The most sizeable venture capital-related transactions in Austria in 2023 that were publicly reported were led by the Austrian/German proptech start-up GROPYUS, who managed to complete a financing round of EUR100 million. This was followed by the Salzburg-based logistics scale-up MYFLEXBOX, with a financing round of EUR75 million. The sustainable online platform Refurbed managed to obtain around EUR54 million. The Upper Austrian cleantech start-up neoom closed with two financing rounds totalling EUR41 million.

During the past year, the top trends in Austria have reflected a dynamic shift in the investment landscape. On the funding side, there has been a notable increase in the number of rounds (particularly those under EUR10 million), indicating a robust interest in early-stage and smaller investments. Despite this increase in activity, there has been a significant decline in the overall volume of funding, suggesting a more cautious approach by investors (due to international economic uncertainties, in particular). Transaction structures have also evolved, with a marked decline in large growth rounds, which may indicate a strategic pivot towards consolidation and a focus on sustainable growth rather than rapid expansion. In addition, there has been a marked emphasis on sustainability, with a significant proportion of investment going to sustainability start-ups. However, the majority of rounds were still in the software and technology sector.

The industries that drove venture capital activity in Austria in the past 12 months were software and technology, e-commerce, and health. These sectors accounted for the most financing rounds (with 64, 28, and 20 respectively) and for the most financing volume (with EUR144 million, EUR92 million, and EUR91 million respectively). Software and technology start-ups included those working on software as a service (SaaS), AI, virtual reality, blockchain, cloud, cybersecurity, and data analytics. E-commerce and health start-ups included those offering online platforms, digital services and innovative solutions for various sectors and customers.

A distinction can be drawn between these industries and the construction-tech/green building and mobility sectors, which saw fewer financing rounds – albeit larger ones, due to the involvement of Gropyus and MYFLEXBOX, two of the top three deals of the year. These sectors also have a strong sustainability focus, which attracted more attention from investors in 2023.

The main structures and legal entities typically used to establish venture capital funds in Austria are GmbH & Co KGs – ie, limited partnerships (Kommanditgesellschaft, or Co KGs) with a limited liability company (Gesellschaft mit beschränkter Haftung, or GmbH) as the general partner (GP) and manager of the fund.

GmbH & Co KG

Typically, investors become directly or (via a trusteeship) indirectly limited partners in a Co KG. The GP is, in most cases, a GmbH (limited liability company) that receives a fee for assuming unlimited liability and managing the fund. Typically, the GP directly manages the partnership, but there are also structures whereby the partnership is managed by a separate management company. As venture capital funds usually fall under the Alternative Investment Manager Act (Alternatives Investmentfonds Manager Gesetz, or AIFMG), which implements the Alternative Investment Fund Managers Directive, the company managing the fund must be a legal person licensed or registered as an alternative investment fund manager (AIFM) under the AIFMG.

GmbH

In the case of a GmbH, the investors become directly or (via a trusteeship) indirectly shareholders of the GmbH. By law, the GmbH is managed by at least one managing director who must be a natural person. However, in most cases, management activities will be outsourced (as far as legally possible) to a management company that must be a licensed or registered AIFM under the AIFMG. Compared to a partnership, a GmbH has a minimum share capital requirement of EUR10,000.

The means for fund principals to participate in the economics of a venture capital fund are typically a management fee and a carried interest. The management fee is a regular payment, usually based on a percentage of the fund’s committed or invested capital, that covers the fund’s operational expenses. The carried interest is a share of the fund’s profits, typically expressed as a percentage of the fund’s total profits paid to the fund manager only after the investors have received their committed capital and a pre-agreed rate of return on committed capital (known as the hurdle rate or preferred return). The customary rate of return is 8% per year and the market standard for carried interest is generally 20% of the fund’s profits exceeding the hurdle rate.

Although the carry calculation in venture capital funds can vary, three methods predominate:

• American-style carry – the fund principals receive their carried interest on all profitable deals on a deal-by-deal basis, regardless of losses made on other deals;
• American-style, with loss carryforward ‒ the fund principals receive their carried interest on all profitable deals on a deal-by-deal basis, but after accounting for realised losses on previous deals and write-downs on assets that have not been liquidated; and
• European-style carry – the fund principals receive their carried interest only after investors have received their committed capital, plus full preferred return.

