co-investing, micro-loans, and vouchers. Private sources of cap-ital typically include domestic or, more commonly, regional VC funds and business angels (e.g. through the Business Angels of Slovenia (Poslovni angeli Slovenije) association).

Limited liability company (Gesellschaft mit beschränkter Haftung; “LLC“). An LLC has a minimum share capital of EUR 35,000. Foundation with share capital of only EUR 10,000 is possible, but only for the first 10 years (so-called “foundation privilege”). Half the share capital must be paid-up at establishment. The applicable corporate income tax rate for LLCs is 25 %.

Limited liability company (дружество с ограничена отговорност; “LLC). An LLC has a minimum share capital of BGN 2 (approx. EUR 1). The share capital consists of the contributions of the shareholders and each contribution cannot be less than BGN 1. The value of the contributions can differ from shareholder to shareholder. If the subscribed share capital is more than the required minimum, only 70 % of the subscribed share capital may be paid upon establishment of the LLC. The applicable corporate income tax rate for all companies is 10 %.

Limited liability company (društvo s ograničenom odgovornošću; “LLC“). An LLC has a minimum share capital of HRK 20,000 (approx. EUR 2,700). At least a quarter of the share capital must be paid-up at establishment, while the rest should be paid within one year from registration. The nominal amount of each share must be at least HRK 200 (approx. EUR 25). Administrative and notarial costs for establishment amount up to HRK 4,000 (approx. EUR 535).

It is possible to establish a “simple” limited liability company (jednostavno društvo s ograničenom odgovornošću) with share capital of only HRK 10 (approx. EUR 1.30), which must be paid-up in full at establishment. The nominal amount of each share must be at least HRK 1 (approx. EUR 0.13). A simple LLC must have legal reserves in which a quarter of profit (decreased by loss from the previous year) must be entered (such an obligation will cease to exist once a simple LLC increases its share capital to at least HRK 20,000). Administrative and notarial costs for establishment amount up to HRK 850 (approx. EUR 115).

From 1 September 2019, founders should be able to establish an LLC completely online through the e-osnivanje app.

The share capital must be paid-up with a credit institution in Croatia. The Croatian tax system applies two income tax rates: 12 % for companies generating turnover below HRK 3,000,000 (approx. EUR 400,000) and 18 % for companies generating turnover above this threshold.

Limited liability company (společnost s ručením omezeným; “LLC“). Among the advantages of the LLC is a very low minimum share capital contribution requirement of CZK 1 (approx. EUR 0.04), with 30 % to be paid-up at establishment. Therefore, the minimum share capital of a one-member LLC can be CZK 1. A higher contribution may be determined and recorded in the foundation deed (in the case of a one-member company) or articles of association (in the case of a company with multiple shareholders). It is also recommended to have share capital of at least CZK 100,000 (approx. EUR 3,900), which is standard in the Czech market and makes the company appear more credible.

Limited liability company (spółka z ograniczoną odpowiedzialnością; “LLC“). An LLC has a minimum share capital of PLN 5,000 (approx. EUR 1,200). The share capital must be paid-up in full before the registration of the LLC in the National Court Register (Krajowy Rejestr Sądowy).

Limited liability company (Societate cu Raspundere Limitata; “LLC“) and joint-stock company (Societate pe Actiuni).
Given the significant difference of capitalisation requirements – RON 200 (approx. EUR 45) for LLCs compared to RON 90,000 for joint-stock companies (approx. EUR 19,500), the LLC is currently the most popular form of company.
Although more rigid in respect to funding (i.e. LLCs cannot issue bonds and their shares cannot be publicly traded) and exit options (i.e. transfers of shares to third parties require pre-approval of the other shareholders and are subject to a 30-day opposition term), LLCs offer a simpler corporate governance structure and hence a  lighter operating burden, which makes them more suitable for closely held businesses or ownership vehicles.

Limited liability company (družba z omejeno odgovornostjo; “LLC“). An LLC has a minimum share capital of EUR 7,500. One-quarter of the share capital must be paid up prior to incorporation. An expedited incorporation procedure is available for so-called simple LLCs (enostavne d.o.o.; (entire share capital paid up upfront in cash, prescribed form used for articles of association). The applicable corporate income tax rate for LLCs is 19 %. A 25 % rate applies to dividends to shareholders who are natural persons.

Lending is an activity reserved to licensed (or passported) credit institutions. There is no specific exemption for shareholder loans or intra-group financing. However, certain exemptions exist (e.g. for lending by AIFM/AIF acting within the scope of their AIFMD licence and for lending of subordinated loans). Careful structuring will be required to avoid legal hiccups.

Shareholder loans are generally permissible. However, such loans should be carefully structured from the tax and accounting perspectives. A loan may be provided with or without interest and it must be at arms’ length (like all related party transactions). Thin capitalisation rules also must be considered.

In insolvency proceedings, a shareholder who has granted a loan ranking behind almost all other creditors.

Foreign shareholders’ loans to Bulgarian companies must be registered with and annually reported to the Bulgarian National Bank for statistical purposes.

Shareholder loans are generally permissible. A loan may be provided with or without interest. A shareholder (having a controlling influence or holding at least a 10 % shareholding) who provided a loan to a distressed company instead of providing capital may only act as a creditor of lower payment priority in bankruptcy proceedings.

Shareholder loans are generally permissible. A shareholder loan (including interest rate) must be on arm’s length terms. If the interest rate is higher, the company cannot claim the interest as a tax expense or it may not be recognised. Thin capitalisation rules also must be considered.

Shareholder loans are generally permissible. However, such loans should be carefully structured from the tax and accounting perspectives.
Under Polish law, the articles of association of an LLC may also oblige the shareholders to make additional capital payments (dopłaty) (i.e. to finance the company, cover losses, etc.).

As a principle, all companies engaged in lending as their main business activity generating revenues are subject to prior authorisation by the Romanian National Bank (“NBR“).
A company providing loans will be required to hold a lending licence if the lending activity is provided on a professional basis, e.g. is done regularly, to multiple borrowers, with the assistance of internal structures designed to carry out lending activities for the purpose of making a profit. While loans to affiliates are not expressly carved-out from this legal requirement, there is already an established practice on the Romanian market whereby loans between affiliates do not meet the legal requirements of professional lending. Additionally, shareholder loans are a common market practice for Romanian companies.
The following requirements should be considered:
• if the loan is granted for a period exceeding one year, notification to the NBR is required. Such notification is required for statistical purposes only (no NBR approval is necessary);
• being a transaction between related parties, the loan should be arm’s length, i.e. bear a market rate interest.

Shareholder loans are generally permissible. However, in addition to tax and accounting aspects, consideration should be given to (in particular):

  • equitable subordination rules – in the event of insolvency, a shareholder cannot claim repayment of the loan extended while the LLC was in crisis (i.e. “when a diligent businessperson would have provided equity financing”); for joint-stock companies (“JSCs“) the rule applies to 25 % shareholders. Since many start-ups are undercapitalised (and may thus qualify as being “in crisis”), shareholders should carefully assess the viability of early shareholder-provided debt financing; and
  • capital maintenance rules – generally, a shareholder’s loan should be on arms’ length terms. Excessive interest rates and the like may qualify as covert profit distribution (prikrito izplačilo dobička) and deemed null and void. The respective rules are less strict for LLCs compared to JSCs.

