In a structured transaction, global travel tech company Flix secured a minority investment from investment firm EQT and Kühne Holding, an investment vehicle of German logistics entrepreneur Klaus-Michael Kühne. The investment in Greyhound owner Flix was led by EQT’s impact-driven, longer-hold fund EQT Future, and seeks to strengthen Flix’s balance sheet. The aggregate investment was reported to total EUR1 billion.

Led by General Catalyst, German AI defence company Helsing reportedly raised EUR450 million in one of Germany’s most sizeable equity funding rounds (Series C) in terms of volume in 2024. AI-driven language translator platform DeepL also secured EUR277 million in funding in May 2024 led by investor Index Ventures, raising the valuation of the Berlin-based company to approximately EUR1.85 billion and making it Germany’s most valued pure-play AI start-up. Munich-based space-tech venture The Exploration Company secured a EUR150 million Series B round led by Balderton Capital and Plural, with participation from a selection of additional investors.

Other sectors with significant funding activity include software and analytics (Helsing, osapiens), health (eGym, CatalYm, Tubulis) and energy (sunfire, Enviria, 1Komma5°).

Interestingly, private debt played a significant role in various later-stage transactions in the German market, such as fintech SumUp, Enpal and iwoca – with the first two private credit transactions reportedly exceeding EUR1 billion in volume.

Notable M&A exits were few and far between for German start-ups in 2024. In May, Dedrone, a German drone defence company, was sold to Axon, a police equipment manufacturer from Arizona, for USD500 million. Another significant M&A exit in the health sector was Cardior, engaged in the development of RNA therapies for heart diseases, acquired by Novo Nordisk for about EUR1.025 billion. Berlin-based start-up Delphai, an AI venture specialised in natural language processing, was acquired by Intapp, a publicly traded company from the US.

In a depressed German market environment, only seven companies went public. Germany's largest IPO was the listing of Douglas in March 2024, with an issuance volume of almost USD1 billion, followed by Springer Nature with USD665 million. German 3D manufacturer BigRep’s listing in the general standard of the Frankfurt Stock Exchange was among the very few in the growth sector (along with Steyr Motors and Elaris in the junior markets).

Overall Trends

The broader trend of increased cost of capital in Germany and challenged valuations is reflected in both financing round valuations and liquidity events. Overall, investors are opting for safer bets and prefer companies with a proven track record or alternative investments over very early-stage ventures.

Structured investments, comprising a mix of debt and equity, as well as primary and secondary transactions, were noticeably more present than in previous years, marking a trend towards bespoke funding events as opposed to more traditional equity financing rounds. Further, certain funding events that occurred in challenging conditions drew significant media attention – eg, air taxi start-up Lilium, or grocery delivery platform Flink.

The number of financing rounds declined for the third year in a row, falling by 12% to 755 transactions vs 2023. Compared with the record number from 2021 (1,160 deals), the number of financing rounds was down 35%. However, the total value of venture capital (VC) investments increased significantly compared to 2023 by more than EUR1 billion to just over EUR7 billion – the third-highest value in the past ten years.

At the same time, numerous growth companies are facing liquidity constraints, prompting some 336 start-ups to file for insolvency in 2024. This figure exceeds the number for the previous year and is 85% higher than in 2022. Prominent examples include fintech Creditshelf, which underwent protective shield proceedings (Schutzschirmverfahren), and relocation start-up Movinga, which had to cease business operations. On the other hand, the rescue of Instamotion, a platform for used cars, illustrated that insolvency proceedings may be a means to continue operations in certain cases.

Regional Divergence

Geographically, Berlin led with a total of 239 venture-backed financing rounds in 2024, significantly surpassing both Bavaria with 146 and North Rhine-Westphalia with 76 transactions.

That said, Bavarian start-ups secured more than EUR2.3 billion in venture funding and surpassed Berlin for the first time in terms of volume, which attracted approximately EUR2.2 billion. North Rhine-Westphalia almost tripled its funding total from EUR331 million to EUR951 million in 2024.

Investor-Friendly Deal Terms

As the VC market is only slowly recovering from moderate levels, companies continue to concede more investor-friendly deal terms. These include founder lock-ups, vesting, and liquidation preferences, as further outlined in 3.5 Investor Safeguards and 5.2 Securities.

In line with the global trend, equity funding in German growth companies heavily favoured software and analytics (including AI) in 2024, with start-ups in the sector securing some EUR2.2 billion. The health sector, the second-largest in terms of total financing volume, realised a total volume of EUR958 million, more than twice as much as in the previous year. As a result of one sizeable transaction in September 2024 (eGym), the fitness segment accounts for EUR185 million with only two deals.

VC-backed exits have overall not concentrated on certain industries and remained subdued in 2024. Notably, there has been an increased exit activity in the healthcare sector in 2024 compared to 2023. The top five VC-backed exits by value in 2024 came from drug discovery (Cardior), application software (Invia Group), mobility (TIER) and business/productivity software (Aaron.ai and shyftplan).

While Germany-incorporated VC funds do exist, neighbouring Luxembourg is more popular, with many sizeable Germany-focused VC investors due to its investor-friendly ecosystem, flexible corporate law and robust regulatory framework. When domiciled within Germany, the asset-managing GmbH & Co. KG (a partnership with a limited liability company as the general partner (GP)) tends to be the preferred structure, owing to its fiscal benefits – in particular, its tax transparency and exemption from trade tax obligations.

Structure

When structuring funds as a GmbH & Co. KG, the separation of management and fund is mandatory. The initiators, together with the investors, participate as limited partners (LPs) without any additional payment obligations (Nachschusspflicht).

The GmbH serving as the fund’s GP is typically excluded from owning fund assets, and its involvement in fund management activities is limited for tax reasons. Instead, fund management responsibilities (day-to-day administration) are assigned to a managing limited liability company (Kapitalverwaltungsgesellschaft, or KVG) (the “Managing LP”).

Investors often receive co-decision rights through an investor advisory board, selected by the Managing LP from among significant investors. This advisory board typically oversees, among other things, deviations from predefined investment criteria and extensions to investment timelines.

An investment committee (IC) leads the decision-making process, using various approval methods such as unanimous voting or a points-based system to ensure alignment with the firm’s investment objectives. This makes the IC the actual investment manager of the fund.

Standard Documentation

Limited partnership agreements cover key areas such as capital contributions, profit distributions, investment strategies, time horizons such as investment and liquidation periods and governance (including GP and Managing LP rights). The terms may be tailored to the specific needs of LPs through side letters, which qualify as amendments to the limited partnership agreement.

The internationally established “2 and 20” fee model constitutes the default within the German VC industry.

Management Fees and Carried Interest

The management fee is an annual fee paid by the fund to the Managing LP for purposes of covering administrative expenses and typically ranges from 2-2.5% of committed capital. It is charged every year the fund is in operation.

