Venture Capital 2024 Comparisons

Among the landmark VC financings during 2023, the impact start-up H2 Green Steel, founded to decarbonise the European steel industry, takes pole position with its EUR1.5 billion financing – making it the largest private placement round in 2023 in Europe. Other significant financings in the Swedish market in 2023 are those of green battery manufacturer Northvolt (EUR135 million) and home energy cleantech start-up Aira (EUR85 million). All these three companies are backed by Vargas Holding, a Swedish impact investor that finances, launches and scales companies according to a greenfield model.

In terms of exits, among the more notable during 2023 include Summa Equity’s exit from life-science company Olink via a sale to strategic buyer Thermo Fisher Scientific Inc, which valued Olink at USD3.1 billion, and IT-security company Yubico’s IPO via a de-SPAC with ACQ Bure, which valued Yubico at USD800 million. This was one of the few significant IPOs in the Swedish market in 2023, and notable for being done via a de-SPAC (which remains quite unusual in the Swedish market).

In the first half of 2024, significant exits in the life science segment have continued, with the sale of the antibody tools and kits provider Mabtech to EQT Healthcare Growth (EQT’s new dedicated healthcare buyout fund), and continued landmark financings of impact growth companies focused on the green transition, including the launch of the textile recycling company Syre (backed by Vargas Holding in collaboration with the H&M Group).

There has been an increase in flat/extension rounds and down rounds as the general slowdown in the domestic and global economy has made it more difficult for companies and investors to agree on valuations. As a result, convertible loans, bridge financings and other types of instruments have been used more frequently to bridge the gap. There has also been an increased focus on bootstrapping and achieving profitability rather than growth at all costs. In addition, there are a number of companies that have had to clean up their cap table of various preference shares or other instruments and convert them into ordinary shares, for example, to level the playing field and re-incentivise founders.

However, with investors still having plenty of capital to deploy and developments in early 2024, such as signs of lower interest rates, there is increased optimism in the market and continued competition and high valuations for the most attractive investments.

Sweden has a well-established start-up community and has produced more than 40 unicorns, including companies such as Klarna, Northvolt, iZettle and Spotify. Traditionally, fintech and SaaS-centred business models have held a strong position among Swedish VC-backed companies, with exits being predominantly in the tech sector (often with US buyers). According to a February 2024 report by Sweden Tech Ecosystem, Sweden ranked third in Europe for deep tech VC investments and second for impact investments in 2023. According to the same report, 74% of Swedish investments in 2023 were made in impact start-ups.

Deep tech with a particular focus on AI-driven business models was inevitably a key focus area for VC investments in Sweden last year, attracting funding despite the prevailing market conditions. AI governance, compliance and ethics are expected to become increasingly important as the new EU AI legislation is implemented.

Energy and renewables has also been an attractive vertical, where, for example, large industrial projects with a clear sustainability focus have remained competitive, namely Northvolt and H2 Green Steel. Sweden’s commitment to sustainability and innovation has also contributed to the growth of start-ups in these sectors.

Companies with consumer-facing business models have faced greater challenges in terms of growth and profitability due to the general downturn in the domestic and global economy, which has affected consumer purchasing power. For those not able to bootstrap, there has been an increase in the number of flat/extension rounds and down rounds, as well as clearing up of cap tables and dealing with incentive schemes that are no longer in the money.

In Swedish fund structures, all entities are generally limited liability companies (Aktiebolag). Swedish fund structures are usually “dual entity” structures, consisting of one entity offering investors to participate through principal linked participating loans (debt) and one entity offering investors to participate through preference shares (equity). The reason for structuring funds in this manner is to facilitate the diverse needs of investors from a variety of jurisdictions, making Swedish fund structures versatile and attractive among a diverse global investor base.

In a Swedish fund, a debt entity would be regulated by a debenture holders’ agreement and an equity vehicle would be regulated by a shareholders’ agreement. The terms of a debenture holders’ agreement and a shareholders’ agreement would in essence be identical but mandatory provisions of the Swedish Companies Act could have implications for the terms of the shareholders’ agreement, while such implications would not necessarily apply in relation to the terms of the debenture holders’ agreement.

