Venture Capital 2024 Comparisons

The most sizeable financing rounds in Portugal in 2023 were:

• BHOUT, which raised EUR10 million;
• Unbabel, which raised EUR19 million;
• Bizay which raised EUR18 million;
• Coverflex, which raised EUR15 million; and
• Infraspeak, which raised EUR17 million. 

The last 12 months were heavily shaped by seed and series A financing rounds aimed at research and development activities made by SIFIDE funds. Access to funding, other than for R&D activities, has been steadily decreasing contributing to an investors’ market, rather than a founders’ market. The number of exits was, below what was expected, as a result of poor market conditions. Start-ups are closely monitoring the market for opportunities to grow by acquisition to ramp up their metrics. Another trend worth mentioning has been the increase of jurisdiction flips to the USA, in search of bigger investment rounds. Secondaries from founders have become rarer.

It is hard to pinpoint specific industries which drove VC activity when most of the Portuguese investment funds are agnostic, notwithstanding banking and finance, insurance, cybersecurity and data driven industries which are more favourable to investment. 

VC funds in Portugal are organised as closed-end VC funds and are subject to specific regulation (see 2.3. Fund Regulation).

The applicable regime requires these funds to have a limited partnership agreement, whereby the management entity of the fund outlines the rights, obligations and corporate governance of the fund. This document also covers the following matters: investment policies and strategies, capital contributions, profit sharing, decision-making processes and exit strategies. 

The investors who wish to subscribe to participation units in the VC funds shall enter into a subscription agreement that will detail the terms and conditions of their investment, the committed capital, the number of participation units being subscribed, how the payment will be made and the type of participation units. 

These documents, along with regulatory filings, disclosures required by the Portuguese Market Commission (CMVM) and compliance with the anti-money laundering regulations, form the legal and operational framework governing the operation and management of VC funds in Portugal. 

In Portugal, there are a couple of common practices and structures that allow the fund’s managers to participate in the economics of the VC fund, as detailed below (Management Fees, Carried Interest, Hurdle Rate, Co-Investment and Conflict of Interest policies). However, these structures need to be evaluated on a case-by-case basis because in Portugal, as in many other jurisdictions, fund managers owe fiduciary duties to the investors in the funds they manage. These duties are based on principles of trust, loyalty and good faith, and require fund managers to act in the best interest of the fund’s investors, and not in their own. 

Management Fees

The fund managers receive management fees, which are annual fixed fees charged as a percentage of the value of the total assets of the respective fund. These fees cover operational expenses, salaries and other costs associated with the management of the fund.

Carried Interest 

Another common practice is to establish that, upon liquidation and after the distribution of profits to the fund’s participants, a percentage of the earnings will be paid to the fund’s managers. 

Hurdle Rate

Together with the carried interest, a hurdle rate is usually established. The hurdle rate sets the minimum rate of return that the fund must achieve so that the fund managers can receive the carried interest. 

Co-Investment

Lately, the possibility of co-investment, ie, the fund’s founding participants and the fund managers having the possibility to, upon verification of certain conditions (including, but not limited to, investment amount, stage of the target, amount of the ticket, target activity), invest alongside and under the same terms and conditions of the fund has become more popular. 

Conflict of Interest Policies

Simultaneously with the above – and as an outgrowth of the fiduciary duties –, the funds need to have conflict of interest policies, which are made in order to identify, manage and mitigate conflicts that may arise between the interests of the fund managers, or related parties, and those of the fund’s investors.

VC funds are highly regulated in Portugal and need to follow the Asset Management Regime (Regime de Gestão de Ativos or RGA) and the entity responsible for the regulatory oversight is the CMVM. The CMVM is responsible not only for approving the registration and incorporation of VC companies and VC funds, but also for overseeing the operation and activities of those entities. 

Compliance with the aforementioned regime (both in the registration stage and in the day-to-day management) is essential for VC entities operating in Portugal to maintain legal and operational legitimacy. 