Carried interest is the percentage of profits of an investment (typically 20%) allocable to the fund’s Managing LP. The Managing LP is entitled to carried interest once the fund has returned the invested capital and a minimum, annually compounding interest rate (typically 6-8% pa – the “hurdle” rate) (distribution waterfall). However, if carried interest is paid on a deal-by-deal basis or the Managing LP is otherwise entitled to advances on the carried interest, LPs typically demand so-called claw-back provisions to address timing disparities/true-ups – pursuant to which carry beneficiaries are required to reimburse LPs if the funds received by the Managing LP exceed targeted returns.

In Germany, the regulatory framework for funds (including VC funds) is established by the German Investment Code (Kapitalanlagegesetzbuch, or KAGB). For an entity to be recognised as an investment fund under the KAGB, it must meet certain structural criteria and be overseen by a licensed management company.

Investment funds in Germany are categorised into Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), which encompass all non-UCITS investment entities. VC funds typically fall under the category of Special-AIFs, which are closed-end funds accessible only to professional and semi-professional investors, excluding retail investors. It remains to be seen what impact, if any, the general rise in European Long-Term Investment Funds (ELTIFs) will have on the VC industry and the composition of a funds’ limited partners.

The Managing LP in an AIF (in the form of a capital management company (KVG)) requires authorisation from the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin) to operate. The KAGB provides for simplified regulation for “small” AIF-KVGs managing Special-AIFs below certain asset management thresholds (which includes the fund structures relevant for VC investments). A “small” AIF-KVG manages Special-AIFs with assets not exceeding either EUR100 million, including assets acquired through the use of leverage, or EUR500 million without leverage if there are no redemption rights for investors within five years of the fund’s first investment. German VC-fund KVGs tend to qualify for the exemption, primarily due to their non-reliance on leverage and their average fund size not exceeding the EUR100 million threshold.

Such “small” AIF-KVGs are subject only to registration, reporting, and specific financial statement obligations, as well as audit requirements. Only AIFs structured as limited liability entities or partnerships, where the general partner possesses limited liability (eg, GmbH, AG, GmbH & Co. KG), are eligible for management under this framework.

Government-Backed VC Funds

Government-backed VC funds receive significant public attention in Germany. The Growth Fund Germany (Wachstumsfonds Deutschland), which achieved its EUR1 billion target volume in 2023, is a fund-of-fund that invests in German and international VC funds. It is one of the largest German government-backed VC funds, with the government providing approximately EUR350 million alongside institutional investors, such as Allianz, Signal Iduna and BlackRock. It is coordinated by KfW Capital – the investment subsidiary of the government-affiliated KfW development bank. As of the end of 2024, the Growth Fund Germany has already committed more than half of its target volume (EUR567 million) to 29 VC funds.

Another government-backed investment vehicle with assets under management of EUR275 million is Coparion, launched by the European Recovery Program (ERP) Special Fund (mandated by the German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz, or BMWK)) and the KfW bank. Coparion focuses on Series A, B and C financing rounds for technology companies with a financing volume of between EUR0.5 million and EUR8 million, with up to a total of EUR15 million per start-up. Coparion invests as a co-investor under the same conditions and usually with the same volume as a private investor, such as a business angel or VC fund.

Finally, the High-Tech-Gründerfonds does, unlike Coparion, independently provide seed-financing and is backed not only by the BMWK and KfW bank, but also by a consortium of German private corporations. It has over EUR2 billion in assets under management and focuses on tech start-ups with substantial growth potential.

Impact Investing and Corporate VC

Impact investing has continued as a theme within Germany’s VC landscape, with a notable emphasis on decarbonisation. Cleantech/energy is a key area for impact funds. Examples include BonVenture in Munich, which supports social enterprises and start-ups across sectors such as education and renewable energy across Germany and Europe. Furthermore, the World Fund, headquartered in Berlin, invests in energy, food, manufacturing, buildings and mobility start-ups while Berlin-based Planet A focuses on green-tech start-ups.

Corporate VC plays a prominent role in Germany’s investment landscape, and DAX-listed companies such as Allianz X, SAP Sapphire and DB1 Ventures (Deutsche Börse Group’s VC arm) entertain notable, sector-focused VC programmes.

Fund-of-Funds

A discernible trend towards increased fragmentation in private markets investments – particularly within VC funds – and extended average holding periods, has led to a noticeable upswing in fund-of-funds activity. This development derives from an increasing number of investors focusing on niche industries or emerging technologies, thus fostering a broader diversification across the VC landscape. The largest fund-of-funds operator in Germany is KfW Capital, with a volume of around EUR2.4 billion. KfW Capital invests across all phases and sectors in VC and venture debt funds with a focus on Germany.

Dual-Track Exit Strategy

VC funds tend to navigate the increasingly extended timeline by implementing dual-track exit strategies for their ventures. In a dual-track process, a company simultaneously (or sequentially) prepares for an IPO as well as a private M&A deal to maximise exit opportunities once market conditions are favourable. In 2024, the Flix transaction showed that private equity opportunities may provide a viable alternative to an IPO exit for late-stage enterprises with continued long-term growth aspirations.

Legal due diligence is usually conducted by the lead investor and includes a review of the company’s capitalisation table and key corporate documents. The process focuses on material terms and encompasses tax considerations, prior financing arrangements, contractual foundations for revenues, liabilities, employment terms, ongoing legal disputes, and IP rights. Financial due diligence centres on validating the completeness and accuracy of the company’s assumptions underlying its business plan, books and records and financial statements. Business due diligence explores the overarching economic outlook of the target company, examining market trends, industry dynamics, growth opportunities, and revenue forecasts.

In some instances (and unlike under, for example, US standard form NVCA documentation), founders assume personal liability for the representations and warranties made in transaction agreements. This liability is generally limited to the lower of:

• the amount invested in the financing round; and
• a cap equal to one to three times their annual salary.

Representations tend to be subject to further restrictions such as “tipping baskets”. Unless an entire data room is deemed disclosed against the representations and warranties (which is market standard in German M&A practice), the company will table exceptions in a disclosure schedule, underpinning the critical role of management in the due diligence process.

Timeline

It typically takes between three and six months to raise a Series B round and the timeline is affected by factors such as complexity of the business model, revenue potential, investor interest, legal set-up and macroeconomic conditions. In general, a preparation and planning phase (centred around Key Performance Indicators and financial information) and the negotiation of financing terms result in the entry into a non-binding term sheet or memorandum of understanding (MoU). Investors will conduct due diligence while, concurrently, long-form documentation such as subscription and shareholders agreements are negotiated. The process is typically significantly accelerated if the funding needs are covered by existing investors that have insights into the business due to (advisory) board representation and information rights.

Relationship Between the Parties

If a new investor enters the cap table, the role of existing investors in a financing round is typically limited in that they do not actively participate in or necessarily benefit from the results of the due diligence. That said, all investors’ consents are typically required in order to amend the shareholders’ agreement, which is the central document in most financing transactions.