Convertible loans for LLCs are not explicitly regulated under Austrian law. Therefore, they must be carefully structured to ensure enforceability and reduce related risks. For instance, all existing shareholders should accede to a convertible loan agreement and guarantee that they will procure conversion of the loan by way of a share capital increase. The conversion itself is typically structured by way of a cash capital increase (with the convertible investor being obliged to subscribe for the newly issued share) against (i) payment of the nominal amount of the newly issued share and (ii) waiver of the outstanding amount of the loan. A contribution in kind of the outstanding loan receivable is also possible but will require a valuation of the contributed loan receivable. Stamp duties of 0.8 % of the contributed loan receivable also may be triggered. Waiver of loans may trigger corporate income tax if the loan is considered as not collectible.

Convertible loans for LLCs are not explicitly regulated under Bulgarian law. Therefore, they must be carefully structured to ensure enforceability and reduce related risks. For instance, all existing shareholders should accede to a convertible loan agreement and guarantee that they will procure conversion of the loan by way of a share capital increase.

The conversion itself is structured either by way of a contribution in kind of the outstanding loan receivable or cash capital increase. A contribution in kind will require a valuation of the contributed loan receivable. A cash capital increase is structured as follows: the investor provides additional cash in the amount of the loan receivable and once the cash capital increase is completed, the company repays the loan with the additional cash paid in by the investor in the cash capital increase procedure.

Any conversion of loans into equity is subject to the approval of the shareholders’ meeting.

Convertible loans for LLCs are not explicitly regulated under Croatian law. Therefore, they must be carefully structured to ensure enforceability and reduce related risks. For instance, all existing shareholders should accede to a convertible loan agreement and guarantee that they will procure conversion of the loan.
The conversion itself is typically structured by way of a share capital increase (with the convertible investor subscribing for the newly issued share) against payment (contribution in kind, i.e. receivable stemming from the loan) for the nominal amount of the newly issued share, practically debt-to-equity. A contribution in kind requires a valuation of the contributed loan receivable by an auditor appointed by the court (following the company’s proposal).

Convertible loans for LLCs are not explicitly regulated under Czech law [NB: it is regulated for joint-stock companies]. Therefore, they must be carefully structured to ensure enforceability and reduce related risks. These are the most common requirements and conditions within investments in start-up companies: (i) due date; (ii) interest rate (mostly 5 – 10 %); (iii) terms and conditions of conversion of the loan to the share; (iv) amount of the maximum possible valuation of the company.
The conversion itself is typically structured by means of a monetary capital increase (with the investor being obliged to subscribe for the newly issued share), whereby the loan will be set-off against the amount of the capital increase.

Convertible loans for LLCs are not explicitly regulated under Polish law. Therefore, they must be carefully structured to ensure enforceability and reduce related risks, e.g. tax-related risks.
The conversion itself is typically structured by way of a cash capital increase (with the convertible investor being obliged to subscribe for the newly issued share) against waiver of the outstanding loan amount. A contribution in kind of the outstanding loan receivable is also possible. The tax consequences of both conversion mechanisms may vary.

Loan conversion into equity is expressly recognised by the Romanian Companies Law as a method for increasing a company’s share capital.
The conversion of loans into equity is subject to the approval of the shareholders’ meeting, to be adopted observing the quorum and voting requirements applicable to the increase of the share capital.
While the shareholders’ approval issued upon the contracting of the loan could be interpreted as a pre-approval of the conversion itself, the actual implementation of the conversion will likely require a new resolution of the shareholders issued for the specific conversion.
Additionally, the registration of the share capital increase resulting from the loan conversion will require the confirmation of the auditor and/or financial/accounting department of the company, attesting the amount of the loan and its reaching of maturity.
Unless decided otherwise by the parties involved, the loan will be converted into shares at their nominal (registered) value.

Convertible loans for LLCs are not explicitly regulated under Slovenian law. Therefore, they must be carefully structured to ensure enforceability and reduce related risks. For instance, all existing shareholders should accede to a convertible loan agreement and undertake to procure conversion of the loan by way of a share capital increase. To increase the robustness of the structure, the convertible loan agreement should take the form of a Slovenian notarial deed (notarski zapis).

The conversion itself is typically structured by way of a contribution in kind of the outstanding loan receivable. The valuation requirement (which generally applies to contributions in kind) may be waived in certain cases. A cash capital increase (with the convertible investor being obliged to subscribe for the newly issued share) against (i) payment of the nominal amount of the newly issued share and (ii) waiver of the outstanding amount of the loan is also possible.

The creation of different share classes is only possible in a “synthetic” way, i.e. by way of contractual agreement rather than having separate share classes.

The creation of different share classes in an LLC is only possible in a “synthetic” way, i.e. by way of contractual agreement conferring additional rights and privileges to a shareholder (also included in the articles of association) rather than having separate share classes.

In an LLC (unlike joint-stock companies) the creation of different share classes is only possible in a “synthetic” way, i.e. by way of contractual agreement rather than having separate share classes.

The creation of different share classes is explicitly permitted under Czech corporate law.

LLCs do not have share classes, but shares may be privileged with respect to  voting rights, dividend and liquidation preferences. There are some strict regulations in the Polish Commercial Companies Code (Kodeks spółek handlowych), e.g. each privileged share may confer not more than three votes. Usually, the “share classes” are further regulated in the Investment Agreement by specifying the liquidation preferences, etc.
The shareholders may also be granted personal rights, e.g. right to appoint/dismiss management board members.

No. Under Romanian companies law there is only one class of shares, with equal rights.
The law also recognises the concept of “preferential shares” in joint-stock companies (acțiuni preferențiale cu dividend prioritar fără drept de vot) allowing their holders preferential rights for the distribution of dividends, but only a right to attend (and not vote) in general assemblies. Such shares are used to a lesser extent in practice, given the absence of efficient controlling rights for their holders.
Such “preferential shares” are subject to the following characteristics: (i) preferential right to obtain dividends, before any other payments out of the distributable profits; (ii) for up to a quarter of the share capital; (iii) not in favour of company directors; (iv) automatically turn into ordinary shares in case of delays in distributing the dividends.

In an LLC the creation of different share classes is possible in a “synthetic” way, i.e. by way of contractual agreement (typically included in the articles of association), rather than having explicitly separate share classes in the manner possible with JSCs.

Corporate Bodies / Advisory Board

Start-up companies (LLCs) typically have two corporate bodies:  (i) managing directors and (ii) shareholders’ meeting. A supervisory board (supervising and cooperating with the managing directors) needs to be mandatorily established only in certain circumstances (e.g. if size-related thresholds are met), whereas the shareholders’ meeting may voluntarily establish such a corporate body. Start-ups typically do not need a supervisory board and do not voluntarily install one.

Start-up companies (LLCs) typically have two corporate bodies:  (i) managing directors and (ii) shareholders’ meeting.