VC investment in Portugal has some particularities due to key aspects, such as the programmes established by the government to boost entrepreneurship. An example is “Consolidar”, a programme with an overall budget of up to EUR500 million, which aims to support the subscription of VC funds for investment in SMEs and mid caps. However, this programme still has some limitation regarding the fund’s investment policy, where the investments can be made and the type of instruments that the fund can subscribe. In addition, the EU funding of VC funds and the tax incentive system for research and development (SIFIDE) depends on the target companies being classified by the Portuguese Innovation Agency (ANI) as R&D companies and creates additional layers of governance rights and reporting obligations. Lastly, in terms of the ecosystem itself, the presence of VC investments in Portugal has been growing and evolving over the past decade, with increasing activity in start-up funding (from Portuguese and foreign investors) and the creation of incubators and accelerators (like StartUp Lisboa, StartUp Braga, Startup Leiria, and Fábrica de Unicórnios). 

VC fund investors typically carry out legal, tax, financial, technical and (more recently) behavioural due diligence. 

The legal due diligence is usually conducted on a “red flag” basis, focusing on corporate structure, assets, financial aspects, key contracts, insurance, labour, intellectual property, technology, data protection, regulatory matters and litigation. 

The tax and financial due diligence are often carried out by financial consultants. 

The technical due diligence intends to validate the existence of the technology and its state of the art.

Behavioural due diligence intends to assess and establish the founders’ ability to tackle the challenges of a fast-paced high octane, aggressive environment. 

The timeline of a new financing round, such as a Series A financing round, with new anchor of investors can vary due to a number of factors on which the process is dependent – the due diligence, the complexity of the deal structure, the negotiation of terms and conditions, the type and number of existing versus new investors, the drafting of the legal documents – but it usually ranges from one month to six months. 

Factors Affecting the Timeline

There are a number of factors that may affect the timeline. 

• Due diligence: the extent of information provided by the company and the complexity of the company’s structure, operations and contracts might delay the timeline.
• Negotiation of terms and conditions: when the company does not consider the market conditions and the rights attached to the financing and the involvement of the legal counsel is delayed, that could also create some delays in the deal.
• Existing versus new investors: potential conflicts may arise due to different visions or policies. Usually, the company and its counsel deal with the existing investors, and the new anchor investors hire a joint counsel to mitigate the conflicts between the parties and create some efficiency in the negotiations. When the company requires additional efforts to co-ordinate different parties, the timeline is normally extended. 
• Majority requirements versus consents by the existing investors: the default rule in Portugal is the simple majority for the approval of business/day-to-day decisions. However, fundamental changes, such as amendments to the articles of association, creation of a new class of shares with special rights and changes impacting rights attached to shares usually require the consent of the existing investors and, if existing investors and new investors are not in synch, all this can create additional layers of complexity and time to the financing round. 

The early-stage financing in Portugal is typically carried out through equity financings or convertible instruments. 

Funding through an equity financing often means that the company will issue the investors preferred shares, which are a type of shares that carry certain preferential rights not available to common shareholders. These rights usually include: 

• non-participating liquidation preferences; 
• anti-dilution protections ((i) and (ii) further detailed in 3.5. Investor Safeguards); 
• pre-emptive and follow-on rights; 
• restrictions on the transfer of founders’ shares – such as lock ups and reverse vesting mechanisms; 
• exit mechanisms – such as the tag-along right, the drag-along right and the mandate to sell (further detailed in 6.1. Investor Exit Rights); 
• governance rights (further detailed in 3.6. Corporate Governance); 
• voting rights and the creation of qualified majorities for certain resolutions of the general meeting; and
• information rights – arising out of the reporting obligations that the investment fund might have towards the Portuguese regulator, the CMVM, or due to their particularities as government-backed funds or SIFIDE funds. 

At a very early-stage, where the valuation is not yet defined and the company needs urgent funding, the convertible instruments take the lead.

Convertible instruments, which usually vary between convertible loan agreements (CLAs) and simple agreements for future equity (SAFEs), are instruments designed to provide a very straightforward way for the investors to invest in the company. 

CLAs are classified as debt instruments where the principal amount, upon verification of certain triggering events, can be converted into a pre-determined category of shares or reimbursed. CLAs usually accrue interest and have a maturity date. 

The investors, for as long as they hold the CLA, will not be shareholders and, as such will not have the rights attached to shares. However, if the investor is an institutional investor, the information rights are usually granted. 

Once the CLA converts into shares, the investor that subscribed for the CLA will have the rights of the class of shares to which the CLA converts – usually the same shares as the investors in an equity financing, if the CLA converts due to an equity financing, or a new category of shares, with the same special rights of the shares of the previous round which shall rank senior to those shares. 