In terms of process, existing investors (and even all investors in early-stage financings) may share legal counsel to streamline and accelerate negotiations. In more sizeable rounds or structured transactions that involve a secondary component (“exit opportunity”), however, it is standard market practice to carefully review the need/desire for separate legal counsel in light of prospectively (diverging) interests. Cost of counsel is less frequently charged to the company than is the case in many jurisdictions.

Governance discussions typically evolve around exit rights and reserved matters/veto rights for commercially relevant measures, such as capital increases or amendments to the articles of association (AoAs). With deviations from the “one share, one vote” principle rarely relevant in practice, the statutory default super-majority requirement of 75% for significant measures, such as a new financing round, typically serves as an inflection point for discussions.

Apart from common stock, typically earmarked for founders and initial investors, the following instruments are frequently observed in German VC transactions:

• Convertible loans serve as the primary “pre-seed”-type of funding instrument in the German VC market. SAFE (Simple Agreement for Future Equity) agreements (a financing instrument popularised by incubator Y Combinator in the US) do not offer investors any significant advantages over convertible loans and come up against legal challenges, such as uncertainty associated with the issuance of “naked warrants” in a German stock corporation (Aktiengesellschaft, or AG)/European company (Societas Europaea, or SE), and lack of viability of “automatic” conversion (since capital increases are not actioned by the management but require the explicit consent of the company’s shareholders, by means of a formal resolution) cannot be addressed in a straightforward manner. As founders may, however, favour SAFEs over convertibles due to the absence of repayment claims and accruing interest, etc, practical needs may ultimately outweigh lingering legal uncertainties.
• Convertible loan agreements do not require notarisation if they are entered into not only by the lender and the company, represented by a managing director, but also by the shareholders. In contrast, if the convertible loan agreements have been concluded only by the lender and the company, but without the shareholders, then these agreements require a notarised shareholders’ resolution authorising the managing director, as well as the corresponding registration of this authorisation resolution with the Commercial Register. The notarisation requirement arises when lenders are subject to mandatory conversion conditions or must comply with shareholders’ agreements setting out relevant obligations (eg, drag-along rights).
• Preferred stock is a form of equity that includes specific rights or privileges not afforded to common stockholders typically by means of a company’s shareholders’ agreement. In Germany, (non-participating) liquidation preferences and weighted-average anti-dilution provisions are mostly negotiated as a means of downside protection, while cumulative dividends are typically not addressed.
• Multiple voting shares (so-called “founders’ shares/dual-class shares”) are equity shares with voting rights of up to 10:1 introduced by the Future Financing Act (Zukunftsfinanzierungsgesetz). They are intended to help founders retain their influence on the company despite raising capital, and have yet to find broad-based adoption in the German start-up landscape.
• Virtual (employee) stock option plans (VSOPs), which embody cash-settled and contingent claims of the holder against the company, are widely utilised in the German market. They are considered more straightforward and flexible (and may entail tax benefits) when compared with physically settled stock options or shares held in escrow/subject to reverse vesting conditions. Restricted stock units (RSUs), performance shares and other instruments are less frequently encountered, although German corporate law in a GmbH conceptually permits significant flexibility.

Although there are no universally accepted standard documents for financing rounds in Germany, the most frequently observed key documentation includes:

• Investment and shareholders’ agreement (Beteiligungs- und Gesellschaftervereinbarung): both agreements are either combined or entered into as separate contracts. The investment agreement outlines the primary investment amount and corresponding ownership stake purchased by each investor in the financing round. It specifies the form and timing of fund disbursement to the company; additionally, milestone agreements may be established, linking the release of investment tranches to the achievement of specific goals by the company. Typically, the shareholders’ agreement covers governance matters – eg, board composition, shareholder majorities and exit rights (IPO, tag- and drag-along rights). Since the investment and shareholder’s agreement, in addition to the obligation to carry out a capital increase, regularly includes provisions to share assignments, pre-emption rights, co-sale rights and obligations or vesting regulations, it does require notarisation in the case of start-ups operating as an Entrepreneurial Company (with limited liability (Unternehmergesellschaft (haftungsbeschränkt), or UG) or GmbH.
• Articles of association: the independent regulatory content of the AoAs is limited, as all essential agreements between founding shareholders and VC investors are typically addressed in the investment-and shareholders’ agreement. Nonetheless, the articles remain a mandatory component of VC investment documentation, and are publicly filed with the commercial register. The AoAs are renegotiated and adopted in each financing round to align with the investor’s participation and to ensure consistency with the shareholders’ agreement. The resolution of the shareholders’ meeting to amend the AoAs requires notarisation.
• Corporate resolutions, which are necessary for capital increases and the exclusion of existing shareholders’ subscription rights, are resolved upon by the shareholders’ meeting and need to be notarised (Section 55 of the Act on Limited Liability Companies (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, or GmbHG)). By making use of authorised capital (Section 55a GmbHG), the shareholders can empower the management of the company in advance, under certain conditions and within certain limits, to decide on the increase of the share capital by issuing new shares to existing or new VC investors. This allows for the swift collection of additional equity when needed. The resolution requires a majority of 75% of the shareholders for a GmbH (75% of the capital represented for an AG).
• Preliminary documentation in an initial stage of a transaction includes non-disclosure agreements and term sheets/MoUs. Typical contents of a term sheet are agreements on the investment amount, the valuation of the start-up and investor rights (eg, veto rights and liquidation preference).

Statutory subscription rights entitle existing shareholders (by default) to subscribe for a pro rata number of newly issued shares in any capital increase. Additional anti-dilution protection, notably in a down-round scenario, is implemented by providing (additional) subscription/pre-emption rights within the shareholders’ agreement.

Around 50% of investors require anti-dilution clauses in early-stage investments. The most common form of anti-dilution protection is the weighted-average method which calculates the subscription price in a subsequent down round as an average of the financing round the existing investor actually participated in and the valuation implied in the down round. Full-ratchet clauses, on the other hand, effectively ensure that investors maintain a relative shareholding equal to their initial investment value irrespective of the valuation underlying the down-round. Full-ratchet protection tends to be “off market”, and can only be secured in rare (distressed) circumstances. “Pay-to-play clauses”, which incentivise existing investors to participate in a new financing (down) round by granting them the economic rights, privileges, and obligations to which they agree during the previous financing round, are less commonly used in Germany than in the US market.

Liquidation preferences have evolved to become market standard and determine the order of payout in a liquidation event (or a deemed liquidation event, which typically includes exit scenarios). They entitle investors to receive a certain multiple (although the German market standard is 1x) of their investment or a specified preference amount before other shareholders receive any distributions. Recently, preferred amounts that annually accrue interest, payable in kind, have become evident in the German growth market, while participating liquidation preferences are still an anomaly. Remaining funds/assets are distributed proportionally – ie, on a pro rata basis. This preference can be structured as “participating” in the “second step” pro rata distribution or “non-participating”, with the latter being more frequently seen in later-stage enterprises. Unlike the non-participating liquidation preference, the participating liquidation preference is not limited to hedging against the negative scenario of an exit below expected value, but rather also serves to secure the investor a premium over their investment. Non-participating liquidation preference holders have the option to receive value on a per share “as converted basis” so that in an upside scenario pro rata allocation is the norm.

