Venture Capital 2024 Comparisons

Venture capital (VC) and financing for start-ups enjoyed a solid year in 2023, with larger volumes than 2019 and 2020 but an overall decline compared to the booming post-Covid years (2021 and 2022).

There were 715 fundraisings on the French market, representing EUR8.3 billion. The most significant included:

• Verkor (EUR850 million);
• Mistal AI (EUR385 million);
• Driveco (EUR250 million);
• Ynsect (EUR160 million); and
• Amolyt Pharma (EUR130 million).

In terms of exits, 2023 was an active year. There were 405 exits and the volume of total exit value (EUR5.3 billion) was stable.

For IPOs, 2023 was slower than 2022, with six IPOs for a total amount of EUR291.3 billion.

The following key trends were observed in 2023:

• a decrease of the number of large rounds (over EUR50 million) and late-stage financings;
• a stabilisation or decline in valuations;
• a significant number of early-stage financings (pre-seed and seed); and
• a shift in key industries (with a strong focus on AI).

France remains the main VC market in Europe, ranking ahead of the UK and Germany, and continues to attract international investments.

Certain start-ups (particularly in hardware, or with an industrial angle) are turning to alternative financing methods (structured financing via asset companies,for example).

The year marked a shift in key industries for VC, with a significant push towards Artificial Intelligence companies (Mistral AI) and a trend towards industrialisation (notably for green tech companies, such as Verkor and Qarnot Computing).

Software, SaaS, BtoB tools and biotech remain attractive VC industries. Some industries, such as Fintech, crypto and internet services, have been less active.

Venture capital fund (VC Fund) structures differ according to the type of investor involved. For retail investors, the most common structures are:

• Venture capital funds (Fonds Commun de Placement à Risque – FCPR);
• Innovation common investment funds (Fonds Commun de Placement dans l’Innovation – FCPI); and
• Regional investment funds (Fonds d’Investissement de Proximité – FIP).

For institutional investors, the most common structures are:

• Professional private equity funds (Fonds Professionel de Capital Investissement – FPCI); and
• French limited partnership (Société de Libre Partenariat – SLP). It should be noted that funds structured in the form of SLPs are the most commonly used to date.

These funds must be managed either by:

• a French management company approved by the French Autorité des Marchés Financiers (AMF) and authorised to act as such under Directive 2011/61/EU (AIFM Directive); or
• a management company authorised in the EU that also complies with the requirements of the AIFM Directive. These management companies can be full-scope alternative investment fund managers (AIFM) (as defined by the AIFM Directive) or sub-threshold AIFMs. (In the latter case, most of the regulatory requirements of the AIFM Directive still apply by virtue of French local regulatory rules.)

Other types of investment vehicles include limited-liability companies used by professional investors and club deals formed by business angels.

The corporate documentation generally established to govern the affairs of the VC Fund comprises by-laws, prospectuses and subscription agreements.

As per the contractual documentation, there is also a shareholders’ agreement and side letters. The governing documents of a retail fund (FCPR, FCPI or FIP) must comply with detailed French law requirements for the fund to be approved by the AMF. Therefore, investors in a retail fund generally do not have the flexibility to negotiate the terms or to request protection in addition to that already provided by the by-laws.

The “Funds Principals” of VC funds mainly participate in the economics of these funds through carried interest mechanisms. Carried interest remunerates the performance of the management team in selecting potentially attractive investment opportunities and aligns the interests of investors when it comes to realising the expected capital gains on the sale of these investments.

In France, carried interest is structured through the subscription of specific fund units or shares, which generally represent one (1)% of the size of the fund. Carried interest units or shares are subscribed by the management company, its employees or its directors, in return for a capital investment. This capital investment is released pari passu with the fund’s other investors.

According to the established practice, the share of the capital gain attached to carried interest units or shares is generally twenty (20)% of the total capital gain for a direct fund, after payment of a priority return to the investors.

The carried interest mechanism in France is subject to special tax treatment. Under this special tax treatment, distributions and gains made by the directors and employees of a management company from holding carried interest units or shares in a fund are subject to a taxation as capital gains (plus-values) rather than as wages and salaries (traitements et salaires). The relationship between the holders of carried interest units or shares and the management company is the subject of a “vesting agreement”.

