Venture capital investment in Austria: market and regulatory overview
A Q&A guide to venture capital law in Austria.
The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivisation and exits.
To compare answers across multiple jurisdictions visit the Venture Capital Country Q&A tool.
This Q&A is part of the global guide to venture capital. For a full list of jurisdictional Q&As visit www.practicallaw.com/venturecapital-mjg.
Venture capital and private equity
Both private equity and venture capital are finance instruments that provide equity to companies not listed on the stock market. Venture capital is a subset of private equity. Typically, venture capital is early stage financing beginning at the second or third stage (if a business angel contributes to the investee company) of a traditional start-up financing sequence. Venture capital financing covers:
Seed-financing (pre-formation financing).
Start-up financing (financing at the investee company's formation stage).
First-stage financing (financing at market entry).
Broadly, private equity is financing beginning in the expansion stage and covering subsequent later stages, in particular, management buyouts (MBOs) and privatisations.
Sources of funding
In 2012, the private equity market (covering both private equity and venture capital) was funded by the following sources (figures for 2013 are not available yet and there are no separate figures available for venture capital):
Government agencies: 46%.
Funds of funds: 2%.
Private individuals: 5%.
Pension funds: 15%.
Insurance companies: 16%
Types of company
Venture capital investors invest in young, private companies with potential for innovation and growth. In 2012, companies from the life sciences and industrial products sector attracted the majority of venture investments in Austria. However, the IT and communications sector experienced an increase in venture investments.
Austrian private equity and venture capital investors raised EUR173 million in 2012, representing a decrease of 31% compared to 2011. Government agencies and banks remain the largest source of capital, followed by pension funds. However insurance companies did return to the private equity and venture capital market and were the second largest source of capital (equal with banks). The Austrian venture capital market remains the smallest among the German-speaking countries and in general is underdeveloped by European standards. In Austria the percentage of investments as a share of GDP amounts to 0.008%, while the European average is 0.024%.
Overall, investment activities remained stable. However, the investment activities of venture capital investors did not decrease compared to 2011. EUR25 million of a total of EUR115 million were venture capital financings in 2012 (compared to EUR25 million of a total of EUR124 million in 2011).
Due to one mega-exit in 2011, divestments in 2012 decreased to an overall of EUR83 million compared to EUR342 million in 2011. Repayments of principal loans went up to 27% compared to 1% in 2011 and write-offs decreased to nearly 16% in 2012.
During 2013, it is likely that these market trends will have continued to develop (there are currently no public figures available for 2013). It is expected that the market as a whole will have declined further, with investments decreasing and the importance of public institutions increasing. For example, in 2013 the Austrian Federal Ministry of Economy and the Austrian Federal Ministry of Finance launched a EUR65 million start-up fund (Gründerfonds) to support start-ups and entrepreneurs, demonstrating the increasing importance of public institutions.
Austrian Alternative Investment Manager Act (AIFMG)
Directive 2011/61/EU on Alternative Investment Fund Managers (AIFM), has been implemented into Austrian law by the Austrian Alternative Investment Manager Act (AIFMG). The AIFMG regulates a variety of asset managers that have not yet been regulated by Austrian financial market regulations. The AIFMG provides that any legal person with a regular business managing one or more alternative investment funds (AIF) is covered by the scope of the AIFMG.
An AIF is any collective investment undertaking (including investment compartments) that does not require authorisation under Article 5 of Directive 2009/65/EC Undertakings for Collective Investment in Transferable Securities. Therefore the scope of the AIFMG covers nearly all active private equity and venture capital funds in Austria. Units of AIF can only be marketed to retail investors in Austria if the AIFM fulfils certain strict requirements set out in the AIFMG. These funds must be funded according to Austrian law (real estate funds, special funds, pension investment funds, managed future funds) or be recognised as equivalent to such funds and providing such funds hold a license required by the AIFMG. Austrian AIFM that are licenced under the AIFMG can market their AIF units to professional investors in the EU (European Passporting Regime) but must comply with various strict requirements. These include:
Sound remuneration policies.
Regulations on conflict of interests.
Extensive reporting and valuation processes.
Internal audit functions that must be implemented by the AIFM.
These licenced AIFM are obliged to provide a minimum equity of EUR300,000 for internally managed AIF, and a minimum equity of EUR125,000 for externally managed AIF. Additional amounts of equity must be provided if the value of the portfolio of the AIF exceeds EUR250 million. However, the AIFMG establishes an additional licencing requirement for large AIFM, but small AIFM are only subject to a registration requirement (de-minimis exemption). Small AIFM are defined as AIFM that either directly or indirectly manage portfolios of AIF where the assets under management (including any assets acquired by using leverage) do not exceed a total net asset value of EUR100 million. This increases to EUR500 million for unleveraged portfolios. These small AIF must also have no redemption rights that are exercisable during the 5-year period following the date of initial investment in each AIF. They are also obliged to register with the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde), have certain reporting obligations and are not entitled to market to retail investors. The European Passporting regime is not applicable to these AIFM.