Since start-ups are typically structured as GmbHs, the shareholders’ meeting has the authority to issue binding directives to the company’s managing directors. The GmbH comes with no statutorily mandatory bodies other than the shareholders’ meeting and its managing directors, but typically does set up an (advisory) board where investors are represented. Certain transactions will require the approval of the shareholders’ meeting or the board prior to execution – whether by statutory law, AoAs or, most notably, shareholders’ agreements. These reserved matters typically include amendments to the AoAs, alteration of the rights attached to or issuance of new shares/instruments, significant corporate transactions and changes in the capital structure of the company.

Shareholders’ agreements often set out information rights to regular reporting which go beyond statutory information and inspection rights.

Fundamental guarantees granted to investors relating to existence, title, the absence of encumbrances and conflicts, etc, are all but ubiquitous in German market practice. In addition, business-related representations, notably concerning the company’s financial statements/status and adequacy of IP assets, are increasingly frequent, particularly in late-stage financings. However, warranties do not typically extend to the business plan, as inherent risks remain with the investor as part of a VC investment’s nature.

Investors generally confirm that they are authorised to enter into the investment agreement and fulfil the associated obligations, that they are eligible/accredited investors, and that the execution and fulfilment of the agreement do not conflict with other obligations.

Additionally, a venture often commits to specific operational covenants which may include obligations to:

• maintain adequate insurance coverage;
• comply with specific accounting principles; and
• adhere to predetermined financial ratios or liquidity levels.

They are also often sought to address investors’ diligence findings.

By statutory default, legal consequences of a breach of representations and warranties amount to the restoration of the breached “contractual guarantee” and the payment of damages if restoration is impossible (in rem restitution, or Naturalrestitution). However, in many cases, immediate claims for monetary damages are excluded. The liability concept in an investment agreement will typically be limited to a cap and, besides the company, founders/key employees may stand behind the representations, typically within the confines of adequacy. Upon breach of a covenant, injunctions become relevant as an effective course of action against the defaulting contractual party. This is also the most relevant legal remedy relating to a shareholders’ agreement.

Among the most relevant government programmes directed at enhancing investments in German early-stage companies are the “INVEST – Venture Capital Grant”, the “Venture Tech Growth Financing” programme, and the “ERP-EIF Facility”.

INVEST – Venture Capital Grant

The BMWK supports investments by private investors or business angels in young innovative companies with grants for investors (acquisition grant of 15% of the invested amount). The investments can be made by natural persons or via an investment company. Natural persons can receive an exit grant if they sell their shares. The exit grant amounts to a flat rate of 25% of the capital gains realised, and thus approximately covers the tax burden associated with the divestiture. The maximum eligible investment amount per investment is EUR333,333.33 per single investment. Each natural person (as a direct investor or as a shareholder in an investment company) can be supported with INVEST up to a maximum total investment amount of EUR666,666.66 (also for investments in different companies) – ie, the acquisition grants per person are limited to a total of EUR100,000 (cap).

To apply, start-ups may submit an online application to the Federal Office for Economic Affairs and Export Control (Bundesanstalt für Wirtschaft und Ausfuhrkontrolle, or BAFA), providing details, including evidence of innovation, company size, age, and legal structure. Upon approval, BAFA issues an eligibility certificate. The investor can then apply for funding via BAFA prior to subscription for shares in the start-up or subscription for convertible bonds.

Venture Tech Growth Financing

The KfW’s “Venture Tech Growth Financing” programme supports emerging technology-oriented companies through funding provided by the German federal government (via the KfW banking group). The programme is part of the Tech Growth Fund initiative. Financing is exclusively facilitated through collaboration with professional, private credit, or venture debt providers. KfW participates under identical terms as the corresponding private lender, sharing the risk, which usually ranges between EUR0.5 to EUR125 million. The standard risk-sharing ratio between KfW and private lenders stands at 50:50.

ERP-EIF Facility

The ERP-EIF Facility is a partnership between the German federal government and the European Investment Fund (EIF) aimed at bolstering venture and growth capital financing, in particular for high-tech growth companies in Germany. The facility’s funding has been successively increased, and volume is currently EUR4.6 billion. The ERP-EIF Facility invests as a fund-of-funds and consists of four sub-programmes (ERP-EIF VC Funds of Funds, EAF Germany, ERP-EIF Growth Facility and ERP co-investment in GFF-EIF Growth Facility). With more than 4,000 small and medium-sized enterprise (SME) investments in Germany and across Europe, the ERP-EIF Facility covers all technology areas through supported funds and forms a relevant part of the pan-European VC ecosystem.

Direct Investment

Shares held by individual shareholders as non-business assets (Privatvermögen)

Capital gains from the sale and other disposals of shares which an individual shareholder holds as non-business assets (generally, participations below 1%) are generally subject to a 25% flat tax (plus 5.5% solidarity surcharge thereon, resulting in an aggregate withholding tax rate of 26.375% plus church tax, if applicable). Losses from the sale of shares may be subject to loss offset restrictions – eg, can only be used to offset capital gains or other investment income. The amount of the taxable capital gain from the sale is the difference between: (a) the proceeds from the sale; and (b) the cost of acquisition of the shares (including sale-related expenses).

Shares Held as Business Assets (Betriebsvermögen)

In respect of gains on the disposal and other disposals of shares held by an individual or corporation as business assets, taxation generally depends on whether the shareholder is a corporation, an individual or a partnership.

• For corporations, capital gains from the sale of shares are, as a general rule and currently irrespective of any holding period or percentage level of participation, effectively 95% exempt from corporate income tax (including solidarity surcharge) and trade tax plus solidarity surcharge.
• For individuals, 60% of capital gains from the sale of shares are taxed at the individual income tax rate plus a 5.5% solidarity surcharge (plus church tax and trade tax, if applicable) on such income tax if the shares are held as business assets by an individual who is subject to unlimited tax liability in Germany. All or part of the trade tax levied may be credited on a lump sum basis against the individual income tax.
• If the shareholder is a partnership, the individual income tax or corporate income tax is not levied at the level of the partnership but at the level of the respective partners. The taxation of each partner depends on whether they are a corporation or an individual. Thus, (corporate) income tax (including solidarity surcharge) and, if applicable, church tax will be assessed and levied only at the level of the partners. Trade tax, however, is assessed and levied at the level of the partnership if the shares are attributable to the permanent establishment of a commercial business of the partnership in Germany. Generally, 60% of a capital gain attributable to an individual partner and 5% of a capital gain attributable to a corporate partner are taxable. The trade tax paid by the fund and attributable to the individual’s general profit share is completely or partially credited against the partner’s individual income tax in accordance with this lump-sum method (see above).