On the other hand, there are SAFEs, which is an instrument that has been introduced by Y Combinator. This instrument is very similar to the CLAs in relation to its terms and conditions for the conversion with the exception of the following:

• it shall be considered as other equity instruments;
• the principal amount shall not be reimbursed; and
• it shall not accrue interest.

In Portugal, in contrast with the UK and the USA, most of the investors are institutional funds and a maturity date is usually required for the conversion of the SAFEs into equity.

Portuguese financing rounds typically are investments in equity (as set out in 3.3. Investment Structure), where the typical key documents are a term sheet – containing the main term and conditions of the investment –, followed by the so called “long form documents”, which are the investment and the shareholders agreements. 

Financing rounds based on convertible instruments are also very common in Portugal, and in these rounds – depending on the amount and on the type of investors – the long form documents used are SAFEs or CLA and shareholders agreements. 

Portugal has not yet reached (and is far from reaching) the level of standardisation of the USA and the UK (since Portugal does not have guidelines like NVCA), but experienced lawyers and players in the VC area of practice have been increasingly trying to standardise clauses and rights (by following international standard practices).

To protect their investment in a downside scenario, VC investors in Portugal usually include some clauses that simultaneously protect their investment and prioritise their return of capital, the anti-dilution protection and the liquidation preference. 

Anti-dilution Protection

Anti-dilution protections are commonly used by VC investors to protect their ownership stake and economic interest in the event of a future down round (an issuance of shares at a lower price per share than the one paid by the relevant VC investor). The broad-based weighted average is the most common anti-dilution protection but, in some scenarios, a full ratchet anti-dilution protection may also apply. 

As opposed to what happens in other jurisdictions, where the anti-dilution works as an adjustment to the conversion ratio of preferred shares into common shares, in Portugal it usually works as an automatic mechanism where, simultaneously with the down round, the company makes a compensatory capital increase (through the conversion of reserves or at the nominal value).

Liquidation Preference

VC investors also require a liquidation preference which entitles them to receive, before the other shareholders, at least an amount of proceeds from the liquidity event equal to the amount of their investment. 

In the event that more than one VC investor is entitled to a liquidation preference at an equal level and the proceeds are not sufficient to completely fulfil the liquidation preferences of all such entitled VC investors, the proceeds are distributed on a pro rata basis with regard to the amount of the liquidation preference at the respective level.

The investors’ typical influence over the affairs of the company may vary depending on the stage of the company, the size of the round, the type of investment and the invested amount, but one way or another, VC investors usually exercise influence over the management, through all or some of the following rights. 

• By securing a seat on the board of the company, with a non-executive board member, that usually (alone or together with other directors appointed by the other investors) exercises its influence over key strategic decisions and has the ability to veto certain actions that may have impact on their investment.
• By having the right to appoint an observer to attend the board meetings. Despite not having voting rights, the observers will share their know-how, participate in the discussions and will be informed about the path the company is choosing.

• By creating qualified majorities that require the approval of a certain class of shares – and sometimes veto rights – for the approval of the general meeting resolutions that can impact the rights attached to their shares and the protective provisions of their investment. 

In the context of a financing round – and depending on the stage of the company – usually the company and the founders (or solely the company) will be jointly and severally liable for a breach of the representations and warranties (R&Ws). 

The R&Ws can be categorised into two main types: the fundamental and the operational R&Ws. 

• The fundamental R&Ws cover the company’s legal status, authority to enter into the agreement and the ownership of shares and the liability of the breaching party to these R&Ws is not limited in amount nor in time. 
• The operational R&Ws provide assurances to the investor regarding the current state of the company’s affairs and its ability to conduct business as usual and cover the company’s compliance with laws and regulations (including tax laws), the absence of pending litigation, the accuracy of financial statements, the ownership of intellectual property rights, the validity of contracts, and the absence of material adverse changes in the company’s business. The liability arising from a breach of the operational R&Ws is usually limited to the amount of the investment – for the company – or to a multiple of the annual remuneration – for the founders, and is usually subject to a time limit that may vary between 12 to 36 months. 

Upon a breach of the R&Ws, investors may be entitled to compensation which can be paid in cash or shares. 

Payment in cash shall be made through the delivery of a cash payment in the amount of the losses. Payment in shares shall be made through the transfer of founder’s shares in the company to be converted into shares with the exact same rights and entitlements as the shares subscribed by the relevant investor, or through a compensatory share capital increase, to be fully acquired at nominal value by the relevant investor (all costs to be borne by the founders or the company), taking into consideration the pre-money valuation of the investment round in which the investor has invested in the company adjusted by the exact amount of the relevant loss. 