Start-up companies (LLCs) typically have two corporate bodies: (i) management board (uprava) and (ii) shareholders’ meeting, (skupština). A supervisory board (nadzorni odbor), which supervises the management board, needs to be mandatorily established only in certain circumstances (e.g. if a company has more than 200 employees or if a company has share capital above HRK 600,000 (approx. EUR 80,000) and has more than 50 shareholders), whereas the shareholders’ meeting may voluntarily establish such a corporate body. Start-ups typically do not need a supervisory board and do not voluntarily install one.

Start-up companies (LLCs) typically have two corporate bodies: (i) managing directors and (ii) shareholders’ meeting. A supervisory board (supervising and cooperating with the managing directors) needs to be mandatorily established only in certain rare circumstances (e.g. if the company trades with securities or organises the regulated market, or under certain conditions if it takes part in cross-border transformations), whereas the shareholders’ meeting may voluntarily establish such a corporate body. Start-ups typically do not need a supervisory board and do not voluntarily establish one.

Start-up companies (LLCs) typically have two corporate bodies:  (i) management board and (ii) shareholders’ meeting. A supervisory board needs to be mandatorily established only in certain circumstances (e.g. if size-related thresholds are met), whereas the shareholders’ meeting may voluntarily establish such a corporate body. Start-ups typically do not need a supervisory board and do not often install one, as it triggers more formalities and costs.

The mandatory corporate bodies of an LLC are (i) the shareholders’ meeting, and (ii) the directors.

Although not expressly provided under the law, the shareholders of an LCC may determine different types of meetings in the articles of association.
Although not expressly provided (or prohibited) under the Romanian Companies Law, in practice the directors can be organised under a board of directors. The organisation of the directors into the collective body of the board of directors is required in the case of joint-stock companies and should be contractually regulated for LLCs.
The two-tier management system (directorate and supervisory board) is applicable only to (large) joint-stock companies.

Start-up companies (LLCs) typically have two corporate bodies: (i) management (poslovodstvo), consisting of a single or more directors, and (ii) shareholders’ meeting. The formation of a supervisory board in LLCs is voluntary and typically not done in start-ups.

The shareholders of an LLC may establish an advisory board that either serves as a supervisory board (and thus qualifies as a corporate body) or that is based on contractual agreement only. Contractual advisory boards are commonly installed to advise the founders of a start-up in their day-to-day operations. An advisory board that has the functionality of a supervisory board (consent rights) would be subject to the rules applicable to supervisory boards (relating to the liability of its members). This is typically avoided. In the case of advisory boards with mere advisory functions (no approval rights); certain specific (limited) approval rights granted to the advisory board, should be fine.

For more information, see here

The shareholders of an LLC may establish an advisory board that is not a corporate body but is based on contractual agreement only (e.g. articles of association or shareholders agreement).
The establishment of an advisory board is not common among start-ups.

Shareholders in an LLC have much more autonomy in arranging their relationship within a company than in joint-stock companies.
The shareholders of an LLC may establish an advisory board that either serves as a supervisory board (and thus qualifies as a corporate body) or that is based on contractual agreement only (e.g. articles of association or shareholders agreement).
The establishment of an advisory board is not common, but provision of advice by investors is. The investor’s representative gets a seat on the management board to be able to either steer or supervise business operations.

Although it is not common in the Czech Republic, an LLC may establish non-mandatory bodies such as an advisory board. The competences of such bodies are always limited by the competences of the mandatory bodies.

The shareholders of an LLC may establish an advisory board that either serves as a supervisory board (and thus qualifies as a corporate body) or that is based on contractual agreement only. Contractual advisory boards are commonly installed to advise the founders of a start-up in their day-to-day operations. An advisory board that has the functionality of a supervisory board (consent rights) would be subject to the rules applicable to supervisory boards (relating to the liability of its members). In the case of advisory boards with mere advisory functions (no approval rights); certain specific (limited) approval rights granted to the advisory board, should be fine, but will have contractual effect on the corporate relevance.

The advisory board is not a regulated concept either for joint-stock companies or LLCs. Hence, for an advisory board to operate, it will need to be contractually established.
An advisory board may be an efficient alternative for shareholders to boost their business. They also offer their members the advantage of less exposure to liability. Conversely, a position in the corporate body of a company, be it as a director or executive member, may trigger liability issues for its holder.

An advisory board is not a regulated corporate law concept per se. However, any of the following can perform equivalent functions:

  • supervisory board – functions as a regular corporate body and can in principle (subject to conflict of interest rules) assume an advisory role (in particular to the shareholders). Its establishment is voluntary for LLCs and thus only rarely used by start-ups;
  • supervisory board committees – a supervisory board (assuming one is established) may form specialised committees which advise it in specialised areas, such as audit and appointments; such committees may include outside experts. Committees are very rare in start-ups (they presuppose the formation of a supervisory board); and
  • contractually or informally engaged advisors – typically serve as consultants. Conflict of interest and capital maintenance rules should be taken into account insofar as shareholders or members of other corporate bodies act as contractually engaged consultants. In terms of market practice, convertible debt documentation used by the Slovene Enterprise Fund requires the borrower to set up an expert committee (acting in an advisory capacity without remuneration).

Investors looking for decisive influence on the start-up’s business decisions typically take management board seats or install wide-ranging approval and veto rights to the benefit of the shareholders in the articles of association.

Members of a contractual advisory board are typically only liable if the advisory board is requalified as a supervisory board or based on an agreement with the company or the nominating shareholder. It is disputable whether the LLC can compensate its board members (reimbursement of expenses should be permissible).

Members of a contractual advisory board are typically only liable based on an agreement with the company or the nominating shareholder. Since an advisory board is not a corporate body, it has no statutory liability towards the company or its shareholders.

The members of an advisory board may be compensated based on an agreement with the company or the nominating shareholder.

Members of an advisory board may be liable towards the company if they use their influence to the company’s detriment. Their liability also may be established on a contractual basis.
Members of a contractual advisory board (non-employees) may be liable towards third parties only if the advisory board is requalified as a supervisory board and provided that the third party cannot settle its claim from the company.
Advisory board members should be able to be compensated on a contractual basis.

As mentioned above, the establishment of an advisory board is not very common in the Czech legal environment and Czech law does not explicitly regulate their liability towards the company or third parties. Members of the statutory body (e.g. managing directors) will always generally be liable, even for actions taken based on the advice of the advisory board. However, in the case of damage, the company could ask for compensation from the members of the advisory board based on the general provisions.
As regards the compensation of board members, reimbursement of expenses is permissible.

Members of a contractual advisory board are typically only liable if the advisory board is requalified as a supervisory board or based on an agreement with the company. The members of an advisory board may be compensated either based on an agreement with the company (employment contract, civil law contract) or as a member of the supervisory board.

The general rule is that the company is liable towards third parties for all acts and deeds performed or executed by its management during the exercise of their duties and not the directors/managers personally.
Personal liability of the management in relation to third parties may occur in strictly regulated circumstances, in particular in case of insolvency/bankruptcy or tax insolvency, and is premised on the wilful misconduct of the manager in question.
The advisory board may be held liable by the company either based on contractual liability (if a form of contractual arrangement exists) or for tort. In both cases, liability will not be presumed, and the burden of proof will lie with the company. Additional conditions consisting of (i) the existence of a form of guilt (intention or negligence), (ii) damage, and (iii) the link between the advisor’s breach and the damage will also require evidence for liability to be triggered.
As regards compensation, their mandates may or may not be remunerated. The tax implications of such a structure should also be considered.