Foreign Tax Residents

Capital gains from disposals by a shareholder not tax resident in Germany are generally only taxable in Germany if the selling shareholder holds the shares through a permanent establishment or fixed place of business in Germany or as business assets for which a permanent representative is appointed in Germany. In this case, the description above for German tax resident shareholders who hold their shares as business assets applies accordingly.

Interposition of Funds

Typically, investments in growth and start-up companies are made in funds structured as partnerships, which tend to be tax-transparent structures if certain criteria are met. Simply put, merely managing one’s own assets, regardless of size, is not considered a commercial activity. However, details are heavily disputed in practice, and whether or not tax transparency of the fund can be achieved requires a case-by-case analysis. If it is the case, then, due to the tax transparency of the fund, the above considerations regarding a direct investment in a portfolio company apply accordingly – ie, there is no difference as far as an investor is concerned. By contrast, if the fund qualifies as trading (gewerblich), it is subject to trade tax; the trade tax paid by the fund and attributable to the individual’s general profit share is completely or partially credited against the shareholder’s individual income tax in accordance with the lump-sum method (see above).

Carried Interest

Carried interest received by VC/private equity fund initiators (typically managing LPs) is, in case of a tax-transparent fund, subject to the partial income method – ie, only 60% is subject to tax at the marginal income tax rate of the carried interest participant. Political attempts to abolish this tax advantage for carried interest resulting from tax-transparent funds have been effectively resisted. It should, however, be noted that the tax treatment of the carried interest received by the initiators of a trading (gewerblich) fund is heavily disputed.

On 15 December 2023, the Future Financing Act came into effect. The objective of this legislative measure was to facilitate access to capital markets and equity financing for start-ups, growth companies and SMEs, in particular. This is to be achieved through, among others, digitisation, deregulation and internationalisation in the areas of capital markets law, corporate law, and tax law.

The Future Financing Act (re)-introduces dual-class shares for (later-stage) start-ups in the form of AGs/SEs, which signifies a significant shift driven by international competition within the capital markets. With several European countries now permitting multiple voting shares in public companies, this new legislation seeks to dissuade German start-ups from opting for foreign legal structures solely for this reason, enabling founders to maintain control over a company, even after selling shares to investors or undergoing an IPO. Corporations are now permitted to issue registered shares with multiple voting rights (regardless of size or whether they are publicly traded). The super voting power must not exceed ten times the voting rights of “ordinary” shares. Unanimous shareholder consent is required to establish multiple voting shares, rendering their introduction at existing public companies more or less impracticable. The tenure of multiple voting rights terminates ten years after the company’s IPO or inclusion in the regulated unofficial market (Freiverkehr; Section 48 of the Stock Exchange Act, or BörsenG) (the so-called sunset clause). This timeframe can be extended by up to ten years via a resolution passed by three-quarters of shareholders. Multiple voting shares cannot be issued when utilising authorised capital.

The expansion of the allowable amount for a capital increase with simplified exclusion of (statutory) pre-emption rights as stipulated in the Future Financing Act will entail significant practical implications. Pre-emption rights may be waived for a capital increase against cash contributions, especially if the issue price is not considerably below the stock market price. Previously, the volume for capital increases with simplified exclusion of pre-emption rights was capped at 10% of share capital; this limit has now been elevated to 20%. Capital increases with simplified exclusion of pre-emption rights will be more attractive to issuers as legal recourse is significantly limited. Resolutions for such increases cannot be contested on the basis of allegations of an unreasonably low issue price. Shareholders excluded from pre-emption rights are not entitled to cash compensation under the German Stock Corporation Act (Aktiengesetz, or AktG).

The Future Financing Act also raises certain volume limits for a corporation’s conditional capital. Conditional capital increases to finance stock options for management and employees can now be conducted up to 20% (previously 10%) of the share capital. This change is expected to impact start-ups where a significant portion of compensation may be provided in options.

The Future Financing Act stipulates a comprehensive overhaul to the legal protection mechanism for shareholders concerning capital measures approved by the general meeting. Due to the uncertainty of court decisions in connection with contestation litigation (Anfechtungsklagen) that alleged the inadequacy of the issue price (in instances where subscription rights were excluded), such contestation litigation posed risks of delays or non-implementation of capital increase resolutions. Under the new version of Section 255 AktG, resolutions can no longer be contested on the basis of the allegation that a shareholder sought to obtain special benefits or due to an allegedly unreasonably low exchange ratio (in case of a share contribution). Instead, it needs to be clarified in appraisal proceedings whether and to what extent the shareholders are entitled to a compensatory payment.

German Growth Opportunities Act (Wachstumschancengesetz)

In addition to the Future Financing Act, the German government aims to create incentives for more innovation and investment in new technologies through the German Growth Opportunities Act, in order to enhance the competitiveness of Germany as a business location. The act was passed by the Bundestag and Bundesrat on 22 March 2024, and includes a total volume of EUR3.2 billion. Companies will benefit from expanded tax incentives for research, improved depreciation options, tax incentives for new residential construction, enhancements to tax loss deductions, and the introduction of electronic invoicing.

WIN Initiative: Growth and Innovation Capital for Germany

The WIN Initiative, presented to the public in November 2024, aims to further establish Germany as a leading location for innovation and growth capital by 2030. Together with a broad alliance of businesses, associations, politics, and the KfW, the federal government intends to sustainably improve the overall conditions for growth and innovation capital in Germany. The participating companies together plan to invest around EUR12 billion in the German VC ecosystem.

Founder/employee arrangements remain highly customised, taking into account various factors such as the negotiating leverage of the founding team, the complexity of the required structure, the specific incentives the company intends to offer, strength of desire for retention on the part of investors, tax considerations for employees, and the intricacy of technical implementation.

Founders typically hold physical shares without restrictions on voting or other membership rights. Generally, transfer restrictions are limited to rights attaching to other shares under the shareholders’ agreement. However, in early-stage investment rounds, financial investors would typically require a renewal of the vesting schedule.

In respect of new hires, there are several forms of incentivisation for purposes of committing employees to the venture – eg, options to acquire company shares (stock options), participation via a VSOP, an employee stock ownership plan (ESOP) or so-called hurdle shares.

With the distribution of stock options, employees receive a (call) option to acquire company shares at a predefined exercise or strike price, provided certain conditions are met and the options are vested. Transfer restrictions for options are generally comprehensive and may further attach to the shares which are granted as part of a physical settlement.

Sometimes (untechnically) referred to as ESOPs, under a “reverse vesting” scheme, the ownership of company shares is transferred to the employee. To ensure that the company is protected against fraudulent use or transfers, the power of disposal (Vinkulierung) and the rights of membership are restricted. In general, vesting conditions (so-called reverse vesting) are part of the mechanism and grant the company the option to claw back the equity granted in case of certain circumstances such as a leaver event.