The purpose of this agreement is to define the terms and conditions under which holders of carried interest units or shares will be required to sell such units or shares in the event of voluntary or involuntary termination of their employment contract. The vesting agreement includes a schedule for determining the portion of carried interest that the holder may retain in the event of voluntary or involuntary termination. The vesting agreement also covers cases of good leaver and bad leaver.

In addition, the governing documents of VC funds that are dedicated to professional/non-retail investors are more frequently negotiated by investors because French laws and regulations allow the flexibility for a wide variety of terms. lnvestors negotiate provisions that are commonly sought by investors in global PE funds, for example:

• key persons and change of control provisions;
• fault and no-fault removal of the management company;
• limitations relating to raising a successor fund;
• management and other fees;
• reporting and environmental, social and governance (ESG) obligations; and
• advisory committee membership.

VC Funds open to retail investors (FCPRs, FCPIs and FIPs) must be authorised by the AMF before both:

• formal establishment of the entity; and
• marketing its interests to prospective investors.

VC Funds limited to non-retail/professional investors (FPCIs and SLPs) must be notified to the AMF within one month after their formation. Since the implementation of the AIFM Directive, the marketing of interests in a VC fund must comply with French regulations relating to:

• public offerings (VC funds that are offered to the public require the AMF’s prior approval of the offering terms);
• solicitation (VC funds must not solicit if they are not approved for marketing either through a marketing passport or under the French local marketing regime); and
• marketing regime (the AMF’s prior approval is necessary for a VC fund to benefit from the marketing passport or to be authorised to market under the French local marketing regime).

The available, limited, private placement exemptions are either:

• contact with an investor on a reverse solicitation basis;
• contacts with managers of funds authorised to operate in France (either by the AMF or through an EU passport) if the VC fund is marketed as an eligible investment for the funds managed by those managers; or
• contact with managers of third-party accounts authorised to operate in France (either by the AMF or through an EU passport) if the VC fund is marketed as an eligible investment for the portfolio managed by those managers.

“Corporate ventures” are the only types of structure that are not regulated as such, and involve a single institutional investor. These funds are often set up by large groups and specialise in the group’s sector of activity.

Depending on the type of investor, the regulatory requirements are more or less flexible. Retail investors are entitled to a higher level of protection than institutional investors. VC Funds must in any case comply with the rules applicable to the type of fund set up, whether these are the relative rules contained in the French Monetary and Financial Code or the rules established by the AMF for each type of VC Fund. The rules governing the AIFM and the depositary should also apply.

Venture capital initiatives are strongly supported by the French public authorities, and this market is expanding quickly. This is the case, for example, with Bpifrance (the French public investment bank), which finances and/or structures a large number of venture capital funds to enable the growth of developing companies in the fields of innovation (Bpifrance is behind around thirty (30)% of the amounts invested in seed and venture capital in France).

The “Tibi” initiative should also be highlighted. The aim of the Tibi label funds is to develop the financing of tomorrow’s technological leaders while promoting the decarbonisation of the economy. Institutional investors, including the Caisse des Dépôts et Consignations and Bpifrance, have committed to investing in these funds. To date, EUR7 billion has been committed.

In 2023, 29 new investment funds dedicated to the innovation sector were created and raised a total of EUR5.26 billion (versus 28 funds raising EUR4.5 billion in 2022). There are notably four (4) first-time funds (ie, the first investment vehicle of a management company): Emblem, Ovni Capital, Polytechnique Ventures and Reflexion Capital.

For early-stage companies, VC investors conduct red-flag legal due diligence, in addition to financial and business due diligence, plus, sometimes, a technical due diligence and background check of the founders. The legal due diligence covers the following.

• corporate law (including status of the founders) and capitalisation table;
• employment law;
• intellectual property law;
• data protection law (compliance with General Data Protection Regulation ((EU) 679/2016) (GDPR) or similar regulation); and
• high level review of top 10/20 contracts.

For larger financing rounds, due diligence may also cover the following additional topics.

• commercial/competition law;
• financial law;
• regulatory law; and
• tax law.

New financing rounds usually take between one and two months from execution of the term sheet, depending on due diligence, structure of the investment and negotiations.

Usually, and for the sake of efficiency, counsels to the company (who also advise the founders) are in charge of leading negotiations and coordinating the various parties involved, including:

• new investors (and their counsels, generally appointed by the lead investor);
• existing investors (and their counsels, in particular in case of reinvestment); and
• business angels/employees (who generally have no counsel).