Supervisory board members are subject to a general statutory duty of care and may be liable to the company or its creditors (in the event of the company’s insolvency).

In principle, external supervisory board committee members as well as external advisors may be liable towards the company on the basis of (i) shadow director liability (typically very rare, since intent to cause harm is required) or (ii) general liability for breach of contract (typically a mandate). External supervisory board committee members are not explicitly liable for breaches of statutory fiduciary duties.

Both the supervisory board members and members of the supervisory board committees (either internal or external) may be remunerated for their work (in addition to reimbursement of their expenses), subject to a decision of the shareholders’ meeting, a provision in the articles of association or, in case of external committee members, supervisory board resolution.

Employee Participation and Vesting

Employee participation programmes are typically structured as virtual share programmes (i.e. a contractual bonus entitlement). However, it is also possible to structure participation programmes using participation rights. The benefit of using participation rights is that the holders can be treated as shareholders with no voting or other minority rights and without special formal requirements (no notarial deed is required).

Employee participation programmes are not typical instruments in Bulgarian start-ups (LLCs). If any, they are typically structured as contractual bonus entitlements. This is partly due to relatively inflexible formalities required to implement a share option plan in an LLC.

Employee participation programmes are typically structured as individual or group incentive plans (e.g. bonus entitlements), gain sharing, profit sharing and employee stock ownership (usually connected with profit sharing).
The benefit of using participation rights is that the holders can be treated as shareholders with no voting or other minority rights.

Employee participation programmes are not typical instruments in Czech start-ups. If any, they are typically structured as virtual share programmes (i.e. a contractual bonus entitlement).

Employee participation programmes are structured either as share programmes (i.e. option pool) or phantom share programmes (i.e. a contractual bonus entitlement). In LLCs, the creation and construction of an option pool is more complicated than in joint-stock companies (e.g. warrants are not permissible in LLCs). It is done by means of a capital increase or share transfer from another shareholder. Employees having phantom shares participate in the profits of the company while having no voting/corporate rights.

The structure depends on the company’s objectives, whether the plan is set to remunerate long-term or short-term performance, and the capital structure (ordinary shares or preferential shares). Stock option plans may be used to reward the long-term performance of employees.
Employee participation programmes are typically structured as virtual share programmes (i.e. a contractual bonus entitlement). However, it is also possible to structure participation programmes using participation rights, which are more common in publicly listed companies (joint-stock companies).

Employee participation programmes in LLCs are typically structured as contractual bonus entitlements. This is partly due to relatively inflexible formalities required to implement a share option plan in an LLC (which is somewhat more straightforward to put in place in a JSC). Founders and early key personnel will in any case already hold equity in the start-up.

Employee profit participation schemes can also be implemented in accordance with the Employee Participation in Profit Sharing Act (Zakon o udeležbi delavcev pri dobičku) in order to qualify for certain tax benefits applicable to such compensation. LLCs can only take advantage of cash-based schemes; share schemes are also available for JSCs. The pay-out per worker is limited to EUR 5,000 per year.

Employee participation programmes should be carefully structured from a tax perspective. In addition, the principal of equal treatment of employees should be considered (i.e. it should be properly documented which employees received which benefits and for what reason) and, in case of an unlawful dismissal, an employee may claim full compensation under the programme, irrespective of whether the payment terms are triggered.

Employee participation programmes should be carefully structured from a tax perspective. In addition, the principle of equal treatment and non-discrimination of employees should be considered. The criteria for the eligibility for performance-based compensation / bonus schemes should ideally be defined and communicated in advance (via the company’s internal acts).

Employee participation programmes should be carefully structured from a tax perspective. Employers may pay out a non-taxable bonus of up to HRK 7,500 (approx. EUR 1,000) annually.
In addition, the principle of equal treatment of employees should be considered (i.e. it should be properly documented which employees received which benefits and for what reason).

Employee participation programmes should be carefully structured from a tax perspective. In addition, the principal of equal treatment of employees should be considered (i.e. it should be properly documented which employees received which benefits and for what reason). Finally, capital markets requirements must be considered (e.g. exemptions from the prospectus publication duty).

Employee participation programmes should be carefully structured from a tax perspective. Furthermore, some of the employee participation programmes are not explicitly regulated under Polish law. All agreements with employees/managers should therefore be precisely drafted to avoid subsequent disputes.

When implementing employee participation programmes, the company should consider any tax implications.
In addition, if the programme is not addressed to all employees, it should be properly documented which employees received which benefits and for what reason (the employees must be given equal treatment).
If a joint-stock company wishes to implement a participation programme, specific corporate aspects should be considered, such as:
• the maximum number of shares acquired (max. 10 % of the subscribed share capital);
• the period during which the acquisition will take place (max. 18 months);
• the minimum and maximum price per share to be paid by the company;
• payment of shares only from distributable profits or available reserves according to the latest financial statements;
• shares acquired by the company for employees must be distributed within 12 months from the acquisition.

Pay-outs under an employee participation programme will be subject to regular personal income tax rates, unless structured in accordance with the criteria of the Employee Participation in Profit Sharing Act (in which case certain tax benefits may apply).

In addition, the principle of equal treatment and non-discrimination of employees should be considered. The criteria for the eligibility for performance-based compensation / bonus schemes should ideally be defined and communicated in advance (via the company’s internal acts).

Founders are typically subject to a reverse vesting arrangement, i.e. they receive/hold their shares from the beginning of the vesting period and during it obtain the right to keep their shares. Therefore, if a founder leaves the company during the vesting period, he/she must transfer a portion of the unvested share to another shareholder in accordance with the vesting terms. The same applies in the case of any equity employee participation programme. In a virtual share programme, a typical (forward) vesting structure is applied, i.e. the beneficiaries receive their entitlement over time during the vesting period. A cliff of 12 months typically applies to vesting terms.

Founders typically are not subject to vesting agreements. Founders retain shares in the company when investors enter the company. There are other protective mechanisms agreed in a shareholders’ or investment agreement aimed at retaining or incentivising the founders, such as bad leaver provisions or a call option for the founders to repurchase their shares from the investor if certain conditions are fulfilled, e.g. the company has reached a minimum internal rate of return agreed with the investor.

Vesting agreements, though not explicitly stipulated in the law, may be contractually entered into with employees of the company. The beneficiaries receive their contractual entitlement to purchase shares over time during the vesting period.

Due to the undeveloped market, founders typically were not subject to vesting agreements.

Founders typically hold (respective fraction) shares from investor entry into the company. Structures where all shares are sold followed by a vesting arrangement being put in place for founders are not common.   The general terms of employee share incentive plans are typically agreed in a shareholders agreement and then implemented in the underlying employment documentation (e.g. bonus schemes).

Founders are typically subject to a reverse vesting arrangement, i.e. they receive/hold their shares from the beginning of the vesting period and during it obtain the right to keep their shares. If a founder leaves the company during the vesting period, he/she must transfer a portion of the unvested share to another shareholder in accordance with the vesting terms. The same applies in the case of any equity employee participation programme. In a virtual share programme, a typical vesting structure is applied, i.e. the beneficiaries receive their entitlement over time during the vesting period. A cliff of 12 months typically applies to vesting terms.