VSOPs are designed to simulate the economics of a stock option while providing the advantage that no membership/governance rights attach to the instrument (pure cash settlement). VSOPs embody the right for a (deferred or contingent) cash payment claim if an exit event occurs. The payment amount is based on the (increase in the) company’s fair market value since the date of grant. In complex transactions, the determination of the equity value underlying the transaction can be complex and prompt an acquirer to demand that settlement agreements be entered into.

In addition, a company may option for hurdle shares as means of incentivisation – ie, company shares with a “negative liquidation preference” ensuring that employees only participate in future value increases. Hurdle shares are physical shares which may require an implementation of the negative liquidation preference as part of a company’s (GmbH) articles.

Through participation programmes such as ESOP/VSOP, employees financially engage in the start-up’s success via physical or virtual equity incentives. The exercise of the right is typically subject to several conditions – eg, duration of employment (vesting), performance of the company/employee or acquisition of the company.

Non-compete and non-solicitation agreements are widespread as part of shareholders’ agreements. This is to safeguard the company’s interests and prevent founders and key employees from engaging in competitive activities or soliciting customers, employees, or business partners upon leaving the venture.

Vesting conditions ensure that employees have only access to their shares after a certain period of time. This vesting period is typically between two and five years, with a one-year cliff vesting period. If employees depart before the end of the vesting period, they cannot exercise the unvested part of their stock option, nor do they receive payments from the unvested part of their VSOPs which are forfeited. Vesting conditions can be used for all of the previously mentioned instruments.

Additionally, employee participation programmes like ESOP/VSOP or hurdle shares may include good leaver/bad leaver clauses which permit the company to reclaim equity granted to an employee upon departure (typically, a reverse vesting call option at nominal value). Bad leaver qualifications tend to be limited to gross misconduct or criminal activity, as well as voluntarily terminations on the part of the employee – making Germany an instrument holder-friendly jurisdiction.

In practice, reverse vesting, which consists of the granting of a call option over the shares obtained in favour of the venture or the other shareholders, is often agreed upon for founder vesting. The founders are initially allocated their full shares and, at the end of the vesting period, all shares become vested and secured. However, premature departure from the company during the vesting period results in the loss of the unvested portion, potentially compensated for only partly or at a discount. The decision between a VSOP agreement with vesting or a submission of previously held founder shares to a reverse vesting mechanism should always be analysed from a tax perspective.

Tax-effective structuring of incentive schemes targets: (i) the avoidance of dry income events for an employee; and (ii) the receipt of capital gains tax treatment for any future increase in company valuation at a preferred tax rate of 25% (plus 5.5% solidarity surcharge thereon, resulting in an aggregate tax rate of 26.375% plus church tax, if applicable) (“Capital Gains Tax”).

ESOP

Almost all ESOP agreements stipulate that employees can acquire shares free of charge or at a discounted price which leads to a non-cash benefit (geldwerter Vorteil) and is, therefore, subject to income tax. However, a financial benefit in the form of a discount is only considered to accrue to the option holder as and when they exercise the option and acquire underlying shares at a discounted rate; only at this point is the monetary benefit realised and subject to taxation. As a result, employees are required to pay taxes on a non-cash sum, unless the time of exercise coincided with a liquidity event, potentially resulting in significant additional tax payments of up to 45% (plus a 5.5% solidarity surcharge thereon, resulting in an aggregate tax rate of 47.475% plus church tax, if applicable) in income tax on the benefit (dry income). Any capital gains from the increase of the value of the granted shareholding after the acquisition are subject to Capital Gains Tax.

VSOP

VSOPs do not entail dry income events as they are taxed upon the actual cash payment to the employee. However, VSOPs trigger a full taxation at a rate of up to 47.475% in income tax/solidary surcharge (plus church tax, if applicable), not offering any option to allocate at least part of the future increase in company value to Capital Gains Taxation.

Hurdle Shares

In order to overcome the disadvantages of the above instruments, hurdle shares have become increasingly popular in the German market. The envisaged tax treatment of hurdle shares is that the employee can acquire the shares for free/at a significant discount due to the “negative liquidation preference” attached to the shares. Notwithstanding the inherent “option value” of hurdle shares, the negative liquidation preference is designed to result in a low/no value of the shares granted to the employee and, thereby, ideally avoid a dry income taxation. Any future increase of the company’s valuation is meant to permit Capital Gains Tax treatment. In this context, taxpayers often try to obtain a binding ruling for the desired tax treatment of hurdle shares which, however, has become increasingly difficult in the recent past. As a result, there remains a legal uncertainty with regard to the valuation of the negative liquidation preference.

Tax Revisions to ESOP Schemes (Physical Shares Subject to Reverse Vesting Provisions)

German tax law basically offers two benefits for the grant of physical company shares – ie, tax benefits only applicable to ESOPs, stock options and (likely) hurdle shares but not to VSOPs.

German tax law may, subject to the satisfaction of certain conditions, permit a deduction of up to EUR2,000 from the income resulting from the acquisition. In practice, this deduction is, due to this low amount, not important for the structuring of incentives.

More importantly, income tax resulting from the acquisition of discounted shares may be deferred until the occurrence of certain events (Section 19a of the German Income Tax Act (Einkommensteuergesetz, or EStG)). This may result in an avoidance of the dry income problem while enabling the employee to acquire the company shares at an early point in time so as to receive a preferential Capital Gains Tax treatment on the future increase of company value. This rule should generally also apply to Profit Participation Rights. However, this must be examined on a case-by-case basis, depending on the specific structure of this instrument.

The enhancements and a broadening of company eligibility criteria of Section 19a EStG under the Future Financing Act and the Fund Location Act (Fondstandortgesetz) led to a significant increase in incentive programmes under the regime of Section 19a EStG. Notably, the change of employer or reaching of a minimum holding period of 15 years will no longer necessarily result in the termination of the tax deferral. As a result, tax is only due at the time when the company shares are actually sold by the employee, thereby avoiding the dry income problem. Since the amendment was introduced, shareholdings in any affiliate of the employer company (within the meaning of Section 18 AktG) are also subject to this benefit, which is of particular interest for foreign start-ups with subsidiaries in Germany.

To sum up, with the Future Financing and the Fund Location Act, the legislator successfully attempted to offset the competitive disadvantage that Germany faced compared to other jurisdictions such as the US. However, certain issues persist. For example, the provision (still) excludes later-stage companies despite its broadened eligibility criteria. Finally, social security contributions incurred at the time of acquisition are not deferred and fall due within the dry income window.

From a process perspective, investment terms are typically outlined in non-binding term sheets, following an assessment of the market, team and an initial validation of the business model by investment teams. As due diligence progresses and binding documentation are entered into, investors in a round often sign and close their investments concurrently, contingent upon fulfilling conditions precedent. The “option pool” or VSOP – whether newly established or expanded upon (ie, the creation of additional awards within an existing pool or scheme) – would ordinarily take effect at the time of a financing round’s closing or, in particular, if additional structuring work is required, may be implemented thereafter.