Since the introduction of the AIFMG in Austria, most venture capital funds established in Austria qualify as alternative investment funds (AIFs) under the AIFMG. An AIF is a collective investment scheme managed by an AIFM. The term “alternative investment fund” encompasses every collective investment undertaking (including its subfunds) that collects capital from a number of investors in order to invest it in accordance with a determined investment strategy for the benefit of its investors. It is important to note that such collected capital may not be directly used for an operational activity. Funds pursuant to the Austrian Investment Funds Act and funds qualifying under the Austrian Real Estate Investment Funds Act of 2011 are also classified as AIFs but are exempted from the AIFMG.

The AIFMG differentiates between AIFMs subject to licensing before the Austrian Financial Market Authority (FMA) pursuant to Article 4(1) of the AIFMG and AIFMs subject only to registration with the FMA pursuant to Article 1(5) of the AIFMG. The main difference is that only selected provisions of the AIFMG (namely Articles 24 to 28, 56 and 60 of the AIFMG) apply to registered AIFMs, which therefore are subject to a reduced supervisory regime. The most notable restriction for registered AIFMs is that registered AIFMs are not allowed to market AIF units or shares to retail clients and are not allowed to provide cross-border management or marketing activities under the EU passporting regime of Directive 2011/61/EU. Licensed AIFMs may further conduct pre-marketing activities, subject to certain conditions (however, see the European Venture Capital Fund (EuVECA) Regulation (the “EuVECA Regulation”) below).

AIFMs that manage funds with assets of more than EUR100 million (with use of leverage) or more than EUR500 million (without use of leverage) are required to obtain a licence; otherwise, registration is sufficient. If a licence is required, the AIFM must fulfil certain requirements to obtain it.

EuVECA Regulation

The EuVECA Regulation was initially introduced with the aim of creating a new pan-European designation for small AIFMs because, generally, they are prohibited from participating in cross-border marketing for their AIF. By registering an AIF as a EuVECA, the AIFM may market the relevant AIF throughout the EU to certain categories of investors defined in the EuVECA Regulation under the EU-wide passporting regime, based on its home state registration. To register a EuVECA, Austrian-based AIFMs must comply with the rules set out in the EuVECA Regulation and supply the FMA with certain information regarding themselves and their AIF.

The EuVECA Regulation is not compulsory for small AIFMs. However, if a small AIFM does not take advantage of this unified regime it must comply with national laws of each EU member state.

A manager of a EuVECA fund may engage in pre-marketing in the EU subject to certain conditions.

The venture capital fund environment in Austria is characterised by a variety of actors, including business angels, venture capital funds, corporate venture capital investors, and public funding sources. Some of the most active venture capital investors in Austria are Speedinvest, aws Gründerfonds, Calm/Storm Ventures, UNIQA Ventures and Elevate Ventures. Speedinvest is one of the most active investors in the DACH region and Calm/Storm Ventures is a prominent early-stage European healthtech investor. In recent years, new fund initiatives appeared on the Austrian market, such as Fund F (focusing on gender-diverse founder teams) or Push Ventures (focusing on greentech and healthcare start-ups).

Due diligence is a crucial process in the start-up and venture capital ecosystem, undertaken by venture capital fund investors to evaluate the potential risks and opportunities associated with an investment opportunity.

During the due diligence process, venture capital fund investors extensively research and examine the start-up and try to understand its business model. The objective is to mitigate risks and make informed investment decisions. Due diligence findings are then reflected in the negotiation of the final deal terms and the assessment of the start-up’s valuation.

Key areas of due diligence are as follows.