When it comes to founders, immediate vesting is the most common arrangement, i.e. founders will have 100 % ownership of the shares immediately from incorporation.
For company directors or personnel, the stock option incentive is expressly defined in the Fiscal Code as a programme initiated within a company via which the employees or directors of the company or its affiliates are granted the right to purchase stock at a preferential purchase price or to be issued a number of free shares. To benefit from the tax incentives for such stock option plans, a cliff of 12 months typically applies to vesting terms, i.e. the vesting scheme has a one-year cliff, after which the participant may either receive its shares for free or at a discounted rate, or receive  a cash settlement based on the share price. Usually the stock option may be exercised at a price below the market value, thus providing an immediate profit, save for lock-up clauses, which may restrict the beneficiary from selling the shares for a certain period.

Founders are typically subject to a reverse vesting arrangement, i.e. they receive/hold their shares from the beginning of the vesting period and during or at the end of this period obtain the right to keep their shares. Therefore, if a founder leaves the company during the vesting period, he/she must transfer a portion of the unvested share to another shareholder in accordance with the vesting terms. Cliffs vary in duration and may be as long as 36 months for good leavers and even unlimited for bad leavers (e.g. under the Slovene Enterprise Fund template documentation). In a contractual bonus scheme a typical (forward) vesting structure is more commonly applied, i.e. the beneficiaries receive their entitlement over time during the vesting period.

Besides careful tax structuring, investors should consider that vesting agreements may not be enforceable vis-à-vis persons that qualify as “consumers” if there is a (significant) mismatch between the fair value of the shares and the consideration payable in case of a leaver event. The leaver may thus challenge the execution of the leaver option based on laesio enormis.

Vesting agreements should be carefully structured from the tax perspective.

Vesting agreements should be carefully structured from the tax perspective.

Besides careful tax structuring, the wording of the vesting agreement must be as specific as possible. Written form is highly recommended. If funds from joint matrimonial property are used in the participation programme, the consent of the spouses is required.

The tax implications of a vesting agreement should be carefully analysed. Vesting arrangements are usually included in the investment and shareholder agreement, but in the case of employees it is recommended to have bilateral contracts.

Stock Options are non-transferable and do not grant rights attaching to the shares before vesting/exercise (e.g. voting or dividend rights). The persons entitled to be granted stock options must usually satisfy certain eligibility criteria (e.g. seniority, performance indicators, continuous service with the company for a specific period, no disciplinary action). Clawback provisions are customary for such stock options plans.

Restricted stock participants are granted shares at a discounted price from the current market price but are restricted from selling the stock for a certain period or face limitations on the volume of shares that can be sold within a certain timeframe.

From the perspective of Romanian capital markets legislation, certain disclosure requirements towards the Romanian National Securities Commission and the Romanian exchange should be applicable if the Company is also listed on a Romanian stock market.

A 12-month cliff period is required for the stock option, subject to the tax benefits provided under Romanian law (i.e. treatment as a non-taxable benefit upon the offer and the vesting of the options).

Granting of preferential shares is allowed.

As with any contractual arrangement under Slovenian law, a leaver could claim the presence of a (significant) mismatch between the fair value of the shares and the consideration payable in case of a leaver event (laesio enormis). This concept is rarely allowed by the courts, however, and the risk would mainly seem to be present in a unicorn-type scenario.

Any provisions stipulating a compulsory disposal of a share should be recorded in a notarial deed form. Vesting arrangements should be assessed from the tax perspective as well.

Venture Capital Transactions

Six weeks (for follow-up rounds by existing investors) to six months (larger rounds, new investors with due diligence requirements, intense negotiations). Bridge rounds are typically faster.

Six weeks (for follow-up rounds by existing investors) to six months (larger rounds, new investors with due diligence requirements, intense negotiations).

Six weeks (for follow-up rounds by existing investors) to six months (larger rounds, new investors with due diligence requirements, intense negotiations).

Six weeks (for follow-up rounds by existing investors) to six months (larger rounds, new investors with due diligence requirements, intense negotiations). Bridge rounds are typically faster.

Two to six months depending on the investor(s), due diligence, negotiations, necessary approvals, founders, previous investors (existing shareholders).

Depending on the financing round it may take from four weeks (existing investors) up to six to nine months (new investors with due diligence requirements, round A, round B funding). Bridge rounds may take less than six months.

Six weeks (for follow-up rounds by existing investors) to six months (larger rounds, new investors with due diligence requirements, intense negotiations).

Investment agreement, shareholders agreement, articles of association, IP transfer deed, capital increase documentation

Investment agreement, shareholders agreement, share subscription agreement, articles of association, capital increase documentation

Investment agreement, shareholders agreement, articles of association, IP transfer deed, capital increase documentation and share takeover documentation

Investment agreement, shareholders agreement, articles of association, capital increase documentation

Investment agreement, shareholders agreement, articles of association, IP transfer deed, capital increase documentation, statement on shares subscription

Investment agreement / convertible loan agreement, memorandum of understanding, shareholders agreement, articles of association, IP transfer deed, capital increase documentation / stock transfer documentation

Investment agreement, shareholders agreement, articles of association, IP transfer deed, capital increase documentation

Rights and obligations relating to the transfer or acquisition of shares in an LLC require an Austrian notarial deed (Notariatsakt). This means that the investment agreement, shareholders agreement and the subscription agreement need to be recorded as a notarial deed. The same applies to share transfer agreements.

Investment agreement, shareholders agreement, share subscription agreement and articles of association may be signed in simple written form. Any transfer of shares requires notary certified signatures and content (but no notarial deed).

Any transfer of shares and capital increase must be registered with the Bulgarian Commercial Register.

The articles of association, decision on capital increase and share takeover statement will need to be in form of a notarial deed (javnobilježnički akt) or certificated private deed (solemnizacija).
The signature on the IP transfer deed needs to be certified.
Creditors may also want to notarise the investment agreement.

Czech law requires notarised signatures on share transfer agreements (i.e. notarial deed is not necessary). A notarial deed is required for a capital increase. The form of the other documents, such as investment agreement or shareholders agreement, is not stipulated by law, but it is recommended to sign them at least with notarised signatures.

In general, the investment and shareholders agreement could be signed in a simple written form. But in practice it is usually executed with signatures certified by a notary public. The capital increase documentation and shares subscription statements must be in the form of a notarial deed. Share transfer agreements must be executed with signatures certified by a notary public. Capital increases are effective upon registration in the Commercial Register.

No legal formalities will be required for signing the investment agreement, memorandum of understanding, shareholders agreement, articles of association or subscription agreement, as long as the equity funding will consist of cash. However, a stock transfer or share capital increase must be recorded with the Romanian Trade Registry, which involves certain formalities.

Rights and obligations relating to the transfer or acquisition of shares in an LLC require a Slovenian notarial deed (notarski zapis). This means that the investment agreement, shareholders agreement and the subscription agreement need to be recorded as notarial deeds. The same applies to share transfer agreements and the (amended) articles of association. Capital increases are effective upon registration in the Slovenian Business Register (poslovni register).

Except for advisor fees, a capital increase will typically trigger ancillary costs (notary, court registration fees) of EUR 2,000 – 3,000 net. For smaller rounds, fees can be lower.