New investors generally expect growth companies in which they invest to increase or “refresh” the size of their employee equity incentive pool at the time of their investment. This becomes a key topic of negotiation because it is ultimately a commercial question with direct bearing on the company’s valuation. As part of the key investment terms, existing shareholders and new investors will be required to find alignment on who bears the dilutive effects of an increase of the incentive pool or the (additional) number of instruments to be awarded. The point has been labelled “option pool shuffle” and concerns the questions as to whether the prospective dilution will be borne by existing shareholders only (and run against the pre-money valuation on a fully-diluted basis) or by all – ie, existing and new investors alike (in which case the increase in instruments runs against the fully-diluted post-money capitalisation).

When it comes to valuation and dilution, investors participating in a round will seek to have visibility regarding the amount of euros they are investing and what their investment amount translates into in terms of their fully diluted pro rata ownership in the foreseeable future. If the increased incentive pool were to be factored into the post-money valuations and all investors equally shared the dilutive effect, new investors would immediately be diluted after closing, and the relative stake purchased would require adjustment. Therefore, ESOP and similar increases are mostly counted against the pre-money capitalisation and are non-dilutive in respect of newly issued shares.

Discussions typically evolve around the substantiation of hiring and retention needs during a predefined timeline that the founding team will be incentivised to demonstrate in order to limit the size and, consequently, the dilutive effect of a pool increase and the new investors’ argument that equity-based incentives are the critical tool of aligning stakeholder interest in a start-up and therefore should be available in adequate quantum.

Share Transfer Restrictions

To safeguard existing shareholders, a GmbH’s publicly available AoAs typically incorporate transfer restriction clauses (Vinkulierung), a violation of which will render a purported transfer null and void. These clauses reflect requirements set out in the shareholders’ agreement and may either restrict the transfer of shares without the company’s authorisation or bestow pre-emptive rights to existing shareholders or the company (redemption at a discount).

Pre-Emptive Rights/Right of First Refusal (ROFR)

A shareholder seeking to dispose of shares is under market standard shareholders’ agreements obligated to offer its shares to shareholders (albeit not – as tends to be the case in other jurisdictions – the company) for their acquisition in proportion to their relative stakes in the company at the conditions offered by a third party within a specified acceptance period (Andienungspflicht). These rights tend to be structured as so-called “Rights of First Refusal - ROFR”, which permit existing shareholders to take a “last look” and not only to put forth a price they would be willing to pay; this would then set the floor for a third-party transaction (so-called right of first offer).

Rights of first Refusal can be structured in a multi-stage process: (i) unless all existing shareholders have exercised their ROFR in a first round, those who did exercise their ROFR are entitled to acquire the residual (“unexercised”) shares in a second round, set within a specific timeframe; (ii) only if the ROFRs are not fully exercised for all shares subject to the sale in such second round, may the selling shareholder then proceed in a transaction with a third party, which sale would still be subject to existing co-sale rights.

Tag-Along Rights

Co-shareholders would typically have the right to demand from the selling shareholder that the sale be only carried out if their shares are (reflective of their pro rata stake in the company) sold alongside the selling shareholders’ shares and subject to the same conditions. If the co-sale requirements are not complied with, there is no obligation to consent to the sale and the shares remain subject to existing transfer restrictions.

Drag-Along Rights

Co-shareholders may compel the sale of shares under predetermined conditions. Often, so-called drag-along rights are not confined to share deals, but extend to other exit routes, notably change-of-control transactions that take the form of mergers or the divestiture of substantially all assets (asset deal). However, share deals remain the most prevalent form of M&A transaction in the German marketplace and drag rights are primarily geared towards this situation.

While drag-along rights are usually contingent upon obtaining a qualified majority, there are occasionally drag sales granted as a unilateral option – eg, in scenarios where key milestones have not been met. Notwithstanding the contractual position, enforcement of drag rights in practice may be challenging and depend on management’s willingness to endorse, or at least permit, an orderly sales process which may be challenging in case of significant shareholder opposition.

Put/Call Options

In certain rare cases, strategically focused shareholders may succeed in negotiating call option rights over other shareholders’ exiting stakes at a price that is typically reflective of, or based upon, a company’s FMV, as existing at the time of the option window. Call options may permit a (group of) specific investor(s) to initiate a change-of-control transaction – eg, in the event of a significant strategic value for a corporate VC or if shareholders seek to pre-agree on a set “path to liquidity” after a certain time. Call option arrangements are often mirrored by corresponding put options and may entail a premium over, as well as a mechanism to fairly determine, the company’s FMV.

IPO Force Right

A right by one VC investor to request that the company undertake preparations for an IPO/listing after a pre-defined period has been argued to conflict with the statutory authority of a management board of an AG/SE to act in the company’s best interest, as existing from time to time. That said, IPO initiation rights are often structured so that all shareholders inter se commit to using their corporate governance rights to procure that an IPO will be initiated. These rights can be subject to value hurdles and/or timing requirements.

IPO exits are typically driven by easier access to new capital, increased liquidity of the shares, a transparent valuation, improved branding and marketing for the company, and enhanced attractiveness to employees due to employee participation programmes. However, the predominant exit strategy in the current German market environment is an M&A exit, primarily by strategic buyers.

When publicly listing shares, issuers can choose from two market segments:

• the regulated market with higher admission and post-admission requirements leading to elevated transparency and typically greater liquidity; and
• the open market with lower entry and compliance costs, which may be more attractive for SMEs.

The Frankfurt Stock Exchange’s Prime Standard is the sub-segment of the regulated market with the highest ongoing transparency requirements. Meanwhile, its Scale open market sub-segment is currently the only registered German SME Growth Market, which allows SMEs to make use of certain alleviations under applicable EU prospectus and market abuse rules.

In order to be admitted to the regulated market, the issuer is required to have been in existence for at least three years (subject to exemptions – eg, for special purpose acquisition companies (SPACs)), have sufficient free float, publish a prospectus including three years of audited financial statements, and report on a semi-annual (Prime Standard: quarterly) basis going forward.

An inclusion of securities in the open market is not governed by statutory law but, rather, the relevant market operator’s general terms. Accordingly, the admission and post-admissions requirements vary more between markets – for example, with regard to admission documentation, requisite term of issuer’s existence, free float and market capitalisation – and thus provide more flexibility for early-stage companies. Uplistings from the open market to the regulated market are possible but not very common.

The preparation and execution of an IPO can be divided into three phases:

• Conception phase (between five and seven months): creation of the issuance concept, including investment case, placement volume and source (company vs shareholders), holding obligations (lock-up), use of proceeds, choice of market segment, and placement strategy/target investors.
• Implementation phase (between three and four months): preparation of investor presentations as well as the securities prospectus and application for BaFin approval. The prospectus is based on a comprehensive due diligence of the issuer by the global co-ordinators of the bank consortium.
• Placement phase (one month): underwriting agreement with the lead consortium bank(s), book building, and pricing. Trading usually commences one day and closes two days after pricing.