Fees of the participating investors’ counsels are usually re-invoiced to the company (within a certain cap negotiated in the term sheet).

Although French corporate rules provide that a capital increase may be voted by a 50% or a two-thirds majority of the shareholders, the structuring of the deal and the rights requested by investors (notably liquidation preference and drag-along rights) generally require the prior consent of all (or virtually all) holders of securities (including ESOP – Employee Stock Ownership Plan – holders). The company’s corporate and contractual structure must be organised accordingly from the early stage of financings.

In most cases, investors subscribe to preferred shares with certain rights (notably liquidation preference rights, anti-dilution ratchet rights and information/audit rights). For major investors, preferred rights may also include the right to appoint board member(s) and veto rights on key decisions.

Preferred rights may be defined by either: (i) the certificate of incorporation (“statutory preferred shares”) or (ii) the shareholders’ agreement (“ordinary shares labelled as preferred”).

Statutory Preferred Shares

The preferred rights are reflected in both the shareholders’ agreement and the certificate of incorporation. However, the issuance of such preferred shares requires that:

• a court-appointed auditor (or an auditor appointed unanimously by the shareholders) delivers a report to the shareholders on the impact of the issuance of statutory preferred shares; and
• in most of the cases, that the holders of each type of securities giving access to the share capital give consent to such issuance of a new category of preferred shares.

This process generates delays (and costs) and is only recommended if the company already has pre-existing statutory preferred shares. In addition, statutory preferred shares are not available to individuals eligible for certain beneficiary tax regimes in France (in particular the plan d’épargne en actions – PEA).

Ordinary Shares Labelled as Preferred

Investors’ rights are solely provided in the shareholders’ agreement, not in the certificate of incorporation. There’s a stronger trend in the market favouring this structuring, even in the case of larger financings.

Finally, please note that certain early-stage startup can issue a “BSA AIR” (warrant), equivalent to a SAFE (Simple Agreement for Future Equity) in the US, with a cap, floor and/or discount over the next round to be negotiated. Please note that, unlike a bond or note, there can be no cash repayment of BSA AIR investment in downside events (absence of financing or liquidity).

Key documents in VC transactions are as follows:

• Term sheet, generally non-binding, drafted by the lead new investors and executed by the company and, as the case may be, the founders and the main existing investors. One- to eight-page documents detailing the main conditions of the transaction and the provisions of the shareholders’ agreement. The company usually grants a three-to-six-week exclusivity period for new investors to complete the transaction.
• Main shareholders’ agreement executed by major investors and the founders detailing governance (composition and organisation rules of the board; veto rights on certain decisions; information and audit rights); share transfer rules (right of first offer and tag-along rights); security issuance rules (priority or pre-emption right in new issue); liquidity (drag-along rights and liquidity process); liquidation preference; and specific provisions for the founders (leaver call option, non-solicit, non-compete and IP provisions).
• Short-form shareholders’ agreement executed by minority investors and ESOP holders with limited rights (full tag-along rights) and key undertakings (right of first refusal to the benefit of main investors/active founders, drag-along rights and acknowledgement of liquidity process) and liquidation preference, consistent with the main shareholders’ agreement.
• Representations and warranties agreement providing for representations given by the founders and/or the company, and indemnification mechanism (generally through transfer or issuance of shares).
• Investment agreement detailing the structure of the transaction; generally executed for larger transactions or complex investments (with several tranches or conditions precedent); the investment agreement usually includes the above-mentioned representations and warranties.
• Shareholders’ resolutions approving the transaction, the issuance of shares, the ESOP and appointing board members (generally through shareholders unanimous decisions deed).
• Updated bylaws.
• Subscription forms executed by each subscriber.

Contrary to other VC markets, France does not have standardised investments documents even if there is a strong market practice on the main terms of the investments. Some projects have been developed to provide guidelines to founders and investors by certain think tanks and law firms without being prevalent on the market.

“Downside scenario” protections include the following.