The majority of Austrian venture capital fund managers fall beyond the de-minimis exemption. Compliance with the licensing requirements may be too expensive, meaning that such AIFM may face significant challenges regarding their respective business model or the set-up of new funds.
Austrian Limited Liability Companies Act Amendment
The Austrian legislator recently amended the Austrian Limited Liability Company Act by implementing a company founding privilege (Gründungsprivilegierung) for Austrian Limited Liability Companies (Gesellschaft mit beschränkter Haftung) (GmbH). This amendment provides for a reduction of the minimum initial share capital from EUR35,000 to EUR10,000. The share capital must be paid up by at least 50%. Ten years after a company registers with the Companies Register, this privilege stops and the share capital must be increased to EUR35,000. This share capital must also be paid up by at least 50%.
In addition, the set-up costs (for example, notary costs) were reduced for limited liability companies that are founded in accordance with the company founding privilege (that is, articles of association are limited to the minimum content required by law).
Tax incentive schemes
For venture capital funds' sources, see Question 1, Sources of funding.
Austrian venture capital funds are mainly funded by government offices. Most of the funds raised are domestic.
There are no current specific structures providing investors with tax benefits. (Until 31 December 2012, a fund could benefit from tax exemptions if it was structured in the form of a medium-sized business financing company (Mittelstandsfinanzierungsgesellschaft) (MFG), provided that it complied with certain investment rules (see Question 7).)
MFGs were introduced on 1 January 2008. The following conditions must be met to qualify as an MFG:
The MFG must be established in the form of a limited liability company (Gesellschaft mit beschränkter Haftung) (GmbH) or a stock corporation (Aktiengesellschaft) (AG) with a minimum share capital of EUR7.3 million.
The purpose of the MFG is limited to investing money and it cannot carry out its own business.
Only 50% of the MFG's shares can be held by public bodies and organisations.
The MFG must invest at least 70% of the funds in companies. The remaining 30% of the funds can be held as cash, bank deposits or in the form of bonds.
An MFG's earnings derived from investments in companies (Finanzierungsbereich) are tax exempt, but its earnings derived from bank deposits and bonds (Veranlagungsbereich) are not (see Question 5). An MFG must comply with section 6b of the KStG for at least seven years, or the tax exemptions are retroactively revoked. MFGs are also tax exempt from capital duty and stamp duties occurring in connection with establishment.
However, the tax exemptions under the MFG regime only apply to investments made before 31 December 2012 and there are currently no tax exemptions or benefits comparable to the MFG regime. Investments made before 31 December 2012 continue to benefit from the exemption of corporate income tax, under certain circumstances, until the beginning of the first business year after 31 December 2018.
In light of the changes to the tax exemptions, limited partnerships (Kommanditgesellschaft) are likely to become increasingly popular for venture capital funds. These are normally structured as a limited partnership with a GmbH as its general partner and the investors as limited partner. The general partner is excluded from management, which is provided by a separate management company with limited partner status. The respective management company is likely to be another GmbH (or legal person) as a matter of law, because the AIFMG requires the AIFM to be a legal person.
Venture capital funds seek to:
Safeguard the invested funds.
Increase the value of the investee company.
Create healthy returns on their investments in the medium term.
In general, investors aim to achieve an overall internal rate of return of between 15% and 25%. They also seek management expertise and resources, new technological developments, and business ideas.
Funds typically have investment periods of five years during which commitments can be drawn down for investments. The average life of funds ranges from eight to 13 years.
Fund regulation and licensing
Under certain circumstances, the managers of alternative investment funds must obtain a licence under the AIFMG (see Question 2). In addition, the promotion of a venture capital fund to potential investors on a commercial basis can qualify as banking business within the meaning of the Austrian Banking Act (Bankwesengesetz), in which case a banking licence is required. However, AIFMs that are not required to obtain a license under the AIFMG must register with the Austrian Financial Market Authority (FMA).
Venture capital funds are regulated by the Austrian Alternative Investment Manager Act (see Question 2). In addition, venture capital funds do not usually qualify as domestic investment funds under the Austrian Investment Fund Act (Investmentfondsgesetz), as this requires the fund's portfolio to consist mainly of securities. Therefore, venture capital funds are not subject to the Investment Fund Act regulations unless this is the case.
Any venture capital fund marketing activities that are deemed to be a public offer of securities are subject to the publicity and prospectus regulations of the Austrian Capital Markets Act (Kapitalmerktgesetz). If so, a prospectus must be filed with the Austrian Financial Market Authority (FMA) and published before any marketing activities are made. An offer of securities is considered a public offer if it is made to more than 150 non-institutional investors.