Except for advisors’ fees, a capital increase will typically trigger ancillary costs – Commercial Register fees are negligible (EUR 15) but translation costs could vary depending on the  number of foreign investors involved. Share transfers will also trigger a notary fee of up to EUR 3,000 (excl. VAT), depending on the materiality interest.

Except for advisor fees, external costs (notary, court registration fees) may amount to anywhere from EUR 1,000 to EUR 4,000.

Except for advisor fees, a capital increase will typically trigger ancillary costs (notary, court registration fees), which are derived from the amount of the increased capital ranging from approximately EUR 800 (in case of an increase of at least EUR 4,000) up to EUR 8,000 net (in case of an increase of more than EUR 800,000). For smaller rounds, fees may be lower.

Except for advisor fees, a capital increase will typically trigger ancillary costs (notary, court registration fees) of EUR 1,000 net (depending on the number of new shareholders and the amount involved). For smaller rounds, fees can be lower.

Except for counsel fees, a capital increase will typically trigger ancillary costs (notary, translation, trade registry fees) of around EUR 500 net. For smaller rounds, fees can be lower.

Except for advisor fees, a capital increase will typically trigger ancillary costs (notary, Business Register fees) of approx. EUR 2,500 – 4,500 (net of VAT). The notarial fees depend on the numbers of documents to be recorded as a notarial deed and on the deal value. For smaller rounds, fees can be lower.

Due to very strict capital maintenance rules, a start-up company may not be able to give representations and warranties in the course of a capital increase. It is thus very common for founders and existing shareholders to give representations and warranties, rather than the start-up company. Existing angel and financial investors typically give only fundamental warranties (regarding their ability to enter into the transaction documents), whereas founders also give operational representations. The liability is typically capped (at a very intensively negotiated level; for founders, typically a multiple of their annual salary is used as a reference for the cap amount).

Representations and warranties are usually given in the investment and shareholders agreement. Usually, the company, the founders and existing shareholders give representations and warranties. Existing angel and financial investors typically give only fundamental warranties (regarding their capacity to enter into the transaction documents and title to shares), whereas the company and the founders also give operational representations. The liability is typically capped (at a very intensively negotiated level).

They are very limited. Usually warranties by shareholders on non-compete / non-solicitation.

Due to capital maintenance rules, a start-up company may not able to give representations and warranties in the course of a capital increase. It is thus very common for founders and existing shareholders to give representations and warranties, rather than the start-up company. Existing angel and financial investors typically give only fundamental warranties (regarding their ability to enter into the transaction documents), whereas founders also give operational/management representations. The liability is typically capped.

Representations and warranties are usually given in the investment and shareholder agreement. Both the start-up, the founders and existing shareholders give representations and warranties. Existing angel and financial investors typically give only fundamental warranties (regarding their ability to enter into the transaction documents), whereas the company and founders also give operational representations. The liability is typically capped (at a very intensively negotiated level; for founders, typically a multiple of their annual salary is used as a reference for the cap amount).

It is usually common for founders to give fundamental warranties (regarding the title on shares and their ability to enter the transaction) and business warranties (related to the general corporate information, contracts and commitments, regulatory and compliance, any litigation or disputes, accounts, assets, IP, IT, insurance, etc.).

Representations and warranties are typically provided by the founders, either in the investment agreement (for equity investments) or in the loan agreement (for convertible loans). Basic (title, no encumbrance) as well as operational representations and warranties are given. In deals involving state-sponsored entities, warranties on tax and general compliance are given.

Austrian limited liability companies have very strict capital maintenance rules that may prohibit them from underwriting liabilities in connection with the capital increase (e.g. under representations and warranties or for cost coverage). Founders and other individuals participating in the transaction may qualify as consumers, in which case consumer laws apply (notably, consumers cannot waive certain statutory rights and claims that would normally be excluded).

Other than the peculiarities set out in the other sections, a share transfer may be registered with the Bulgarian Commercial Register only if there are no unpaid liabilities for remuneration or social or health contributions in respect of the company’s employees for the preceding three years (to this end, a declaration is signed by the company’s managing director and the transferor of the shares).

No special particularities.

Czech limited liability companies have strict capital maintenance rules that may prohibit them from underwriting liabilities in connection with the capital increase (e.g. under representations and warranties or for cost coverage). Founders and other individuals participating in the transaction may qualify as consumers, in which case consumer laws apply (notably, consumers cannot waive certain statutory rights and claims that would normally be excluded).

Some of the legal concepts used in VC transactions are borrowed from the common law system. Thus, some of the constructions cannot be easily reflected in the articles of association and should be only kept in the investment and shareholders agreement, e.g. share classes.

Different rules apply when implementing a capital increase by current shareholders (former investors) or new shareholders (new investors) as regards the registration formalities with the Trade Registry – see above.
Due to the strict capital maintenance rules, any investments made as equity financing may only be recouped by way of dividends and/or loan interest and repayment of the loan. In July 2018 the Romanian Companies Law changed, allowing Romanian companies to distribute dividends on a quarterly basis and not only annually.

For more information, see here

A large part of the investment documentation will typically need to be in the form of a notarial deed, which in many cases requires the Slovenian language to prevail (of note to foreign investors) and increases the transactions costs in a deal.

See also Sections (i) “What representations and warranties are typically given to investors and who would be giving them?” above and (ii) “What legal peculiarities do shareholders of a start-up need to consider?” below.

Liquidation proceeds (typically structured as 1x, non-participating, i.e. the investor has a right to recover its investment before the other shareholders participate in the liquidation proceeds; if sufficient liquidation proceeds exist, all shareholders would receive pro-rata proceeds), information rights, pre-emptive rights, the right to veto a drag-along (i.e. the drag-along right would still require a majority, including the votes of the investor), tag-along right, anti-dilution right (typically calculated based on the weighted average; such rights are typically requested only in post-seed investments), subscription rights, and non-compete / non-solicitation for founders. Registration rights are granted and requested only in larger financing rounds.

Liquidation preference (typically structured as 1x, non-participating, i.e. the investor has a right to recover its investment before the other shareholders participate in the liquidation proceeds; if sufficient liquidation proceeds exist, all shareholders would receive pro-rata proceeds), information rights, pre-emption rights, drag-along right, tag-along right, anti-dilution right, and non-compete / non-solicitation for founders. Certain investors also require veto / approval rights over major business decisions.

Liquidation preference (allowing investors to recover their investment before other shareholders in case of liquidation, merger or sale of more than 50 % of shareholdings or 50 % of a start-up’s asset value), information rights, pre-emptive rights, veto right, tag-along right, anti-dilution right, and non-compete / non-solicitation for founders.

Liquidation proceeds (the articles of association may stipulate, e.g. that the investor has a right to recover its investment before the other shareholders participate in the liquidation proceeds; if sufficient liquidation proceeds exist, all shareholders would receive pro-rata proceeds), information rights, pre-emptive rights, tag-along right, anti-dilution right and subscription rights, and non-compete / non-solicitation for founders.