• A ratchet right entitling the investors, in the event of a down-round within a two- to five-year period from financing closing date, to benefit from additional shares reducing, therefore, price per share of their investment. This ratchet is usually structured through warrants attached to the shares (but can also be structured as an adjustment to the conversion ratio of preferred shares). Ratchet rights generally use a weighted average formula and can include a “pay to play” condition.
• Liquidation preference, entitling the investors to be repaid for their investment before the other shareholders if a liquidation, sale or merger of the company takes place:
1. Non-participating liquidation preference – investors receive the maximum between their pro rata of the total proceeds and their investment amount (1x non-participating, which is the most common protection); a certain multiple of investment can also be granted (eg, 2x non-participating).
2. Participating liquidation preference – investors receive their investment amount plus their pro rata of the remaining total proceed (if any).

Please note that an ordinary shareholders cannot be completely stripped of all their financial rights. French market practice has imposed that all shareholders receive a minimal amount (even when proceeds are lower than the investment amount). This amount is generally equal to the nominal value of the shares or to a percentage of the proceeds (between 1% and 10%) and is to be allocated prior to the liquidation preference.

• Anti-dilution rights in the event of a new share capital increase. Investors will benefit from an anti-dilution protection entitling them to maintain their percentage of shareholders and may also negotiate a priority right over future financings.

Founders remain in charge of the management of the company, but investors usually negotiate the following rights:

• the right to appoint one or more board members or observers;
• the right to convey board meetings and shareholders meetings;
• veto rights through a board-qualified majority of the board (ie, the majority including the investor board member) on certain operational decisions including approval of annual budget, capex over a threshold, compensation of the founders, related-party transactions, appointment/removal of key employees, sale of assets, ESOP, etc.;
• veto rights through the investors’ majority (ie, approval of a percentage of the preferred shares) on certain protective decisions (number of board members, distribution of dividends etc.);
• the right to dismiss, with or without cause, the officers of the company (above a certain shareholder threshold); and
• audit and information rights.

In the context of a financing, representations and warranties on the company and its subsidiaries covering a large scope (corporate, capitalisation table, IP, employment, tax, insurance, accounts, financing, contracts etc.) are granted by the founders (generally at an early stage) and/or the company.

The following limitations are usually provided:

• information fairly disclosed in the agreement (no reference to data room);
• time limitations: between 12 and 24 months, except for tax and certain fundamental representations; and
• financial limitations:
1. de minimis (ie, the minimum amount of damages suffered either by the investor or by the company) generally equal to 0.1% of the invested amount;
2. the threshold (ie, the minimum amount of cumulated damages entitling the investor to claim) is equal to 1% of the invested amount; and
3. the cap (ie, the maximum amount that may be claimed by the investor) is equal to the invested amount (if founders are warrantors, then the cap for them is equal to one or two times their annual salary).

Indemnification can be paid in cash or in shares of the company, usually at the sole decision of the warrantor.

The French government provides a variety of programmes to encourage equity financing in growth companies. These programmes are designed to reduce risk and increase the appeal of investing in startups. They include direct financial support, tax incentives and special statuses that confer tax advantages. The landscape of incentives is subject to change, reflecting the government’s ongoing commitment to fostering a dynamic and innovative business environment. The complexity of these programmes and their application to specific situations can be significant, and the details of each are subject to specific rules and conditions.

Such programmes include the following.

• Bpifrance, the French public investment bank, which is a key player in this ecosystem. It offers a range of financial instruments and support services for start-ups and SMEs (small and medium-sized enterprises), including direct equity investments, co-investments, investment as LP in VC fund and various loans and guarantee schemes.
• The Young Innovative Company Status (JEI – Jeune Entreprise Innovante). Companies that qualify for JEI status can benefit from tax incentives (notably exemptions from corporate income tax and local taxes for a certain period) and social charge exemptions (partial or total exemptions from employer social security contributions on salaries paid to researchers and developers).
• Investment Tax Credits – France offers various tax credits to incentivise investment in growth companies. One example is the “Réduction d’impôt pour investissement dans les PME” (Tax Reduction for Investment in SMEs), which provides personal income tax reductions for individuals investing in small and medium-sized businesses. The French Parliament very recently introduced (Finance Act for 2024 voted in December 2023) additional tax credits to incentivise individuals to invest in Young Innovative Companies (jeunes entreprises innovantes) or Particularly Young Innovative Companies (jeunes entreprises particulièrement innovantes) –  see above. There are annual investment caps and overall limits on the tax reduction amount.
• The Research Tax Credit (CIR – Crédit d’Impôt Recherche) tax incentive designed to encourage companies to invest in research and development activities within France. It allows eligible businesses to claim a tax credit on their R&D expenditures, which can be used to offset corporate tax liabilities or, in some cases, be reimbursed if the credit exceeds the tax due. The credit is calculated as a percentage of qualifying R&D costs, with different rates applicable depending on the size of the company and the amount spent. The CIR is a key component of France’s policy to foster innovation and support the competitiveness of its industries on a global scale, and has been fairly stable over the past few years.
• The Innovation Tax Credit (CII – Crédit d’Impôt Innovation), which is a tax credit aimed at supporting SMEs that engage in innovative projects. It is similar to the above-mentioned Research Tax Credit (CIR – Crédit d’Impôt Recherche), but specifically targets innovation expenses.
• The French IP box regime allows French companies developing eligible IP assets (eg, patents, patentable inventions, software protected by copyrights, etc.) to benefit, under certain conditions, from a reduced corporate income tax rate of 10% applying to the net income deriving from the licensing or transfer of said assets.