The AIFMG contains provisions intended to protect investors and the respective markets, including remuneration, conflict of interests, risk and liquidity management.
In addition, the relationship between the investor and the fund is set out and determined in the partnership agreement, the articles or in a shareholders' agreement.
Investors typically seek to negotiate protection provisions such as:
Restrictions on the types of investment the fund can make (for example with regard to a specific geographical or sector focus).
Restrictions on the fund size and investors' capital commitments.
Restrictions on borrowing by the fund.
Restrictions on the fund managers' other activities, including provisions for conflicts of interest.
Key executive clauses.
Powers for a specified percentage of investors to remove managers in certain circumstances.
Regular reporting to investors, including quarterly and annual financial statements.
Interests in investee companies
Valuing and investigating investee companies
Venture capital funds use different valuation methodologies in valuing investee companies, depending on the stage at which an investment is made. In general, venture capital funds value investee companies in accordance with European Private Equity and Venture Capital Association (EVCA) valuation guidelines.
In later stage investments (expansion stage, MBO or IPO) it is often appropriate to value investee companies using:
Discounted cash flows. The company's value is derived from the present value of expected future cash flows (or the present value of expected future earnings).
Earnings multiples. An earnings multiple is applied to the company's earnings.
For early stage companies (seed, start-up or first-stage), these methodologies may not be appropriate as there are usually no current and short-term future earnings or positive cash flow. Therefore, venture capital funds commonly base the investee company's value on the price of the recent investment, as recommended by EVCA valuation guidelines.
Venture capital funds conduct due diligence to achieve an informed evaluation of the value and risks presented by the investee company, to:
Expedite the transaction.
Reveal hidden risks.
This can result in a change in valuation or a decision not to proceed with the investment.
The investment decision is taken only after the investee company's due diligence and thorough evaluation of identified risks, potential for return and possible exit scenarios. The venture capital fund's management, together with external advisers, usually prepares the basis for the investment decision. The analysis primarily addresses the company's past development and strategy.
Venture capital funds usually look at the following issues for the investee company:
Management and organisation.
Market and competition.
Product and technology.
Financing and tax.
Legal issues, often focusing on intellectual property, agreements with management and key employees, confidentiality and invention assignment agreements.
Business model and corporate planning.
The principal legal documents used in a venture capital transaction include:
Articles for the investee company (if amended in the course of the investment).
Procedural rules for the investee company's managing board.
Procedural rules for the investee company's supervisory or advisory board (if established).
Protection of the fund as investor
Venture capital investors usually expect to receive full representation and warranties from the investee company and existing shareholders, although they are often different to those given in other kinds of corporate transactions, such as M&A transactions or public offerings.
Apart from representation and warranties, protection provisions cover:
Consent rights for certain shareholder resolutions.
Restrictions on share transfers, such as requirements for approval by a shareholders' meeting or by the investor.
Pre-emption rights and rights of first refusal.
Tag-along and drag-along rights.
These provisions are contained in either the articles or the shareholders' agreement. If the investee company is established in the form of a GmbH the articles and any shareholders' agreement providing these rights must be signed in a notarial deed.
Forms of equity interest
In principle, only AGs can issue different classes of shares with different liquidation preferences or profit participations. However, a GmbH's shareholders can grant an investor preferential rights that are similar to the rights vested in preferred shares.
In practice, venture capital funds take equity interests in the investee company in the form of ordinary shares. However, if the investee company is a GmbH, they negotiate to have preferred rights attached to their shares by contractual agreement until conversion of the GmbH into an AG. At this point, the fund's shares are converted into preferred shares. If the investee company is an AG at the time of investment, venture capital funds often subscribe for preferred shares.
Venture capital funds usually have the following rights as holder of preferred shares, or ordinary shares with preferred rights under a contractual agreement (see Question 16), provided that these rights are given in the investment documentation and the articles:
Preferred dividend. Preferred shares entitle their owner to receive preferential dividend payments (Vorzugsdividende). If a preferred dividend is not paid in full in a fiscal year, the outstanding portion must be paid in the following fiscal year. If the preferred dividend is not paid at that time, the relevant shareholders are granted full voting rights until the preferred dividend is fully paid. Since preferred shares are not statutorily excluded from voting, and venture capital funds usually demand voting rights, the payment structure can be individually negotiated.
The regulations on GmbHs allow shareholders to allocate a shareholder (that is, the venture capital fund) preferred dividend rights, if explicit provisions for this are contained in the articles.
Liquidation preference. Liquidation preferences can include:
any investment amount paid by the venture capital investor;
a specific internal rate of return.
They can be extended to previously omitted dividends provided that explicit provisions are contained in the articles.
Voting rights. As a basic rule, each share in an AG grants the right to vote, unless preferred shares without voting rights are issued. Shares with multiple voting rights cannot be issued in AGs.