Generally, Fund Principals will hold between 2 and 4% of the total fund commitments. Management fees would typically be in the range of 1.5–2.5% of the total commitments during the investment period, and thereafter the fee base is usually the acquisition cost of unrealised investments.

Carry (carried interest) is most often calculated according to a European fund-as-a-whole model.

Swedish venture capital fund managers are generally governed by the AIFM directive, which has been implemented in Swedish law through the Swedish Alternative Investment Fund Managers Act and/or the EuVECA Regulation.

Highly specialised managers and narrow investment objectives are observed in the venture capital space. Investment strategies incorporating ESG are very common.

The Swedish government, through various government-controlled funds, is an active investor on the Swedish venture capital market, and there are several programmes and government/quasi-government organisations in Sweden that aim to support growth companies through equity financings, loans, guarantees and grants, especially in sectors such as innovation, sustainability, digitalisation, and life sciences. Government-backed VC funds include entities such as Saminvest, which acts as a fund-of-funds investor to stimulate the private venture capital market, and Almi Invest, which is Sweden’s most active investor in early-stage companies. Other government-backed VC funds include Industrifonden, a venture capital fund established as a foundation by the Swedish government that invests in Swedish companies with international growth potential, and the investment arm of the Swedish Energy Agency, Energimyndigheten Holding AB, which, together with InnoEnergy, invests in energy-related innovations. On the impact investment front, funds like Norrsken, founded by Klarna co-founder Niklas Adalberth, which aim to support ventures with a positive societal impact, Trill Impact, which leverages a private equity approach to drive substantial and measurable impact alongside financial returns, and Summa Equity, investing in companies that address social, environmental and business opportunities aligned with the UN Sustainable Development Goals, are active investors both nationally and internationally.

VC fund investors typically take a risk-based approach to their due diligence, focusing the in-depth review on key areas of material importance to the target in question while covering other customary due diligence areas through management interviews and confirmatory Q&A.

Key areas of focus will typically include title to shares (including a review of incentive schemes), intellectual property rights, key commercial agreements and employment terms for key personnel (including non-compete/non-solicitation, confidentiality and sufficient assignment of intellectual property rights). However, this is subject to adaptation to the specific target and the nature of the legal risks prevalent in its operations.

Typically, Swedish-style investment agreements will contain anti-sandbagging provisions, which preclude liability for information that has been fairly disclosed during the due diligence process, whether or not the investor had actual knowledge of it. As a result, a thorough due diligence review of the information provided by the company during the due diligence process may be critical to the validity of the representations and warranties. In this respect, it may be noted that disclosure letters are not standard practice in the Swedish market.

The overall timeline from the signing of a Term Sheet to the closing of a financing round in a straightforward process typically takes approximately 4–6 weeks, although this is of course subject to variation on a case-by-case basis. With the introduction of the new Swedish Foreign Direct Investment Act (the “FDI Act”) in December 2023 (as further described in 7.2 Restrictions and theTrends & Developments chapter of this guide), the timeline to closing may delay the overall process due to the need to await regulatory approvals in the event that the target company engages in activities subject to the FDI Act. In this regard, it can be noted that the FDI Act allows applications to be submitted already on the basis of a Term Sheet, provided that it sufficiently describes the ownership and governance rights that the investor will ultimately acquire.

The anchor investor will take the lead in the due diligence and the negotiation of the transaction documents, with the syndicate and follow-on investors piggy-backing thereon (typically on a non-reliance basis with respect to due diligence). The target company will cover reasonable transaction costs incurred by the lead investor and, in certain cases, syndicate investors, subject to a pre-agreed cap. Both joint and separate counsel set-ups are observed.

Existing investors typically have pre-emption rights (but no obligation) to participate in new financing rounds with their pro rata portion, entailing a need for the company to co-ordinate the participation levels of existing shareholders as part of the overall process for the financing round.

New financing rounds require the issuance of new instruments by the company (as it is not possible for a Swedish private limited liability company to hold its own shares), which under Swedish company law requires a shareholders’ resolution. It is possible to authorise the board of directors to issue additional shares in certain circumstances, and this is often used to cover subsequent closings. However, a bona fide new financing round (ie, not a second closing or the like) is typically structured on the basis that all existing shareholders agree to the terms of the financing and vote in favour of the resolution to issue new shares at the general meeting, as it will almost always require amendments to the shareholders’ agreement (to which all shareholders are a party).