Investment in growth/start-up/VC fund portfolio companies may entail certain tax advantages for both French individuals and entities subject to corporate income tax (CIT).

French individuals may in that respect benefit from certain tax incentives, under certain conditions, upon investment or exit of growth/start-up/VC fund portfolio companies, as follows.

• Upon entry – specific personal income tax reductions for eligible subscriptions in the share capital of SME (“réduction d’impôt pour investissement dans les PME”). This tax reduction generally amounts to 18% of the amount invested in the relevant SME. Note that the French Parliament very recently introduced (in the Finance Act for 2024) additional tax reductions amounting to 30% (or even 50%) for subscriptions in the share capital of companies qualifying as young or particularly young innovative companies (see 4.1 Subsidy Programmes).
• Upon exit – potential application to the favourable Plan d’Epargne en Actions regime (PEA) –  French individuals may, under this specific tax regime, be exempt from personal income tax on the capital gain realised on their investment, provided that: (i) shares were subscribed to through this specific savings plan; and (ii) the shares or proceeds from the sale of the shares are not withdrawn from the PEA before the fifth anniversary of the PEA; however, social security contributions remain applicable at a rate of 17.2%.
• The standard capital gains tax regime provides for a flat tax of 30% assessed on any capital gains, potentially increased by a surtax on high income. There is no tax specificity for capital gains realised on shares of growth/start-up/VC fund portfolio companies.

Entities subject to French corporate income tax may, subject to certain conditions, amortise their subscriptions in the share capital of innovative SMEs over a five-year period (by deducting one-fifth of the investment from their taxable base). Except for this tax regime, there is no other specific tax regime for entities investing in growth/start-up/VC fund portfolio companies.

The French government has implemented several initiatives to bolster equity financing activity in France. These measures are designed to support startups, small and medium-sized enterprises (SMEs) and innovation, as well as to stimulate investment in the French economy.

One of the key strategies has been the introduction of tax incentives to encourage investment in SMEs. For instance, the Madelin tax credit allows individuals investing in SMEs to benefit from income-tax reductions.

In addition, the French government has reformed savings plans to direct more savings into equity financing. The Plan d’Epargne en Actions (PEA) and the Plan d’Epargne Retraite (PER) are examples of savings plans that offer tax advantages to individuals investing in stocks or equity funds, with the aim of channelling more personal savings into the equity market.

To foster innovation, the government has set up the French Tech Initiative, which aims to promote the growth of French startups and to attract foreign talent and investors. This initiative includes the French Tech Visa, a simplified, fast-track scheme for non-European start-up founders, employees and investors to obtain a residence permit in France.

Additionally, as a member of the European Union, France benefits from EU-wide initiatives such as the Capital Markets Union (CMU), which aims to deepen the single market for capital across the EU.

In France, as in many other jurisdictions, the long-term commitment of founders and key employees is often sought through a combination of contractual agreements, equity incentives, and corporate-governance mechanisms. These tools are designed to align the interests of the founders and key employees with the success and longevity of the company, as follows.