• Financial due diligence – this aspect focuses on evaluating the start-up’s financial health, including its historical and projected financial statements, revenue streams, expenses, profitability and cash flow. Investors assess the accuracy of the financial data provided and analyse key financial metrics to gauge the start-up’s financial viability.
• Legal due diligence – legal due diligence involves a thorough examination of the start-up’s legal framework to assess the legal risks and obligations associated with the investment. During a legal due diligence process, various legal aspects are examined, including corporate governance, contracts, IP rights, regulatory compliance, real estate ownership, litigation history, employment matters, environmental compliance and any other legal documentation or issues relevant to the transaction.
• Market due diligence ‒ market due diligence aims to assess the start-up’s target market, industry trends, competitive landscape and growth potential. Investors analyse market size, customer segments, competitors and barriers to entry to determine the start-up’s market position and long-term prospects.
• Operational due diligence – operational due diligence focuses on evaluating the start-up’s operational capabilities, including its organisational structure, supply chain, manufacturing processes (if applicable), technology infrastructure, and scalability. Investors seek to identify any operational inefficiencies or risks that could impact the company’s growth and profitability.
• Team due diligence ‒ team due diligence involves assessing the start-up’s management team, their experience, expertise and track record. Investors evaluate the team’s ability to execute the business plan, their alignment with the company’s vision, and any potential talent gaps that need to be addressed.

The timeline of a new financing round in a growth company with a new anchor investor can vary depending on the complexity, negotiation and documentation of the deal, but it can be expected to take six weeks (for follow-up rounds by existing investors) to six months (for larger rounds, new investors with due diligence requirements, intense negotiations). Bridge rounds are typically faster. In some cases, if there are no negotiations and only the term sheet is implemented, it can take as little as one or two weeks.

The relationship among the various parties in one round may also vary depending on the level of alignment, co-operation and trust between them. However, there are some common aspects. Existing and new investors may have different interests and expectations regarding the valuation, terms and conditions of the investment. Also, majority requirements or consents by all existing investors may apply depending on the provisions of the shareholders’ agreement and the articles of association of the company.

Start-ups in Austria employ a diverse range of financing instruments to propel their growth. The typical instruments of start-up financing are equity financing, convertible investments and public grants.

Equity Financing

Equity financing is the traditional and prevalent method of venture capital and start-up financing and is typically provided via a cash capital increase in combination with capital contributions (Gesellschafterzuschuss) (ie, capital in exchange for equity). Depending on the start-up’s situation, financing may be contingent on the satisfaction of milestones/conditions precedent (eg, minimum turnover figures or availability of product-related features).

Convertible Investments

As an alternative to equity financing or bridge financing instruments, convertible loan agreements (CLAs) or Simple Agreements for Future Equity (SAFE) instruments are commonly used in venture capital and start-up practice. CLAs and SAFEs are designed to allow investors to a start-up with capital while deferring the determination of the company’s valuation until a later date.

Public Grants

Government grants and subsidies are an avenue, especially for technology and innovation-focused start-ups. These offerings can provide non-dilutive funding, supporting specific projects or research and development endeavours.

Hybrid Financing Instruments

To a lesser extent, start-ups are financed via hybrid instruments such as participation rights (Genussrechte) and silent partnerships or crowdfunding platforms.

Participation rights, silent partnerships

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

Silent partnerships are similar to participation rights, but typically confer more rights (eg, the right to inspect books and records, as well as other information rights).

Crowdfunding platforms

Crowdfunding platforms are leveraged by start-ups to raise capital from a broad audience, fostering community support and acting as a form of market validation. Some start-ups also explore traditional bank loans or credits – although this is less common and usually reserved for those with a solid financial track record.

Different legal documents are required for a start-up’s financing round, depending on factors such as the nature of the transaction (eg, equity or convertible financing) and the jurisdiction of the company. In Austria, most financing rounds are structured as an equity participation in a capital increase. The company’s capital is increased and the resulting new shares are issued to the investor against payment of the nominal amount plus a cash contribution. The following legal documents need to be executed as part of such a traditional equity financing round.

