Are there specific legal requirements or preferences regarding the choice of entity and/or equity structure for early-stage businesses that are seeking venture capital funding in the jurisdiction?
When establishing an early-stage business, the choice of legal structure not only establishes the foundation for future entrepreneurial activities, but also impacts, among other things, tax and accounting responsibilities, the formalities required for the formation process, and the way investors or financial institutions evaluate the company. A basic distinction is made between partnerships and corporations.
Partnerships, on one hand, are characterized by the fact that they can be set up easily and with little bureaucratic and financial effort. Since a partnership is an association of individuals, the founding members are, however, basically liable with their private assets which is one of the reasons that partnerships are the exception within the German venture capital environment. Another reason is that the participation of an investor, which itself is structured as a tax transparent investment fund, in a partnership might also negatively impact the tax status of such investor.
On the other hand, a limited corporation is only liable with its assets. In Germany, the most widespread limited corporation in the early start-up phase is the limited liability company (Gesellschaft mit beschränkter Haftung) with a required share capital of EUR 25,000.00. The main advantage of the limited liability company is the limited liability of its individual shareholders. The shareholders are not liable with their private assets if the company suffers difficulties, but only in the amount of the capital contribution or the amount of the company’s assets. In addition, such legal form simplifies the collaboration with external investors as the share capital is split in transferable shares with a nominal value of EUR 1.00 each.
For founders who pursue an initial public offering in the future, there is also the option of setting up a German stock corporation (Aktiengesellschaft). However, in Germany a stock cooperation involves from scratch increased organizational and legal efforts for the founding team. In addition, the share capital of a German stock cooperation is at least EUR 50,000.00. Therefore, the formation of German stock corporations is the exception rather than the rule. If the desire to go public arises after the founding process, a German limited liability company can also be converted into a German stock corporation by way of a change of legal form without creating tax disadvantages.
What are the principal legal documents for a venture capital equity investment in the jurisdiction and are any of them publicly filed or otherwise available to the public?
In connection with a venture capital financing, the investment agreement, the shareholders’ agreement and the articles of association form the core documentation. The investment and shareholders’ agreements create the basis for the investor’s financial investment and participation in the respective company and consist of two independent parts, the investment agreement, which contains the agreements on the investor’s financial participation in the start-up, as well as the shareholders’ agreement, which regulates the future cooperation between the founding shareholder(s) and investor(s) as (future) shareholders of the company. The two parts are either combined into one agreement or concluded as two separate agreements. If the target is a German limited liability company pursuant to the German Limited Liability Companies Act (GmbHG), usually, the signing of the investment documentation requires notarization by a public notary, among others, due to the agreed provisions regarding the transfer of shares in the company. This may lead to substantial costs depending on the investment sum.
With respect to the company’s articles of association, the independent regulatory content of the articles of association is limited because the material commercial and legal agreements between the founding shareholder(s) and venture capital investors are regulated in the investment and shareholders’ agreement. Therefore, only those provisions having mandatory corporate law character are typically included in the company’s articles of association. Nevertheless, the articles of association are a mandatory part of every venture capital investment documentation as it is necessary to align the articles of association with the investment and shareholders’ agreement. Furthermore, accompanying documents such as for example managing director service contracts, rules of procedure for the management and/or an advisory board and agreements on (virtual) employee incentive schemes are regularly negotiated in the course of a venture capital funding.
With regard to publication requirements the investment and shareholders’ agreements (and the other accompanying documents) do not have to be published in the company’s commercial register. Therefore, the respective regulations contained in investment and shareholders’ agreements remain confidential and cannot be reviewed by third parties. The articles of association, by contrast, are available for public inspection in their most recent version in the company’s commercial register.
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The Legal 500 Country Comparative Guides 2025_Venture Capital_Chapter Germany
This article was first published in: The Legal 500 Country Comparative Guide Venture Capital (last updated: March 2025)