Founders

• The shares of the founders are generally subject to transfer restrictions – a four-year lock-up (with a 10% carve-out); a proportional tag-along of the main investors; and/or a full tag-along right in case of transfer of a significant part of their shares.
• Leavers provisions – repurchase by the investors (and other active founders) in case of departure; claw-back on 100% of the shares (in the event of a “bad leaver”) or only on unvested shares with a reverse vesting (in the event of a “good leaver”). The acquisition price can be equal to nominal value (bad leaver); fair market value (good leaver); or discounted price (for termination for cause but without gross or wilful misconduct). The terms and conditions of the claw-back are subject to tough negotiation, and can differ from one matter to another.
• Finally, certain rights of the founders provided in the shareholders’ agreement (primarily the right to appoint board members, and anti-dilution rights) are conditional on the founders being active in the company.

Key Employees

• Long-term commitment of key employees is generally secured through the allocation of founders’ warrants (BSPCE – bons de souscription de parts de créateurs d’entreprise) which allow them to subscribe, subject to vesting, to shares of the company at a given exercise price (similar to a stock option plan but with a favourable tax regime). The shares then subscribed are often subject to a call option in case of departure of the company. Alternative ESOP structure such as warrants (BSA - bons de souscription d’actions), stock option or free shares are also available but less frequently used given the applicable tax regime to the company and the beneficiaries.

In France, as in many other countries, there are several instruments and securities generally used to incentivise founders and employees. These are designed to align the interests of the employees with those of the company and its shareholders, and to retain key talent within the company.

Type of Instruments

• Founders’ warrants (BSPCE - bons de souscription de parts de créateur d’entreprise) are warrants, granted for free, which allow employees to subscribe to ordinary shares at a strike price determined at the allocation date. This is the most commonly used instrument in France as it benefits from an attractive tax regime described below. The allocation is subject to several conditions, as follows:
1. the issuing company is less than 15 years' old and is subject to corporate income tax;
2. the company is at least 25% held by individuals or companies or at least 75% directly held by individuals (specific rules exists to disregard the stake of certain investment funds);
3. the beneficiaries must be employees of the issuing company (or of a subsidiary 75% directly held by the issuing company) or board member (if the board can be assimilated with the conseil d’administration of a Société Anonyme). Consultant, freelancer and, generally, board members of a Société par Actions Simplifiée cannot be allocated founders’ warrants;
4. the exercise price of the founders’ warrants must correspond to the fair market value of the underlying shares of the company at the time of allocation.
• Stock options are generally granted to employees who are not French tax residents (notably when the country of tax residency does not recognise founders’ warrants locally), as the tax regime for French employees is less favourable.
• Warrants or BSA are generally subscribed to by consultant, freelance or independent board members who cannot receive founders’ warrants. Unlike the latter, the fair market value of the warrants must be paid at the time of subscription, and the tax regime is less favourable (see 5.3 Taxation of Instruments).
• Free shares: if the issuing company can no longer grant founders’ warrants (eg, because it is over 15 years' old or because of its capital structure), free shares can be granted to employees and corporate officers. The number of free shares cannot represent more than 15% of the share capital (or 30% or 40% in certain circumstances) and a beneficiary cannot hold more than 10% of the share capital, provided that this threshold is determined based on the shares held by a beneficiary for less than seven years). The shares are effectively issued after an acquisition period of at least one year from granting, and the shares are then subject to a lock-up period (so the aggregate of the vesting and lock-up periods would be at least two years). The tax regime is less favourable to that applicable to that for BSPCE (see 5.3 Taxation of Instruments).

Main Terms and Conditions (Founders’ Warrants, Stock Options and Warrants)

• Such instruments generally give right to ordinary shares (in particular without liquidation preference rights or ratchet), and are subject to a four-year vesting period with a cliff of one year – performance conditions can also be provided.
• In case of change of control, vesting is usually accelerated (and can be negotiated, in particular to provide for a US standard double trigger) and is exercised at the time, failing which it lapses.
• In case of departure, the key employees must exercise the instrument within a limited period of time (between one to three months, or six months in the specific event of a death).

Founders’ Warrants (BSPCE - bons de souscription de parts de créateur d’entreprise)

No tax or social security contributions are incurred by the issuer/employer upon the granting/exercise of the BSPCE.

For the beneficiaries, there is taxation of the gain (ie, the difference between the sale price of the shares and the exercise price of the warrants) upon disposal of the underlying shares under the capital gains tax regime. Accordingly, the effective tax rate (including personal income tax and social security contributions, and unless a specific option is made) would amount to 30% (or 47.2% if the beneficiary is employed in the group for less than three years).