Although it is not uncommon for shareholders’ agreements governed by Swedish law to include provisions whereby the agreement can be amended with the approval of a specified majority, it is important to note that such provisions are effectively equivalent to a power of attorney, which under Swedish law can always be revoked by the issuer. Hence, the enforceability of such amendment clauses may be challenged depending on the type of changes made through the amendment, and thus this type of amendment provision may therefore be useful as a means to ensure that all shareholders participate in the signing of the amended shareholders’ agreement (under threat of breach of contract if they abstain), but needs to be more carefully considered in the event necessary to rely thereon in order to ensure a legally binding agreement in lieu of each party’s signature.

In early stage financings, ie, pre-seed and seed, the founders will typically try to avoid the introduction of preference share structures, as this is often considered premature.

In later rounds, ie, Series A and beyond, a preference share structure with a non-participating 1x liquidation preference is most commonly used. However, from time to time, higher liquidation preferences as well as participating liquidation preferences are seen, which is not entirely uncommon for companies that have faced challenges in raising capital and have opted to accept more aggressive liquidation preferences in order to avoid having to carry out a down round. In recent years, due to the general economic downturn and shortage of VC funding, such investment structures appear to have become more prevalent – which in turn has led to an increased focus on and discussion of “dirty” term sheets in the start-up community.

The typical key documents of a financing round in Sweden are as follows:

• term sheet;
• investment agreement;
• shareholders’ agreement; and
• articles of association.

Investment Agreement

The investment agreement (sometimes referred to as the “subscription agreement” or “investment and subscription agreement”) is similar to a share purchase agreement in an M&A transaction in that it sets out:

• the investment amount to be paid by the relevant investors and the number of shares to be subscribed for;
• the actions to be taken at closing in order to complete the investment;
• the representations and warranties provided to the investors; and
• the limitations of liability applicable to such representations and warranties.

In addition, the investment agreement may include covenants relating to the assignment of intellectual property rights, non-compete and non-solicitation provisions for key personnel, as well as customary boilerplates such as confidentiality and governing law.

The corporate documentation relating to the share issue to be resolved at the shareholders’ meeting in order to effect the investment is typically included as an appendix to the investment agreement, together with pre- and post-round cap tables and appendices relating to the representations and warranties (eg, list of key personnel, owned and licensed intellectual property rights, material agreements, etc).

Shareholders’ Agreement

The shareholders’ agreement is typically entered into by all shareholders and includes provisions relating to:

• governance, including nomination rights for the board of directors, and reserved matters;
• pre-emptive rights in relation to new financing rounds (customarily with exceptions for, eg, incentive programmes);
• pre-agreed ESOP pool size;
• liquidation preference;
• transfer restrictions (customarily right-of-first-refusal, drag-along and tag-along, with carve-outs for transfers to affiliates);
• exit provisions;
• founder vesting and lock-in (if included);
• anti-dilution and downside protection (if included);
• information and audit rights;
• non-compete and non-solicitation; and
• assignment of intellectual property rights, in addition to customary boilerplates such as confidentiality and governing law.

There are no commonly agreed templates for the above-mentioned agreements in the Swedish market, although the content of the provisions in negotiated agreements has been largely harmonised in market practice. Investors familiar with the NVCA standard templates will note that Swedish style agreements are shorter, but that the Swedish provisions are nonetheless inspired by US concepts (albeit adapted to work in a Swedish legal context).

Articles of Association

The articles of association for Swedish limited liability companies are quite short and rather standardised, as they must be registered with the Swedish Companies Registration Office and thus become publicly available. They are the main constitutional document of the company, and can be amended by a qualified majority of the shareholders at a general meeting (unless higher thresholds are specified either in the articles of association or, more commonly, in the shareholders’ agreement as a reserved matter).