Liquidation proceeds (typically structured as 1x, non-participating, i.e. the investor has a right to recover its investment before the other shareholders participate in the liquidation proceeds; if sufficient liquidation proceeds exist, all shareholders would receive pro-rata proceeds), information rights, pre-emptive rights, drag-along right (i.e. the drag-along right would still require a majority, including the votes of the investor), tag-along right, anti-dilution right (typically calculated based on the weighted average; such rights are typically requested only in post-seed investments), subscription rights, and non-compete / non-solicitation for founders.

Liquidation proceeds typically may be implemented by means of the established contribution to benefits and losses (i.e. when concluding the shareholder agreement investors, as minority shareholders, may negotiate to have the profit participation higher than the loss participation, provided the difference is reasonable under the circumstances and is expressly provided in the agreement).
Minority rights may also include information rights, pre-emptive rights, the right to veto a drag-along (i.e. share transfers require the vote of a majority of shareholders holding three-quarters of the share capital, which may include the vote of the investor if he/she/it holds at least 25 % of the share capital), and tag-along rights. Anti-dilution rights may only be enforced if expressly provided in the shareholders agreement, based on a contractual obligation. Non-compete and non-solicitation for founders may also be provided in the shareholders agreement and enforced contractually.
Also, in 2015 Romania adopted a new law (no. 120/2015) on stimulating individual business angels, which aims to grant certain tax benefits for individual angel investors, such as exempting them from dividend income tax for three years from the acquisition of shares in the LLC. However, certain conditions must be met to benefit from such tax incentives.

Liquidation preference (typically structured as 1x, non-participating, i.e. the investor has a right to recover its investment before the other shareholders participate in the liquidation proceeds; if sufficient liquidation proceeds exist, all shareholders would receive pro-rata proceeds), information rights, pre-emption rights, flip-over right, tag-along right, anti-dilution right, and non-compete / non-solicitation for founders. Certain investors also require veto / approval rights over major business decisions.

EKEG: Loans granted by shareholders with a participation in the share capital of at least 25 % or a controlling influence (e.g. through voting rights) to start-ups that are in financial crisis may fall within the scope of the Austrian Equity Compensation Law (EKEG). The applicability of the EKEG would prohibit any repayments of the loan during such a crisis.
Capital maintenance rules: Austrian LLCs are subject to very strict capital maintenance rules that essentially limit payments of the LLC to its shareholders to dividends and arm’s length transactions (consequences of a violation: transactions are null and void, at least partly; claw-back risk; liability of management; tax liabilities).
Compliance with grant conditions: Start-ups are sometimes provided with grants from public institutions, such as the Austrian federal promotional bank (aws) and the Austrian Research Promotion Agency. Grant schemes commonly impose strict conditions throughout the funding period and sometimes afterwards. These can include minimum requirements for subsequent financings, such as prohibited repayment.
Unclear qualification: Depending on the structure, it may be difficult to clearly qualify the participation right or silent partnership for tax and accounting purposes. This uncertainty may lead to tax risks and accounting errors.

For more information, see here

Capital maintenance rules: LLCs are subject to capital maintenance rules that essentially limit payments of the LLC to its shareholders to dividends and arm’s length transactions (consequences of a violation: liability of management and tax liabilities).

Compliance with grant conditions: Start-ups are sometimes provided with grants from public institutions. Grant schemes commonly impose strict conditions throughout the funding period and sometimes afterwards. These can include minimum requirements for subsequent financings, such as prohibited repayment.

Lack of regulations: Some of the legal constructions used in VC transactions are not regulated under Bulgarian law. Thus, the investment and shareholders agreement should be carefully drafted and negotiated to reflect the parties’ will.

Given the stricter legal rules applicable to transfers of shares in an LLC, it may prove difficult to enforce various options (e.g. call options, drag along options).

Shareholders also acting as members of the management board do not need to be employed with a start-up; however, they still need to have pension and health insurance. If they do not have it on another basis (e.g. employment with another employer) they will need to enter into employment or pay insurance by themselves.
Company name: Must be in Croatian or another official EU language, written in Latin letters and/or Arabic numerals. The company name may comprise foreign words if they comprise a trademark registered in Croatia or if they are usual in the Croatian language, there is no corresponding Croatian word or they concern a “dead” language (e.g. Latin, Greek).
Stamp: Croatian companies are still obliged to use a stamp.
Capital maintenance rules
: LLCs are subject to very strict capital maintenance rules that essentially limit payments of the LLC to its shareholders to dividends (i.e. profit above share capital) and arm’s length transactions (consequences of a violation: transactions are null and void, at least partly; claw-back risk; liability of management; tax liabilities).

Capital maintenance rules: Czech LLCs are subject to capital maintenance rules that essentially limit payments of the LLC to its shareholders to dividends and arm’s length transactions (consequences of a violation: transactions are null and void, at least partly; claw-back risk; liability of management; tax liabilities).
Unclear qualification: Depending on the structure, it may be difficult to clearly qualify the participation right or silent partnership for tax and accounting purposes. This uncertainty may lead to tax risks and accounting errors.

Compliance with grant conditions: Start-ups are sometimes provided with grants from public institutions. Grant schemes commonly impose strict conditions throughout the funding period and sometimes afterwards. These can include minimum requirements for subsequent financings, such as prohibited repayment.
Unclear qualification: Depending on the structure, it may be difficult to clearly qualify the employee participation programmes for tax and accounting purposes. This uncertainty may lead to tax risks and accounting errors.
Lack of regulations: Some of the legal constructions used in VC transactions are not regulated under Polish law. Thus, the investment and shareholders agreement should be carefully drafted and negotiated to reflect the parties’ will.

Capital maintenance rules: Investors can recoup their equity funding through quarterly or annual dividends, arm’s length interest rates and reimbursements. Arm’s length intergroup transactions may also be considered (consequences of a violation: transactions are null and void; liability of management; tax liability).

If start-ups apply for national and/or European funds/grants, the strict regulations governing such programmes must be observed (e.g. the programme for stimulating the establishment of SMEs “Start-up Nation Romania”). Such programmes usually include certain requirements to be met before and after financing and may also include minimum requirements for subsequent financing.

Tax implications must always be observed. For example, when incorporating the company, there are certain benefits granted for a new LLC, such as the exemption of the employer from paying certain social contributions (retirement – CAS) for up to four employees; however, there are important limitations to be considered as well.

Given the stricter legal rules applicable to transfers of shares in an LLC, enforcement of various options (e.g. call options, drag along options) may prove cumbersome.

Equitable subordination: In the event of insolvency, a shareholder cannot claim repayment of the loan extended while the LLC was in crisis (i.e. “when a diligent businessperson would have provided equity financing”); for JSCs the rule applies to 25 % shareholders. Since many start-ups are undercapitalised (and may thus qualify as being “in crisis”), shareholders should carefully assess the viability of early shareholder-provided debt financing.

Capital maintenance rules: Slovenian LLCs are not permitted to pay shareholders assets in excess of the LLC’s registered capital and restricted reserves (osnovni kapital in vezane rezerve). Payments exceeding this limit may qualify as covert profit distribution (prikrito izplačilo dobička) and deemed null and void. While this regime is more forgiving than the one applicable to JSCs, the recommendable route is nevertheless to keep all dealings between the LLC and its shareholders (in particular any involving upstream transfers of value) at arms’ length. Tax considerations play a role as well.