In GmbHs, shareholders have voting rights proportionate to their subscribed share quota. For each EUR10 of capital contribution, a shareholder is granted one vote. Contrary to AGs, these voting weights are not binding. Therefore, a venture capital investor shareholder may be granted multiple voting rights in the articles of association to the extent that each shareholder of the investee company has at least one vote.
A variety of rights can be granted to the venture capital fund to gain a level of management control over the activities of the investee company, including:
The right to nominate members of the management board.
The right to nominate members of the advisory or supervisory board.
Consent rights with regard to certain measures of the management board.
Transfer of material management decisions to shareholder level.
These protections are usually contained in the articles and/or the shareholders' agreement.
Share transfer restrictions
The transfer of shares in the investee company is usually restricted by requiring consent from all or a certain percentage of shareholders or the investor. In addition, the investment documentation usually contains pre-emption rights or rights of first refusal (see Question 16).
Venture capital funds usually seek to negotiate drag-along and tag-along rights under which they can require:
A stock exchange listing.
A sale of the entire issued share capital or all, or substantially all, of the assets of the investee company.
Participation in a transfer of shares under the same terms and conditions as the transferring shareholders.
Shareholders have statutory subscription rights which entitle them to subscribe for shares corresponding to their shareholdings. Shareholders can only be excluded by shareholder resolution, unless they waive their subscription rights.
However, the investment documentation often requires the investor's approval for any exclusion of subscription rights or, where all of the shares are not subscribed for by shareholders on a pro rata basis, for unsubscribed shares to be offered to the investor.
In most cases, depending on the fund's structure, approval by the fund's investment committee is required. The investment committee in most cases consists of representatives of the investors in the venture capital fund.
Depending on the structure of the venture capital fund, other and/or further corporate bodies may need to give their approval. If the venture capital fund is structured as an AG, approval of the supervisory board (Aufsichtsrat) may be additionally required if the supervisory board is not the investment committee. The same applies to venture capital funds in the form of a GmbH that have a supervisory board.
Where parallel fund structures are in place (in which case the fund invests through parallel fund vehicles in the form of an AG and limited partnership, for example), consent of the AG's supervisory board and the (joint) investment committee of the parallel fund vehicles may be required.
Founder and employee incentivisation
The most common form of incentive for founders is direct participation in the investee company's equity capital in the form of corporate shares and/or (additional) share options. Employees are usually granted share options that can be exercised subject to agreed vesting provisions.
Alternatively, or in addition to the above, incentives can be granted in the form of profit participation programmes, profit participation loans and bonds, and phantom shares.
Non-equity participations, such as profit participation schemes, phantom shares or bonus payments, and equity participations granted to employees are fully taxed on realisation.
Provided that certain conditions are fulfilled, shares up to an amount of EUR1,460 can be issued to employees income tax free.
Venture capital investors usually seek to negotiate the following protection provisions in the investment documentation:
Lock-up periods for founder shares, during which a transfer of founder shares is not permitted or requires the investor's consent. Lock-up provisions can be combined with specific vesting provisions.
Compulsory transfers of founder shares after defined events (for example, loss of management function) where the purchase price is calculated under good or bad leaver provisions.
Investments in unsuccessful companies usually result in write-offs involving full depreciation of the participation in the investee company following the full loss of market value. Funds may try to:
Sell shares to special restructuring funds.
Sell specific assets (for example, IP) to strategic partners.
Liquidate the investee company.
The following exits are mainly used for investments in successful companies:
Trade sales. Exiting by trade sale to strategic investors is the predominant exit strategy for venture capital investments.
Secondary buyout. This is an exit by selling the investee company to another financial investor and is often an MBO.
The most common exit strategies may be anticipated in the investment documentation. In most cases, the investment documentation contains provisions that the venture capital investor is entitled to initiate an exit procedure, either by exercising drag-along rights in the case of a share sale, or on the basis of the explicit entitlement to realise a stock exchange listing.
Description. This website is part of the official Austrian legal information system and contains a selection of Austrian laws translated into English. All translations are unofficial and only occasionally updated. The website is maintained by the Austrian Federal Chancellery.
Philipp Kinsky, Partner
Herbst Kinsky Rechtsanwälte GmbH
Professional qualifications. Austria, Attorney-at-law (Rechtsanwalt), 2001
Areas of practice. M&A; private equity and venture capital; banking and finance; capital markets.
Languages. German, English, French
Professional associations/memberships. Austrian Bar Association.
Christoph Wildmoser, Partner
Herbst Kinsky Rechtsanwälte GmbH
Professional qualifications. Austria, Attorney-at-law (Rechtsanwalt), 2006
Areas of practice. Banking; finance; corporate; M&A; private equity.
Languages. German, English, French
Professional associations/memberships. Austrian Bar Association; International Bar Association.