The articles of association set out the company’s name, share capital, and purpose as well as the size of the board (usually expressed as a minimum and maximum), whether or not the company shall appoint an auditor, and the company’s financial year. If the company has more than one class of shares, the articles of association must also stipulate such classes and the rights of the shares, including voting differences (maximum 1:10), liquidation preferences (if any) and pre-emption rights. With regard to voting rights of the shares, no share may carry voting rights that are more than ten times greater than the voting rights of any other share. It should also be noted that it is not possible to issue non-voting shares in a Swedish limited liability company. The articles of association will also contain fairly standard provisions on the procedures for convening and conducting general meetings.

Other common and important provisions in the articles of association relate to clauses restricting the transfer of shares, which are legally binding on both the company and any third-party acquirer:

• consent clause (samtyckesförbehåll);
• right-of-first-refusal clause (förköpsförbehåll); and/or
• post-sale purchase right clause (hembudsförbehåll).

The articles of association may not include any other restrictions on the transferability of the shares other than the three clauses listed above, which means that additional transfer restrictions contained in, for example, the shareholders’ agreement will not be legally binding on a third party. It is common for the shareholders’ agreement to include a right-of-first-refusal, supplemented by a post-sale purchase right clause in the articles of association, in order to protect against a party transferring its shares in breach of the shareholders’ agreement.

All shareholders are typically granted pre-emption rights to participate in any new financing rounds with their pro rata shareholding. Common carve-outs include share issues under agreed incentive programmes and rescue issues.

In addition, the reserved matters will typically include provisions for the issuance of any shares or other securities ranking senior or pari passu with those held by the investors.

Anti-dilution provisions are not uncommon in larger Series A and subsequent rounds, particularly where international investors are involved. When included, they take the form of weighted average formulae. Full ratchet anti-dilution provisions are quite unusual in the Swedish market. Increased attention has been paid to anti-dilution provisions in recent years, which can be attributed to the fact that the importance of such provisions has become more apparent in the current market conditions.

From time to time, exit rights (such as the drag-along provision) are qualified on the basis of minimum monetary thresholds that must be reached in order to be triggered and/or there is a requirement that a minimum period of time has passed since the initial investment, as well as the right for investors to trigger an exit and appoint a financial adviser after a certain period of time.

The largest investors will typically have board representation rights and control/influence over certain reserved matters. In addition to such traditional governance rights, the investors will also typically have information rights which may be coupled with audit/inspection rights in order to monitor their investment and better exercise their governance rights.

Board Representation Rights

Board representation rights are negotiated on a case-by-case basis, taking into account the existing board composition, the overall shareholding structure, the need for independent directors and/or specific skills and similar commercial considerations. Typically, in VC-backed companies, the board of directors consists of three to eight members, with a mix of founders, investors and independent or external directors. The articles of association will specify the minimum and maximum number of ordinary directors and deputy directors to be appointed, noting that, if the board consists of fewer than three ordinary directors, the shareholders must also appoint at least one deputy director. Unless otherwise agreed, the chairman is appointed by the board and has the casting vote pursuant to the default provisions of the Swedish Companies Act.

The board is formally appointed by the shareholders at the general meeting, and the shareholders’ agreement is therefore typically structured as a right for certain parties to nominate a director and a corresponding obligation for all other parties to vote their shares in order to appoint such nominee.

The Swedish Companies Act does not recognise the concept of board observers, but it is not uncommon for such positions to exist in Swedish VC-backed companies. It should be noted that the rights and obligations of the board observers (eg, to receive information and attend meetings, and their duty of confidentiality) must be set out in the shareholders’ agreement.

Reserved Matters

As regards reserved matters, investors are typically granted voting rights or influence over certain shareholder matters decided at general meetings, as well as more operational matters decided at board level. Whether or not such approvals are structured as veto rights for (a limited number of) specific investors, or as voting rights to be exercised by a group of investors and/or a specific share class, will depend on the overall shareholding structure and similar commercial considerations.

The list of reserved matters will vary widely from company to company, but will often include safeguards relating to:

• decisions that will dilute the shareholding of the investor(s), such as changes to the share capital and the issue of instruments ranking senior or pari passu with those held by the investor(s) or directed share issues not otherwise authorised under the shareholders’ agreement;
• major changes in the company’s strategic direction or decisions that otherwise materially change the basis on which the company conducts its business (including the pursuit of an IPO or trade sale);
• the approval of any dividend, distribution or return of capital to the shareholders;
• approving any voluntary liquidation, dissolution, winding-up, bankruptcy, reconstruction or reorganisation of the company;
• decisions regarding the appointment or dismissal of the CEO;
• decisions relating to related party transactions; and
• certain operational decisions considered to be of high value to the company (to be determined on a case-by-case basis, but which may include, eg, approval of budgets and business plans, approval of material contracts, transactions and/or investments above a certain threshold, approval of borrowings above a certain threshold and/or decisions relating to material litigation).