Stock Options

For the issuer – specific employer social contribution is due upon granting of stock options, amounting to 30% of either:

• 100% of the estimated fair market value of said options as determined for consolidated accounting purposes (assuming the company applies the international financial reporting standards (IFRS) regulations); or
• 25% of the fair market value of the shares on the granting date.

For the beneficiaries: taxation upon disposal of the underlying shares of:

• the exercise gain (ie, the difference between the fair market value of the shares on the exercise date and the exercise price) at an effective tax rate (including personal income tax and social security contributions) of a maximum of about 61.6% (including deductible CSG); and
• the capital gain (ie, the difference between the sale price of the shares and the fair market value of the shares on the exercise date) at the effective tax rate (including personal income tax and social security contributions, and unless a specific option isselected) of 30%.

Warrants (BSA)

For the issuer – no tax or social security contributions incurred by the issuer/employer per se upon allocation/exercise of the warrants. However, as the BSA are not governed by any specific and dedicated tax/social security regime in France, there is a significant risk of reclassification of the subsequent gain realised on these warrants as “employment income” (or, as the case may be, as another type of income that would be taxed at a higher rate than capital gains).

For the beneficiaries – gains realised on these warrants are, in principle, subject to the capital gains tax regime (ie, a flat tax rate). However, similarly to above, given that BSA are not governed by any specific and dedicated tax/social security regime in France, there is a significant risk of reclassification of the subsequent gain realised on these warrants as “employment income” (or, as the case may be, as another type of income that would be taxed at a higher rate than capital gains).

Free Shares

For the issuer: a specific employer social security contribution amounting to 20% of the fair market value of the free shares at the end of the vesting period (ie, upon issuance of the shares, with the issuance date being at least one year after share allocation).

For the beneficiaries: taxation upon disposal of the shares (no taxation before) of:

• the acquisition gain (ie, the fair market value of the shares at the issuance date) at an effective tax rate (including personal income tax and social security contributions) of a maximum of 38% (including deductible CSG) for the portion below EUR300,000 and 61.6% (including deductible CSG) for the portion above EUR300,000; and
• the capital gain (ie, the difference between the sale price of the shares and the fair market value of the shares on the issuance date) at an effective tax rate (including tax and social security contributions, and unless a specific option is selected) of 30%.

Importantly, note that, in all cases:

• a surtax on high income (3% to 4%) may apply to the beneficiaries; and
• the different regimes described herein are based on the French rules currently in force (it is important to be aware that tax laws change frequently, and occasionally on a retroactive basis) and offer certain options which may be applicable for beneficiaries depending on their specific situation, on a case-by-case assessment. 

The percentage of pre- or post-closing ESOP is negotiated as part of the discussion on the valuation of the company.

On the closing date of the financing round, the shareholders grant the management of the company the power to issue and grant the securities. The allocation is very often subject to the prior approval of the board at the qualified majority (ie, including the prior approval of one or two of the members appointed by the investors). This delegation of power is limited to 18 months.

The allocations are made after closing on one or several occasions.

In France, shareholder exit rights in the context of a sale, IPO, or other liquidity event are typically governed by provisions in the shareholders’ agreement.

• Transfer restriction before liquidity: the transfer of shares is subject to lockup (for the founders exclusively), full tag-along rights (in case of change of control, disinvestment by the founders and sale to a non-financial investor) and, in certain matters, proportional tag along rights (on transfer by the founders).
• Drag-along rights provide that, if a shareholder receives an offer by a third party over at least 95% of the share capital, and if the offer is accepted by a certain majority of the share capital, all the shareholders are committed to transferring their shares. In the negotiation of the majority to trigger the drag-along rights, parties usually try to avoid individual veto rights (except in case of an offer before a certain period or below a certain multiple threshold).
• Liquidity provisions generally provide that the parties aim to find a liquidity solution (in the form of a sale or IPO) within a negotiated time frame. After a four- or five-year period, investors negotiate the right to appoint investment bank(s) to identify liquidity options for the company. The drag-along majorities may be amended after the liquidity period to allow the investors to force a sale of the company. In the case of pre-IPO, the shareholders’ agreement may detail registration rights, lock-up provisions and undertakings to subscribe to the IPO as cornerstone investors.

IPOs are not a common exit strategy for French start-ups (compared to a strategic sale or private equity buy-out). Startups considering an IPO must weigh up various factors that influence the time line, including market conditions, the maturity of the business, regulatory compliance and the amount of capital needed.