• Investment agreement – this is the main transaction document that outlines the specifics of the investment. It details the amount invested, the valuation of the start-up, and other terms and conditions such as representations and warranties, use of funds, and conditions precedent of the fund flow. It is essentially the roadmap for the financial arrangement.
• Shareholders’ agreement – this document governs the relationship between the shareholders. It covers who gets a say in what. Typical shareholders’ agreements include provisions for decision-making, board representation, share transfer restrictions (tag-along, drag-along, pre-acquisition rights, etc), liquidation preference and authorisations of incentive programmes.
• Articles of association – during a financing round, adjustments or even restatements to the company’s articles of association are necessary. These amendments or restatements reflect changes in the share capital, voting rights and other key elements impacting the company’s corporate governance.
• Technical capital increase documentation – this set of documents is required to technically implement a share capital increase.
1. Minutes of the general meeting – a record of the decisions taken during the general meeting, such as the formal resolution to increase the share capital and issue new shares to investors. The minutes need to be certified by a notary public.
2. Subscription declaration – this declaration is a formal commitment from investors to acquire new shares as part of the capital increase. Depending on the legal form of the start-up, this must be executed in the form of a notarial deed or as a notarial or attorney private deed.
3. Commercial Register filing ‒ to legally effect the capital increase, a filing is made with the Commercial Register, updating the company’s share capital. The signatures on the filing must be certified by a notary public.
• Ancillary documents, including IP transfer deeds and (new) managing director agreements.

In Austria, venture capital investors typically seek anti-dilution protection and pre-emption/subscription rights over new shares in their investment agreements with start-ups. These provisions are designed to protect the investors’ ownership percentage and valuation in case of a future share issuance at a lower price (down round). Anti-dilution protection can take different forms, but the most common methods are weighted average anti-dilution and full ratchet anti-dilution.

Pre-emption/subscription rights over new shares are also standard for venture capital investors in Austria, as they allow the investors to maintain their ownership percentage in the company by participating in each share issuance. However, these rights do not prevent dilution in a down round, unless they are combined with anti-dilution protection.

In addition, as a protective measure, venture capital investors in Austria typically secure a liquidation preference over other earlier investors, founders and employees. This means that they are entitled to receive a certain amount of the proceeds from the liquidation or sale of the company before any other distributions are made. The liquidation preference can be either non-participating or participating, depending on the terms of the financing agreement. A non-participating liquidation preference gives the investors the right to choose between receiving their preference amount or their pro-rata share of the proceeds, whichever is higher. A participating liquidation preference gives the investors the right to receive both their preference amount and their pro rata share of the remaining proceeds. In cases where there are multiple investors with different financing rounds, the liquidation preference is usually structured as “last in, first out”, meaning that the later investors have priority over the earlier ones.

In recent months, pay-to play provisions have become more popular, protecting investors who continue to invest in start-ups. “Pay to play” means that non-investing investors lose privileges or preferences. These pay-to-play effects were often negotiated in down rounds as a benefit for investors who continue to financially support the start-up in difficult times. By way of example, non-investing investors would lose their liquidation preferences to make new investments into the start-up more attractive.

The investors’ typical influence over the management and affairs of the start-up depend on the size and stage of the investment, as well as the negotiating power of the parties. Market standard rights in relation to the company’s corporate governance include the following:

• advisory board representation or observer rights, which allow investors to appoint members or observers to the company’s advisory board (if implemented) and to participate in its decision-making;
• veto rights or consent rights, which require the investors’ approval for certain matters affecting the company, such as changes to the share capital, the business plan, the budget, the dividend policy and other operational measures exceeding certain thresholds; and
• information rights, which entitle investors to receive regular and timely financial and operational information from the company.

Owing to very strict capital maintenance rules, it is questionable whether a start-up can give representations and warranties during a capital increase. It is thus common to also request founders and existing shareholders to give representations and warranties as well. Existing non-operative shareholders (particularly investors) typically give only fundamental warranties regarding their ability to enter into the transaction documents, whereas founders also give operational warranties. The liability for breaches is typically capped, with the cap being intensively negotiated. For founders, typically a multiple of their annual salary is used as a reference for the cap amount.