Representations and Warranties

The investment agreement will typically include a catalogue of fundamental and operational representations and warranties made by the existing shareholders or a group thereof (such as the founders in more early-stage fundraisings). The extent to which the company itself can make, and be liable for, representations and warranties provided to its investors is a subject of legal debate in Sweden. The prevailing view, supported by case law dating back to the 1930s, is that a company cannot be held liable to its share subscribers. The reason for this is that the protection of the company’s creditors is considered to take precedence over the protection of the company’s investors.

The scope of the representations and warranties will depend on the target company, the nature of its business and its maturity and growth stage (with more extensive warranties being more common in later stage fundraisings). Swedish style transaction documents tend to be shorter than, for example, US investors are used to, and the same will inevitably be true of the warranties. That being said, the overall topics covered by the warranty catalogue will be roughly the same. For example:

• ownership and authority;
• financial statements;
• material agreements;
• employees and pensions;
• intellectual property rights;
• IT and data security;
• GDPR and data privacy;
• tax;
• disputes;
• insurance;
• regulatory licences and permits;
• compliance with laws;
• sanctions; and
• AML and ABC-related warranties, as well as general warranties relating to the information provided during the due diligence phase.

Despite the focus on impact investments and ESG-driven business models in Sweden in recent years, this has not yet resulted in the inclusion of ESG-related warranties on a larger scale.

Covenants Relating to Closing

In addition to the representations and warranties, the investment agreement will include covenants for the company and existing shareholders regarding steps to be taken at closing, including the holding of a general meeting at which the shareholders undertake to vote their shares in order to do the following:

• to resolve to issue new shares to the investor(s);
• to appoint the new board of directors;
• to allot the shares so subscribed for by the investor(s); and
• to register the share issue and other shareholder resolutions with the Swedish Companies Registration Office in order to give them full legal effect.

The share issue will become effective when the new shares and the new shareholder(s) are entered in the share register, which is kept by the board.

Other closing deliverables may include evidence that new employment agreements have been entered into with relevant key individuals, confirmations of the assignment of intellectual property rights to the company by relevant employees, consultants and other third parties, and, where applicable, the consent of contractual counterparties in relation to changes in shareholdings that trigger change-of-control or similar rights. In addition, the newly introduced Swedish FDI Act makes it necessary to regulate the responsibilities of the parties in respect of companies and investments falling within the scope of the Act to ensure that such FDI notifications are made and approvals are obtained where required (see further 7.2 Restrictions and the Trends & Developments chapter of this guide).

Other Types of Covenants and Undertakings

Other common covenants in the investment agreement include an obligation to discharge resigning board members from liability at the next annual general meeting and to update the register of ultimate beneficial owners kept by the Swedish Companies Registration Office.

The shareholders’ agreement will usually include non-compete and non-solicitation covenants, which will generally include a carve-out for institutional investors.

All parties will be subject to confidentiality undertakings and similar boilerplate provisions in the investment agreement.

Forms of Recourse

Liability for breaches of the obligations in the investment agreement will typically be several and not joint, and determined on a pro rata basis. Compensation can be structured in a variety of ways, but one of the most common structures is based on the issuance of so-called compensation shares at quota value (ie, the total share capital divided by the total number of shares issued, typically equal to SEK1 or similar), which has the effect of diluting all other shareholders in favour of the investor(s). In essence, the investor(s) are entitled to increase their pro rata shareholding acquired through the investment to the level that their original investment amount would have entailed had the loss incurred by the breach been known at the time of the valuation.