The primary listing venue in France is the Euronext Paris. The regulated market of Euronext Paris is designed for highly structured companies that have the resources to meet the requirements of European regulations, so that they can attract international investors and a more liquid market. Euronext Growth is suited to SMEs, with simplified listing and reporting requirements (more flexibility for the pricing of subsequent offerings, no prospectus required for private placement regardless the size of the transaction).

Offering structures for growth companies often involves a combination of public offerings for retail investors and private placements for institutional investors. Generally, a pricing range is disclosed at the opening of the offering and will be set at the end of the subscription period depending on the bookbuilding outcome.

As the employee equity incentive is subject to sale restrictions, secondary market trading is needed prior to an IPO to provide liquidity for early investors and employees. Liquidity can be provided by new investors (subject to the shareholders’ provisions on transfer of shares) or existing stockholders to demonstrate the support of core shareholders before an IPO. One of the main challenges is control over non-public information communicated to employees as part of the secondary. Another challenge is the valuation of the company and the secondary price, which may impact the IPO price. Following the IPO, a liquidity programme can be set up, subject to specific legal limitations in terms of price, volume and resources allocated by the company.

French legal provisions that govern the offering of a company’s equity securities in a venture capital transaction are primarily found in European regulations, the AMF’s regulations, the Monetary and Financial Code (“Code Monétaire et Financier”) and the Commercial Code (“Code de Commerce”). These provisions are designed to protect investors and ensure market transparency.

Regulatory Framework

• Prospectus requirement – for public offerings, a prospectus approved by the Autorité des marchés financiers (AMF) is required unless an exemption applies.
• Private Placements – private placements to a limited number of investors or qualified investors (less than 150) are common in venture capital and are exempt from the prospectus requirement.
• Employee Equity Participation – specific rules apply for employee share ownership plans, which may include preferential terms under certain conditions.

Disclosure and Reporting Obligations

Companies must comply with ongoing disclosure and reporting obligations, particularly for sizeable transactions that could affect the financial markets.

Thresholds and Limits

There are thresholds for the number of investors (150 qualified investors) and investment amounts (no prospectus under EUR8 million) that, if exceeded, may trigger additional regulatory requirements.

AMF Regulations

The AMF provides regulations and guidelines on the offering of securities, including venture capital investments, to ensure investor protection and market integrity.

In practice, the complexity of these transactions often requires careful structuring to comply with the relevant legal provisions, especially when numerous employees or entitlement holders are involved.

In France, the scope of the government’s scrutiny over foreign investments has continuously increased over the past 12 months. Temporary protective measures adopted during the COVID-19 pandemic became permanent due to geopolitical tensions and the energy crisis, whilst the scope of sensitive activities has been widened to protect French innovation.

This has led the FDI authorities, accustomed to focusing on defence matters and strategic infrastructure, to become particularly stringent on the technology sector, with increasingly tight control over innovative segments such as AI, biotechnologies, cybersecurity, photonics, data storage or semi-conductors.

This has materially affected investments by foreign VC investors (EU or non-EU) in French companies, as a very broad range of activities are now subject to the government’s investigations, regardless of the stages of development of the target entities (investments of 10% or 25% of a target’s voting rights may constitute eligible investments), the maturity of a project, or the amount of the investment.

In addition, the French Government may condition its approval of such investments to certain undertakings by the investor (eg, maintaining IP, R&D or industrial capabilities in France, implementing procedures to protect French sensitive data, etc.), which could hinder the integration of the target within the investor’s group or the ability of the investors to exit.

Regulated industries

Depending on the nature and size of the investment, stake acquisitions in French companies may require regulatory reviews or approvals before they can be completed. This is especially the case for investments in certain regulated industries, such as banking or insurance companies (eg, the acquisition or extension, directly or indirectly, of a “qualifying holding” – 10% or more of 20%, 1/3, 50% of the capital or votes, in a French bank is subject to prior assessment and a non-objection decision by the European and French regulatory authorities). In practice, these regulatory approvals are considered a condition for completion of the transaction and necessarily have an impact on its timetable.

Currency exchange control is not generally an issue in France, as it is part of the Eurozone, but investors must comply with anti-money laundering regulations. Banking-related regulations require due diligence and reporting, which can affect transaction timelines and complexity.