Please see 2.4 Particularities. Government-sponsored VC funds are available and very active in Portugal. 

However, the “Consolidar” programme is the one that creates more incentives to equity financings in Portugal. The programme has an overall budget of up to EUR500 million and supports the subscription of VC funds for investment in SMEs and mid caps. 

The main features include: 

• the subscription of VC funds is made by Portuguese Recovery and Resilience Fund (FdCR); 
• the FdCR will have the same investment conditions as private investors in each VC fund; 
• an investment amount between EUR10-50 million;
• the FdCR can subscribe up to 70% of the VC fund; 
• the VC fund needs to invest an amount corresponding to FdCR’s investment in companies registered or operating in Portugal; and 
• the VC fund can only invest through equity or quasi-equity instruments. 

After a period of three years, the VC fund and/or the founders can buy back FdCR participation for the amount of the investment with a certain interest rate accrued.

There are specific tax rules for VC investments, or VC funds. In Portugal, for individuals, capital gains are taxed at 28% over 100% of the capital gain, or over 50% if the company is a micro/small company. Participation exemption exists if the holding is above 10% and the participation was held for a period longer than 12 months, which typically is harmful for business angels that in an exit scenario are usually below the threshold of 10%. In such case, the seller subjects the capital gain to its CIT tax rate. Currently the CIT general tax rate is 21%, plus local tax. The SMEs have a reduced rate of 12.5% for the initial EUR50.000,00 of taxable income. 

Please refer to 4.1 Subsidy Programmes for details of government incentives. Other noteworthy initiatives are the stock options tax scheme, whereby employees of startups that receive stock options are subject to a single taxable event (sale of the shares), and the tax rate is reduced to 14%. Board members are excluded from this regime.

In Portugal, founders’ and key employees’ long-term commitment is procured trough the combination of several methods that ultimately reward their performance and commitment by giving them the opportunity to share in the future success of the company, ie, upon the occurrence of trade sale, an IPO or any other liquidity event. 

For such purpose, start-ups – from seed to later stages – create incentive plans to offer to their key employees (alongside with their monthly remuneration). 

For the founders, acting as directors, despite  the possibility of them being issued rights under the incentive plan, the incentive provisions are usually specified in the shareholders’ agreement, with more severe mechanisms for the occurrence of a bad leaver (which occurs when a founder voluntarily leaves the company or is dismissed for cause) or a good leaver (which occurs when the founder leaves the company and is not considered a bad leaver) event – if a founder acting as a director (i) is deemed a bad leaver, the company shall have the right to acquire the vested and non-vested shares of such founder at the nominal value; (ii) is deemed a good leaver, the company shall have the right to acquire the non-vested shares. 

In addition to the above, non-compete, lock ups and leaver provisions are commonly created to ensure that the founders’ vision remains aligned with that of the company and, if not, there are mechanisms to reduce any losses in connection therewith.

Due to the creation of the Start-ups Law (see 5.3. Taxation of Instruments) and the requirements created by VC investors (which, now more than ever value and demand that plans of this kind be created as a condition for their investment), the incentive plans foreseen are in the process of standardisation. Their main features are the following: 

• there must be an unallocated pool of approximately 10% of the company’s share capital available to award to key employees; 
• the board can grant options to key employees; 

• the exercise of the options gives rise to phantom shares (which are instruments granting their owners the economic – but not the voting – rights of real shares); 

• the exercise price is usually the valuation of the previous investment round; 

• the exercise of the options is subject to a vesting period – usually of 48 months with a one-year cliff period  – and leaver provisions aligning with the company’s and the employee’s long-terms objectives; and 

• upon occurrence of a trade sale, an IPO or liquidity event, the employee will have the right to sell phantom shares. 

In May 2023, a new stock options taxation regime that aims at ensuring that taxation is competitive and occurs only when the gains are effectively obtained was created. 

Under that new regime: 

• a 50% exemption on the gains resulting from a stock options plan was created; 
• the actual taxation rate on those gains can be reduced up to 14% if securities and underlying rights are held for a minimum one-year holding period; 
• the beneficiaries shall be issued securities or equivalent rights; and
• the taxation only occurs upon “alienation” and includes exchange of shares. 