As a simplified calculation example, assuming that an investor invests SEK10 million at a pre-money valuation of SEK100 million, the investor will acquire a 10% stake in the company. Due to a breach of warranty, there is a loss of SEK20 million and the pre-money valuation of the company, had such loss been known prior to the round, would not have been SEK100 million but SEK80 million. At such a valuation, the SEK10 million contributed by the investor would have given the investor a 12.5% stake instead of 10%. Consequently, additional shares equivalent to 2.5% of the company’s total number of shares will be issued to the investor at quota value (which is the minimum amount at which shares may be issued under the Swedish Companies Act, and therefore as close to no consideration as is legally permissible).

Other common methods of compensation may include an obligation for the founders to compensate for warranty breaches up to a certain threshold (often linked to the annual salary of the founder), after which any remaining amounts are sometimes dealt with by way of compensation shares. Compensation to be provided by certain groups of shareholders (eg, founders) will often include the right to provide compensation by way of transfer of shares at fair market value. Examples include where compensation warrants are issued that can be exercised in the event of warranty breaches or failure to meet certain milestones that are material to the underlying valuation.

Liability for warranty breaches will typically be made subject to a number of limitations, such as time and monetary thresholds. In addition, as noted in 3.1 Due Diligence, it is common in Swedish style transactions that the warrantors are not liable for any breaches relating to matters, facts or circumstances that were fairly disclosed during the due diligence process – regardless of whether or not the investor had actual knowledge of them.

There are no specific government tax subsidy programmes targeted towards investments into growth companies. Sweden, however, has extensive tax exemptions on gains and distribution attributable to shares applicable in the corporate sector under the so-called participation exemption regime. In general, Swedish limited liability companies can divest shares and receive dividends on shares in unlisted companies tax free. The unlisted company must be deemed equivalent to a Swedish limited liability company from a civil law and tax law perspective for the tax exemption to apply.

Further, Sweden does not levy withholding tax on repayment of amounts that are considered as principal and interest for tax purposes.

Please see 4.1 Subsidy Programmes. In addition, capital contributions and lending are generally not taxed at the level of the portfolio company or the investor. Interest income is taxed if the lender is tax resident in Sweden and subject to the standard corporate income tax rate (20.4% for FY 2024). This tax treatment applies to all limited liability companies in Sweden and is not specific to VC.

On 1 January 2019, the Swedish government enacted new rules limiting deductibility on interest expenses, capping deduction of net interest costs to a maximum of 30% of tax EBITDA. The rules have been ratified to make investment via debt and equity equal for the investee.

The founders’ and other key employees’ long-term commitment to the venture is generally sought to be procured through equity-based incentive schemes coupled with contractual obligations, including vesting, leaver provisions, transfer restrictions in the form of lock-ins, and non-compete/non-solicitation undertakings.

Founder lock-ins and vesting is prevalent in early-stage fundraisings and typically renewed in connection with subsequent early-stage rounds for as long as the founders hold a more substantial stake in the company.

Through the leaver provisions, the continued participation in the equity-based incentive programme is made subject to the participant’s continued employment or engagement in the venture. However, due to Swedish taxation rules, such leaver provisions are typically limited in time.

Non-compete provisions will be included in both the shareholders’ agreement (or, as applicable, warrant agreement) and the employment agreement of such individual. Non-compete provisions in Swedish employment agreements are subject to various restrictions and requirements for compensation, pursuant to case law from the Swedish Labour Court (Arbetsdomstolen). Consequently, the non-compete provision included in the shareholders’ agreement enables the company and other shareholders to enjoy a more extensive scope of protection against the founders and other key employees competing with the venture.

Equity-based incentive programmes in Swedish limited liability companies can be divided into the following five main categories:

• warrants (teckningsoptioner), where the participant holds a registered security that gives the right to subscribe for a new share in the company without the need for a new issue;
• share options, where the participant enters into an agreement that gives them a call option or a put option on an already issued instrument;
• employee stock options (personaloptioner), where the participant is given a right to acquire a security, such as a share or a warrant, in the future, and this right is typically associated with restrictions on the disposal right linked to the continued employment;
• qualified employee stock options (kvalificerade personaloptioner), where the participant is given a right to acquire a share in the company in the future, and this right can be exercised no earlier than three years and no later than ten years after the acquisition, provided that a number of specifically stated conditions (with respect to the issuing company, the holder and the option itself) are met; and
• synthetic options (also referred to as phantom schemes), which entail a right to a cash payment based on the share’s value development (and thus do not give the holder any right to any instrument).