Compliance with grant conditions: Start-ups are sometimes provided with grants or investments from state-sponsored institutions, in particular the Slovene Enterprise Fund and SID Banka. Grant and investment schemes commonly impose strict conditions throughout the funding period and sometimes afterwards.

Limitations on serial company formation and certain founders: In an effort to combat creditor fraud and tax abuses, the Slovenian Companies Act (Zakon o gospodarskih družbah; ZGD-1) limits certain persons from acting as shareholders or founders of companies. Such persons include those with a history of tax abuses and white-collar criminal convictions, but also former shareholders of an LLC deleted from the Business Register without liquidation and a person who founded a different LLC or acquired a share in an LLC three months prior to the newly attempted company formation.

Direct shareholders of an LLC are registered with the Austrian Commercial Register (Firmenbuch) with their name and street address and their participation in the company. Except for the articles of association and the capital increase documentation, no transaction documentation should become publicly available.

Direct shareholders of an LLC are registered with the Bulgarian Commercial Register with their name and country of residence/incorporation and their participation in the company. Except for the articles of association and the capital increase documentation, no transaction documentation should become publicly available.

Direct shareholders of an LLC are registered with the Court Register (sudski registar) with their (company) name, address and personal identification number issued by the Tax Authority. Their participation in a company is not published, but it may be accessed at the Court Register upon request. Except for the articles of association and the capital increase documentation, no financing documentation should become publicly available.

Direct shareholders of an LLC are registered in the Czech Commercial Register (obchodní rejstřík) with their name and street address and their participation in the company. Except for the articles of association and the capital increase documentation, no transaction documentation should become publicly available.

Direct shareholders having more than 10 % in the share capital of an LLC are registered with the Polish Commercial Register (Krajowy Rejestr Sądowy) with their name and their participation in the company. Except for the articles of association and the capital increase documentation, no transaction documentation should become publicly available.

Shareholders in an LLC must be registered with the Romanian Trade Registry and such information is part of public records. Except for the articles of association and the capital increase documentation (corporate resolutions), no transaction documentation should become publicly available.

Direct shareholders of an LLC are registered with the Slovenian Business Register (poslovni register) with their name and street address and their participation in the company. Except for the articles of association and the capital increase documentation, no transaction documentation should become publicly available.

Exits

Pre-emptive right, drag-along right, tag-along right and to a minor extent (i.e. in later stages only) registration rights. Founders are typically subject to a lock-up. 1-2x liquidation preferences (non-participating) are quite common.

Pre-emptive right, drag-along right, tag-along right. Founders are typically subject to a lock-up. 1-2x liquidation preferences (non-participating) are quite common.

Pre-emptive right, drag-along right, tag-along right.

Pre-emptive right, drag-along right, tag-along right. Founders are typically subject to a lock-up.

Pre-emptive right, drag-along right, tag-along right. Founders are typically subject to a lock-up. 1-2x liquidation preferences (non-participating) are quite common.

Pre-emptive rights, call option, liquidation preference, drag-along or tag-along rights. Founders are typically also subject to a lock-up period.

Pre-emption right, drag-along right, tag-along right. Founders are typically subject to a lock-up. 1x liquidation preferences (non-participating) are common.

Exits are typically structured either as a share deal (sale of all shares in the start-up) or asset deal (sale of all assets of the start-up). Mergers and IPOs are rare.

Exits are typically structured either as a share deal (sale of all shares in the start-up) or asset deal (sale of all assets of the start-up). Mergers and IPOs are rare.

Asset deal (sale of all or a main part of the assets of the start-up) or a share deal (sale of all shares in the start-up).

Exits are typically structured either as a share deal (sale of all shares in the start-up) or asset deal (sale of all assets of the start-up). Mergers and IPOs are rare.

Exits are typically structured either as a share deal (sale of all shares in the start-up) or asset deal (sale of all assets of the start-up). Mergers and IPOs are rare.

Usually a company’s exit is structured as a share deal (sale of shares to the other shareholders or to a third party) or asset deal (sale of all the company’s assets). Mergers and IPOs are rare.

Exits are typically structured either as a share deal (sale of all shares in the start-up) or, less commonly, asset deal (sale of all assets of the start-up). Mergers and IPOs are rare.

Relocation of the main entity to a different jurisdiction pre-exit is not unheard of.

Any agreements governing the transfer of shares in an LLC, as well as any agreements on the envisaged transfer of shares (e.g. call-options / put-options), need to be recorded in the form of an Austrian notarial deed (Notariatsakt).

Any agreements governing the transfer of shares in an LLC or transfer of the business as a going concern must be executed with (i) notarised signatures of both the transferor and the transferee, and (ii) notary certified content. To be effective vis-a-vis third parties, the transfer agreement, along with other documents, must be registered with the Bulgarian Commercial Register.

The form of asset deals depends on the subject of the transfer (e.g. IP, real estate).

Share transfer agreements need to be in the form of a notarial deed (javnobilježnički akt) or certificated private deed (solemnizacija). The form of asset deals depends on the subject of transfer (e.g. IP, real estate).

Any agreements governing the transfer of shares in an LLC must include notarised signatures of both the transferor and the transferee.

Any agreements governing the transfer of shares in an LLC need to be executed with the signatures certified by the notary public. The capital increase documentation and the shares subscription statements need to be in the form of a Polish notarial deed.

The agreements governing the transfer of shares in an LLC do not require any formalities other than the parties’ signatures. However, for a share transfer to be effective and enforceable against third parties (Romanian IRS, company creditors, etc.), the transaction must be registered with the Trade Registry Office.

When the share transfer takes place between shareholders, the transfer may be implemented swiftly. Conversely, when the share transfer involves third parties, the registration formalities with the Trade Registry are more cumbersome and effective transfer of the shares is conditioned upon absence of opposition from creditors, or final dismissal of such opposition. Implementation of a share transfer in favour of a non-shareholder will take between two months (if no opposition is lodged) and six to 12 months (if an opposition is lodged).

Any agreements governing the transfer of shares in an LLC, as well as any agreements on the envisaged transfer of shares (e.g. call-options / put-options), need to be recorded in the form of a Slovenian notarial deed (notarski zapis). Structures employing a long-form share purchase agreement in a non-notarial form (containing the majority of the commercial deal terms) with a notarial deed short-form transfer document (used for registration formalities) have also been used on the market in the past years.

Registration in the Slovenian Business Register (poslovni register) is required to achieve the full effects of the transfer of share in an LLC. This is typically done as a matter of course by the notary involved with the transfer documentation.

Mădălina Neagu

Mădălina Neagu

Bucharest

Maximilian Nutz

Maximilian Nutz

Vienna

Katerina Kaloyanova

Katerina Kaloyanova

Sofia

Rudolf Bicek

Rudolf Bicek

Prague

Jurij Lampic

Jurij Lampic

Ljubljana

Thomas Kulnigg

Thomas Kulnigg

Vienna

Peter Gorše

Peter Gorše

Ljubljana

Vid Kobe

Vid Kobe

Ljubljana

Paula Weronika Kapica

Paula Weronika Kapica

Warsaw

Ozren Kobsa

Ozren Kobsa

Zagreb

Vladimir Cizek

Vladimir Cizek

Czech Republic

v.cizek@schoenherr.eu