General economic conditions and capital market sentiments influence the timing. The issuer’s IPO readiness is also critical, including factors such as financial performance, growth trajectory, corporate governance structure and regulatory compliance. As most start-ups in Germany are organised as a GmbH, the IPO tends to necessitate a structural conversion into a legal form suitable for public listings (AG, SE, or partnership limited by shares (Kommanditgesellschaft auf Aktien, or KGaA)).

Alternative capital market exit strategies to a traditional IPO involve:

• a direct listing, whereby the issuer’s existing securities are admitted to trading without a concurrent public offering – sometimes a private placement with institutional investors is organised immediately prior to the listing; or
• a de-SPAC transaction, in which a private entity goes public by merging with a publicly listed SPAC.

There is a tangible market need for pre-IPO secondary market trading, particularly to facilitate liquidity for certain investors and employees who hold equity-based compensation in privately held companies. However, so far, no relevant market structures have evolved in Germany or Europe. In Germany, the use of virtual instruments such as individualised, non-transferrable VSOPs has made it challenging for incentive entitlement holders to obtain meaningful liquidity.

In April 2024, Forge Global Holdings Inc., a leading private securities marketplace, together with Deutsche Börse, announced the launch of Forge Europe. Forge Europe seeks to establish a marketplace for direct secondary transactions in late stage/pre-IPO start-ups.

Pre-IPO secondary market trading faces certain legal challenges. Generally, a published securities prospectus is required for a public offer of shares (as further outlined in 7.1 Securities Offerings). Given that most start-ups are organised in the form of a GmbH, a prospectus is not required, as a GmbH share is not a security within the meaning of the EU Prospectus Regulation.

Pursuant to Section 6 of the German Asset Investment Act (Vermögensanlagegesetz, or VermAnlG), the public offer of investments (which encompasses GmbH shares) requires the publication of a prospectus. Exceptions are made in Section 2 paragraph 1 VermAnlG. No prospectus is needed, inter alia, if: (i) there is only a low distribution of the investment (maximum of 20 shares); (ii) the sales price of the investment offered within a period of 12 months does not exceed a total of EUR100,000; or (iii) the sales price of the investment amounts to at least EUR200,000 per investor.

Determining the fair market value of privately-held company shares (or virtual instruments) for secondary market transactions can be challenging due to the absence of publicly available pricing data and market benchmarks. As there is a shortage of investors facing a significant number of potential investment targets, an information asymmetry persists on the buy-side.

Shareholders’ Agreements tend to stipulate various share transfer rights and restrictions such as ROFRs, ROFOs, co-sale and tag-along rights which apply in respect of secondary transactions and can complicate, or even block, trade sale transactions.

It remains to be seen how well transfer restrictions in German market practise and the continued use of virtual instruments permit an evolution of secondary trading and whether shareholder agreements will pre-clear certain transactions relating to vested shares in late-stage companies.

For an AG/SE/KGaA, in the event of a sizeable transaction such as a capital increase with no (statutory) pre-emptive rights, a prospectus is not required in the case of a public offer if the offer is exclusively directed to qualified investors (who are deemed to have sufficient sources of information to obtain the necessary basis of knowledge). If a public offer targets non-qualified investors, a prospectus is not required if it is addressed to fewer than 150 natural or legal persons.

The public offer of GmbH shares does not require the publication of a prospectus under the VermAnlG if the offer is addressed to a limited number of persons or it is addressed only to employees by their employer or by an affiliate of their employer.

If numerous employees/entitlement holders exist in a (late-stage) start-up organised as an AG, the transferability of shares is usually largely restricted. Consequently, in such cases, these shares do not qualify as securities under the EU Prospectus Regulation. Even in instances where transferability is not restricted, a prospectus is not mandatory if a document is provided containing information about the quantity and characteristics of the securities, as well as the reasons and particulars of the offer.

Foreign Direct Investment Screening (FDI)

The German foreign investment screening framework is governed by the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) and the Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung). The competent authority, the BMWK, has the authority to examine whether the investment in a domestic company through the direct or indirect acquisition of voting rights is expected to negatively affect the public security or order of Germany, another EU member state or with respect to projects of EU interest.

As part of the cross-sector regime (sektorübergreifendes Verfahren), the law currently lists 27 categories (including critical infrastructure in a number of sectors and other business activities in many different areas, such as software, healthcare, artificial intelligence, semiconductors and others) where the acquisition by a non-EU investor requires a mandatory filing and prior clearance by the BMWK. Voting rights thresholds of 10% or 20% apply – depending on the applicable category. In case the German company is active in certain areas of military, defence or security of government information technology, acquisitions by non-German investors of 10% or more of the voting rights trigger a mandatory filing and pre-closing clearance requirement as part of the sector-specific regime (sektorspezifisches Verfahren). In all other cases, the BMWK is entitled to review any acquisition by non-EU investors of at least 25% of the voting rights, even if no mandatory FDI filing is required.

For an investor who already owns a participation above the entry thresholds, the crossing of certain further thresholds may require prior clearance (20%, 25%, 40%, 50% and 75%). Pursuant to guidance from the BMWK, the acquisition of additional voting rights as part of capital increases or financing rounds is only covered by the German FDI regime if the percentage share of voting rights crosses a relevant threshold as a result of the transaction (ie, not if an investor acquires shares only to the extent required to prevent a dilutive effect).

Foreign investment approvals have become increasingly significant in the realm of VC and start-up investing, as the German regime was amended several times during the past few years to cover a broader range of activities without regard to the size of the business. At the same time, almost half of the VC funds invested in Germany derive from third countries, according to reports of the German Start-up Association (Bundesverband Deutsche Startupse.V.).

The European Commission is currently working on a comprehensive revision of the legal framework with the objective to instigate a dedicated investment screening law in all EU member states.

Investments in Regulated Banks, Financial or Payment Services Providers and Insurance Companies

In the fintech/insurtech space, an investor that intends to acquire a direct or indirect participation in a German regulated bank or other financial institution – such as a financial services provider, payment services provider, e-money institution or investment firm – of over 10% of the capital or voting rights is required to submit a notification to BaFin and obtain pre-closing approval in the context of an owner control procedure (Inhaberkontrollverfahren). During this procedure, BaFin reviews, among other things, the strategic plans, financial standing and reliability of the investor. The legal basis depends on the company’s regulatory status. Crossing of 20%, 30% and 50% thresholds requires additional clearances. In the case of German banks that fall under European banking supervision, the approval process involves the European Central Bank.

An owner control approval is also required for direct and indirect investments in insurance and reinsurance undertakings as well as in certain regulated asset (fund) management companies – in each case, also starting at 10% of the capital or voting rights.

Stamp Duties and Currency Control

The German government imposes no stamp duties nor any control on the purchase or sale of foreign currencies.