In Swedish VC-backed companies, the most prevalent incentive programme structures for key employees are warrant programmes and qualified employee stock option programmes, while founders typically only have common shares subject to negative vesting and other lock-in mechanisms.

Warrant Programmes

Warrant programmes will comprise of (i) the terms and conditions of the warrants and (ii) a warrant agreement entered into between the company and the participant. The financial terms of the warrants are typically calculated on the basis of the Black & Scholes model, which has become an established standard. The terms and conditions of the warrants are to a large extent a rather standardised format based on the provisions of the Swedish Companies Act, regulating, for example:

• strike price;
• maturity;
• procedural formalities relating to exercise; and
• certain protective provisions.

The terms and conditions are registered with the Swedish Companies Registration Office and thus become publicly available. The warrant agreement will include a number of important provisions which the parties do not wish to make publicly available, for example:

• transfer restrictions (typically structured as a right of first refusal to the benefit of the company or a party designated by the company);
• vesting and leaver events; and
• exit provisions (including drag- and tag-along rights).

Vesting is structured as “reversed vesting”, ie, the participant will be the legal holder of all warrants as of day one but with a call option for the company to purchase or have the company redeem all or a portion of such warrants in the event of a leaver scenario. The most common vesting schedule is a four-year linear vesting with a one-year cliff, although other models are also used on a case-by-case basis. A comprehensive assessment of the transfer restrictions, vesting provisions and lock-ins imposed on the participants warrants needs to be done in order to assess the tax implications of the programme (see further 5.3 Taxation of Instruments), and this assessment will often have a significant impact on the actual terms of the programme in order to ensure that the programme does not give rise to detrimental tax consequences for the participant and the company.

Through the leaver provisions, ownership of the warrants and thus the right to exercise the same into shares in the company is made subject to the participant’s continued employment or engagement in the venture. However, such qualification cannot be unlimited in time and as such a participant will only be considered a bad leaver if their employment terminates within a specified, initial time period. The exact length of such time period is subject to the overall tax assessment.

Qualified Employee Stock Options

Qualified employee stock optionswere introduced through legislation in 2018 to facilitate recruitment and retention of key personnel in start-ups. Up until then, employee stock options issued at no cost and which remained subject to continued employment were generally avoided for Swedish tax subjects as the benefit value, determined as the difference between the exercise price and the market value of the underlying share on the exercise date, was taxed as income from employment (ie, progressive tax rate up to approximately 55% for the participant and social security charges for the company). Consequently, it became difficult for companies to predict the cost of an employee stock option programme, and start-up companies that competed for talent on an international market had limited options to offer equity-based incentive schemes without substantial investments from the participant. However, following the introduction of the qualified employee stock option rules in 2018, it became possible for certain start-up companies to structure programmes so that the benefit of the employee stock option would not be subject to taxation for the employees nor the company, provided thatcertain specific conditions were met in regard to the following key parameters.

• The issuing company– Such qualifications include, inter alia:
1. maximum number of employees;
2. financial thresholds that may not be exceeded;
3. exclusion of certain types of operations; and
4. a limitation that the company cannot have carried out operations for more than ten years prior to issuing the options.
• The participants– Such qualifications relate to, inter alia, requirements that the participants be employed by the company for at least three years following the issuance of the options, as well as requirements regarding minimum incomes received from the company during such period and restrictions on shareholding in the company.
• The options–These qualifications relate to the value of the options as such where certain maximum thresholds cannot be exceeded, calculated both on an individual basis and on an aggregate basis for all participants.

In addition, the exercise period must be within three to ten years after the options were acquired by the participant in order for the options to fulfil the requirements for qualified employee stock options entitling to more beneficial tax treatment. One important question which therefore needs to be addressed in the agreement between the company and the participant is how to handle an exit that occurs prior to such minimum time period of three years.

Terms and choice of instrument in an incentive scheme are vital in determining the taxation of the scheme. Generally, an incentive scheme can either (i) be taxed at exercise as income of employment (progressive tax rate up to approximately 55% for the participant), or (ii) be subject to capital gains tax upon divestment of the instrument utilised (tax rate 25% flat, 30% or under the so-called 3:12-tax regime with a blended rate of 20–55%). Vesting, leaver and lock-in provisions need to be carefully monitored and each programme analysed as a whole on a case-by-case basis to ensure the tax outcome sought.