Securing funds is a crucial element in the establishment and expansion of a start-up. Consequently, Austria presents an extensive array of public financing options. The public financial support available in Austria is notably varied and has been embraced positively by the entrepreneurial community. Key players in the Austrian funding landscape include the Austrian Research Promotion Agency and Austria Wirtschaftsservice GmbH. These institutions provide a range of financial assistance, including guarantees, loans with subsidised interest rates, as well as grants that do not require repayment.

There is no specific tax treatment of investments into growth/start-up/venture capital fund portfolio companies (however defined). Thus, normal Austrian capital gains taxation applies (27.5% for natural persons taxable in Austria and corporate income tax of 23% for Austrian corporations).

In Austria, the government recently took significant steps to create an environment that supports equity financing, with a special focus on start-ups. The enactment of the Start-up Promotion Act (Start-Up-Förderungsgesetz) towards the end of 2023 stood as a clear indicator of this dedication. This Act was a detailed assembly of tax and corporate law amendments aimed at strengthening the start-up ecosystem. It increased the financial attractiveness of employee incentive programmes by implementing tax reforms, thereby promoting broader involvement in the growth and prosperity of start-ups.

Furthermore, as part of this Act, a new corporate form known as the Flexible Company (FlexCo) was introduced. The FlexCo structure was designed to be less expensive and more adaptable than traditional corporate entities, serving as an additional measure to lower the hurdles for capital acquisition. These legislative changes were elements of a larger strategy to establish Austria as a competitive centre for start-ups and venture capital. The aim was to boost the country’s attractiveness to international investors and highly skilled professionals.

In Austria, the long-term commitment of founders is usually secured by the fact that they hold significant shares in the company, which are diluted over the course of the rounds. The situation is different for key employees, who generally do not hold any direct participation in the company, owing to adverse tax effects. Hence the long-term commitment of key employees to a start-up is often secured through employee participation programmes. These programmes are typically structured as virtual share programmes, which are essentially contractual bonus entitlements. An alternative to virtual share programmes is participation rights, which allow holders to be treated akin to shareholders. These participation rights confer benefits without imposing voting or other minority rights and do not necessitate special formal requirements such as a notarial deed.

The introduction of the FlexCo has provided a novel avenue for employee participation. The FlexCo allows for the issuance of company value shares (CVS), which are tailored for employee participation. CVS usually do not grant voting rights but do allow for participation in general meetings. This new option is particularly appealing, thanks to its synergy with recent tax changes that were implemented as part of a start-up package introduced concurrently with the FlexCo. These innovations represent a strategic approach to aligning the interests of employees with those of the company, thereby fostering their long-term commitment.

Founders are typically subject to a reverse vesting arrangement – ie, they receive/hold their shares from the beginning of the vesting period and during it obtain the right to keep their shares. Therefore, if a founder leaves the company during the vesting period, they must transfer a portion of the unvested shares to another shareholder in accordance with the vesting terms.

A common vesting schedule would normally be an arrangement with good/bad and grey leaver events, with a four-year vesting with a 6–12-month cliff and then a monthly/quarterly vesting until the end of the vesting period. This may vary in individual cases, as it often depends on whether and to what extent the founders have already invested in the company themselves, how long they have committed full-time to the company, and other notable factors.

In the case of an exit transaction before the end of the vesting period, the vesting period is usually accelerated. This is sometimes combined with a condition that the founder must remain with the company for a certain period of time at the buyer’s request (often referred to as single- and double-trigger acceleration).

The same applies in the case of any equity employee participation programme or the issuance of CVS. In a virtual share programme, a typical (forward) vesting structure is applied ‒ ie, the beneficiaries receive their entitlement over time during the vesting period. A cliff of 12 months typically applies to vesting terms.

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

Equity-based incentives typically trigger dry income taxation at the time of the grant. Since 1 January 2024, a new taxation regime was introduced to tackle the issue of dry income taxation. In a nutshell: eligible start-ups may allocate (for free) equity to employees, which is then taxed only at a later stage ‒ for instance, at the time of an exit, but also if the employee leaves the start-up.

At the respective trigger event, 75% of the value is taxed at a flat rate of 27.5%, while the remaining 25% is taxed at the standard progressive income tax rate. Social security contributions and other employer-related taxes apply. Minimum holding periods also apply.