However, this new taxation regime disregards: 

• the absence of liquidity in exchange of shares; and 
• cash-settlements, which were the market standard up to that date. 

It is very important to keep in mind that the exemption created by this regime is not applicable to stakeholders with more than 20% of the share capital or voting rights of the entity issuing the stock options plan. 

Usually, when a new investor comes in, it requires the creation or the increase of unallocated pools of stock options between 7-10% of the company’s share capital for future allocation to key employees. 

In terms of dilution, the pre-money valuation given by those VC investors usually includes the increased/created pool, which means that such VC investor will not be diluted by that creation/increase in the pool. However, in future rounds, if the new investor requires another increase of the pool, every shareholder – including the VC investor – shall be diluted. 

Shareholders’ rights in relation to a sale or any other type of liquidity event are governed by the shareholders’ agreement. 

The shareholders’ agreement includes drag-along rights, tag along rights and a mandate to sell. 

Drag Along

The drag along is the right to force other shareholders to sell their shares in the event of an offer for a certain percentage of the share capital of the company. It is very common to anticipate that a certain offer to acquire the share capital of the company needs to meet certain objective requirements for the VC investors to be dragged to sell their shares. Multiples on the investment, cash deals, exclusion of the VC investors from the operational representations and warranties are the most common requirements for the VC investors to be dragged. 

Tag Along

Tag-along rights give minority shareholders the option to join a sale initiated by the majority shareholders and are a “must have” in the shareholders’ agreement. However, transfers of shares made by VC investors are usually excluded from the applicability of the tag-along rights. 

Mandate to Sell

As funds, the VC investors have a limited duration and usually foresee a divestment/exit strategy, which will be triggered if the company’s shareholders do not obtain access to liquidity within a specific deadline, directly related to the fund’s divestment period. VC investors will be granted the right to choose an investment bank/consulting firm to sell 100% of the company’s share capital. 

VC investors usually do not see their shares subject to any transfer restrictions, but the transfer of their shares – other than permitted transfers to affiliates of such fund – will be subject to the right of first refusal from the other shareholders and, where applicable, the drag and tag along rights. 

When Portuguese start-ups are preparing themselves for an IPO, there is usually a jurisdiction flip to a more favourable jurisdiction (in terms of regulation, type of players and financial conditions perspectives). 

In Portugal, it is not possible to talk about pre-IPO liquidity because Portuguese capital markets are not active in terms of IPOs. Investors, employees and founders shall expect to obtain liquidity through a trade sale. 

In a securities offering, the immediately applicable regimes – irrespective of the sector of activity of the company - are: 

• the Securities Code (Código dos Valores Mobiliários); 
• the Portuguese Companies Code (Código das Sociedades Comerciais); 
• Law No 83/2017 of 18 August, which establishes the measures to combat money laundering and terrorist financing; and 
• the Portuguese Competition Act (Law No 19/2012 of 8 May). 

Portuguese legal and regulatory frameworks encourage the investment of a foreign VC investor in a Portuguese start-up since there are no restrictions on the entry of foreign capital in Portugal. Since the Portuguese framework is in line with EU regulations, a non-discriminatory environment is followed, so the foreign VC investor will face the exact same challenges/restrictions that a Portuguese VC investor would when investing in regulated sectors (such as telecommunications, energy and insurance). 

However, a couple restrictions may apply to VC transactions (including on foreign investment) in Portugal, as set out below. 

• To the extent that the transaction either constitutes (or is deemed to constitute) a concentration falling within the scope of the EU Merger Regulation (Council Regulation (EC) No 139/2004 of 20 January 2004) or of the Portuguese Competition Act (Law No 19/2012 of 8 May), it shall be subject to examination or clearance by the European Commission or the Portuguese Competition Authority. 
• For the acquisition of listed companies, the CMVM shall have a say in the matter. 

• The Portuguese government has control over the foreign investment – the review being triggered only if the potential acquirer is ultimately owned by an entity outside of the European Economic Area and also if the target assets are deemed “strategic assets” for the country – and over concessions for the operation of certain public goods.

• If the company is already subject to any sectoral regulations due to its sector of activity, such regulators shall also review and sometimes approve the transaction. 

In addition, due to the EU sanctions on some Russian individuals and Russian entities, it has been highly difficult for Russian individuals and entities to operate in Portugal.