Cash bonuses and phantom schemes are generally taxed as employment income at payment.

In case of employment taxation, the employer or the entity providing the benefit will be subject to Swedish social security charges where applicable.

The size of the ESOP pool is typically agreed already at the stage of the term sheet discussions. In recent years’ prevailing market conditions, with valuations being cut and many companies having to carry out flat/extension rounds and even down rounds, there has been a heightened need to discuss the handling of any existing incentive programmes which are “out of the money” in connection with the term sheet negotiations in order to land on an appropriate overall size for the ESOP pool after such clean-ups of existing incentive programmes.

The structure of the various types of incentive programmes are rather standardised, taking into consideration applicable Swedish corporate and tax laws and regulations, and therefore are resolved upon by the company’s board of directors without necessarily also needing to be a reserved matter for investor approval.

As regards timing, for practical reasons and not wanting to make closing of the investment round subject to too many external variables, employee incentive programmes are typically not implemented simultaneously with the investment round.

The shareholders’ agreement will typically include a right of first refusal coupled with drag- and tag-along provisions. The right of first refusal is commonly structured as a right for all other shareholders to acquire their pro rata portion (or more if not all shareholders have opted to act on their right) at the same price and terms as were offered to the third-party buyer. In the event the right of first refusal is not acted on by the shareholders, the tag-along right will often come into effect (provided that any minimum triggering threshold for such tag-along right is met). The trigger for the drag-along right will be subject to a qualified majority of the shareholders acting as a dragging majority. Depending on the overall structure of the cap table, such group may be limited to one or several specific share classes and/or may list specific parties who must always participate in order to comprise a dragging majority.

In addition to the contractually regulated transfer restrictions, the articles of association will typically also include additional, statutory transfer restrictions in order to safeguard against any transfers in breach of the shareholders’ agreement. The most prevalent combination is for the shareholders’ agreement to include a right of first refusal coupled with a post-transfer purchase right in the articles of association.

The shareholders’ agreement will typically grant the investor(s) a certain degree of control over the exit process, eg, by way of reserved matters relating to the ability to block the initiation or execution of an IPO or trade sale and a right to appoint exit advisers in the event an exit has not been pursued within a predetermined time frame.

It may be noted that, in Swedish M&A transactions, each seller is generally expected to provide both fundamental and operational warranties – regardless of whether they have held board seats or other managerial roles. However, liability is several and not joint, and is restricted to each seller’s pro rata portion; and the use of W&I insurance is quite common. Consequently, as regards the exit provisions included in the shareholders’ agreement, there is no standard practice of limiting the scope and type of warranties that investors will be required to accept liability for in connection with an exit.

Over the last decade, an increasing number of IPO exits for start-ups have been observed; both on the regulated market on Nasdaq Stockholm and on the MTFs’ Nasdaq First North and Nasdaq First North Growth Market. The listing venue primarily depends on how sophisticated the issuer is in terms of level of internal control, governance, investor relations, etc. Experience has shown that start-ups usually pursue IPOs by a combination of an offering of existing shares (secondary offering) and new shares (primary offering) in order to (i) enable sell-down for founders and main owners and (ii) at the same time raise capital for continuous growth.

In Sweden there is no framework for “grey markets”, but such trade is done privately and there are actors who assist in facilitating such trade outside the regulated marketplaces.

In Sweden, there are no securities laws governing equity offerings of non-listed companies. Private limited liability companies are restricted in their ability to market their securities more broadly and may not direct offerings to more than 200 people. Should a company wish to make a larger offer, it needs to be a public limited liability company (note that this is not the same as being listed). For public limited liability companies, the prospectus regulation is applicable and, for offerings directed at more than 149 individuals, a prospectus may be required.

In December 2023, Sweden implemented the FDI Act, which has had, and is expected to have, a significant impact on mergers, acquisitions, venture capital and other investments in Swedish-based companies. (See the Trends & Developments chapter of this guide for a detailed description of the Act.)