To qualify for the new taxation scheme, a start-up must meet the following criteria:

• no more than 100 employees;
• annual turnover not exceeding EUR40 million; and
• the company must be within ten years of its founding.

While it is generally appreciated that there is now a tax-efficient way to distribute equity to employees, there are many questions regarding the details of the new regulation. Also, the new regulation may not be beneficial in certain scenarios, including in high-growth scenarios where the exit value significantly exceeds the valuation of the company at the time of the grant (given that 25% of the equity is still taxed at the standard progressive income tax rate up to 55%).

This depends on the type of employee incentive programme. Generally, the implementation of an employee incentive programme based on virtual shares usually depends on whether the dilution from the financing round has already been priced in or not.

If the dilution from the financing round has not been priced in and the new investors in the round will not be diluted by the programme, it is usually agreed that the company will allocate a volume corresponding to a percentage of the fully diluted share capital prior to the financing round.

If the dilution from the financing round has already been priced in and the new investors will also be diluted by the programme, it is usually agreed that the company will allocate a volume corresponding to a percentage of the fully diluted share capital after the financing round.

Exit rights and/or exit strategies are regularly anticipated in the shareholders’ agreement of a start-up. There are often provisions stating that the investors are entitled to initiate an exit procedure, either:

• by exercising drag-along rights in the event of a share sale; or
• based on explicit entitlements to initiate an IPO or an M&A process.

The transfer of shares in a venture is usually subject to restrictions (eg, consent requirements, pre-emption rights or lock-up periods), which aim to protect the existing shareholders and the venture from unwanted or detrimental transfers. Typically, transfer of shares (or parts thereof) by a shareholder to its privileged third parties (eg, affiliates) is exempt from such transfer restrictions. The exit triggers are commonly defined as events or circumstances that entitle or oblige the shareholders to initiate or participate in an exit process, such as reaching a certain valuation, achieving a certain milestone or receiving a bona fide offer from a third party.

An IPO exit for start-ups is not very prevalent in Austria. Typically, trade sales or secondary buyouts are used as exits for investments in successful companies. Exit by a trade sale to a strategic investor is still the predominant strategy for successful venture capital investments. If there is a secondary buyout, it is typically a management buyout.

Secondary interest generally exists after a certain time in the life cycle of a start-up. The authors are not aware of a tangible market need for secondary market trading. Given that the transfer of shares in an Austrian start-up entity (typically established as a limited liability company or FlexCo) must meet certain formalities, a secondary trading market would generally be difficult. In addition, EU capital markets requirements apply.

Given the legal formalities for the issuance or transfer of shares in an Austrian start-up entity (typically established as a limited liability company or FlexCo), there are no public offerings of equity in Austrian start-ups. Public offerings would generally be subject to EU capital markets requirements.

In Austria, foreign venture capital investors from outside the EU/European Economic Area (EEA) are subject to the Investment Control Act (ICA), which aligns with the EU Foreign Direct Investment Screening Regulation. The ICA mandates a filing requirement for such investors when they aim to acquire a significant stake in an Austrian company – specifically, when the investment reaches or surpasses 10%, 25% or 50% of the voting rights, potentially leading to control over the company or its essential assets. This requirement is especially pertinent if the company operates within a sensitive sector as outlined in the ICA’s annex and is based in Austria. While start-ups with fewer than ten employees and a turnover or balance sheet below EUR2 million are theoretically exempt, this exemption is seldom applicable in practice, as most start-ups surpass these thresholds by the time they seek growth capital.

The ICA’s broad interpretation of critical sectors, such as IT, means that most investments in start-ups by non-EU/EEA entities are likely to be notifiable. Additionally, the ICA’s provisions extend to financing rounds where the aggregation of voting rights acquired in joint transactions by foreign investors could trigger the notification requirement. During the past year, the significance of these restrictions has been underscored by the broad interpretation of critical infrastructure sectors, thereby increasing the instances where foreign venture capital investments are subject to regulatory scrutiny.