Month: February 2023
There have been many different language translations of Venture Deals since it was first published in 2012. The first German translation of Venture Deals 4e is out, and Florian Kreis did an amazing job.
Florian aimed to modify the book as little as possible, even if the relevant passages did not correspond 100% to German best practices but were still feasible to implement. He believes the structures originally developed in the U.S. have become the international standard and are a great role model for Germany.
However, the challenge in revising the book this way is putting these structures into the context of German law. Sometimes, this required minor changes or simply using the correct language. In other cases, it was a lot more challenging.
Following, in Florian’s words, are several examples of things he had to modify more extensively.
Corporate law: In Germany, most companies in general and most VC-financed companies are structured in the legal form of a “Gesellschaft mit beschränkter Haftung” (GmbH). Larger companies often convert to the “Aktiengesellschaft” (AG) later, especially if they want to go public. Both the GmbH and the AG are corporations. In addition, many GmbH & Co. KG companies exist in Germany. They correspond in their structure roughly to a Limited Liability Company (LLC). GmbH & Co. KG companies have decisive tax disadvantages for startups and are, therefore, rarely used in this area. The GmbH has a great advantage in that it can be structured very flexibly. You can deviate from the legal regulations to a very large extent, and in practice, you do so. Most of the VC structures from the US best practice can be integrated into the GmbH structure. Often, this integration results in VC-financed GmbH companies having little to do with the GmbH as envisaged by the law.
Board of Directors: There is no board of directors in Germany. In the GmbH, the most important body is the shareholders’ meeting. The shareholders are represented there and usually have voting rights in proportion to their shareholdings. In addition, there are the managing directors as executive bodies. In the VC sector, it is common to introduce a third body in addition to the shareholders’ meeting and the management. This third body is often referred to as an advisory board (Beirat), sometimes also as a supervisory board (Aufsichtsrat). In practice, certain functions of the shareholders’ meeting are transferred to such an advisory board, for example, the appointment and supervision of the managing directors or the decision-making capacity in the case of protective provisions. In the end, however, it is the shareholders’ meeting that remains the most important body in the GmbH.
Conversion right: In Germany, there is generally no conversion right entitling the holder of preferred shares to convert them into common shares at any time. This may not seem like a big deal at first glance, but it has extensive implications under various aspects, such as the structure of the liquidation preference. In the USA, the conversion right ensures that holders of preferred shares are not disadvantaged compared to holders of common shares; in Germany, this legal consequence must result directly from the structure of the preferred shares. In some cases, this causes confusion in terms of terminology: In Germany, the participating preference is referred to as the “nicht anrechenbare Liquidationspräferenz” (non-compensable liquidation preference), while the non-participating preference is referred to as the “anrechenbare Liquidationspräferenz” (compensable liquidation preference). Hence, the negation is exactly in reverse. However, the lack of a conversion right also has implications for anti-dilution protection: in the U.S., this is usually done by adjusting the conversion price. In Germany, anti-dilution protection is achieved by issuing additional preferred shares. The lack of conversion rights must also be considered when structuring voting rights.
IPO issues: Possibly the biggest problem for German venture-backed companies is the very low number of IPOs in Germany. The boom years of 1998 (79 IPOs), 1999 (175 IPOs), and 2000 (142 IPOs) are long gone. In 2022, just as in 2009, there was only one IPO; typically, there are between three and 16 per year. Since the attractiveness of investments is also largely related to exit channels, this aspect affects the availability of capital and company valuation at every stage. It is not uncommon for companies wanting to go public to relocate their registered office to the USA at an early stage. There are also legal differences: Registration Rights, for example, are not legally binding. Piggyback rights are permissible, but due to legal regulations, they are not mandatory. Even though the regulations may not be binding or necessary in individual cases, they can help to bring the topic of going public into focus at an early stage and make it a subject of discussion.
Employment Issues: There are significant differences between Germany and the U.S. regarding employee issues. There is a reason why on page 264 of Venture Deals 4e, it states, “We’ve encountered some challenging situations in certain states in the United States that made firing almost as challenging as firing in parts of Europe.” This must have meant Germany… If a company regularly has more than ten full-time employees, terminations may only be made for certain reasons. Then you may only terminate those employees you actually still want to keep. These issues were problematic twenty years ago when the unemployment rate in Germany was relatively high, and terminated employees could not easily get a new job. Today, things are different: For some years, German has had a shortage of skilled workers, and companies are usually happy if they can find suitable employees.
Employee option pool: The framework conditions for employee option pools remain a major problem in Germany. The tax framework and valuation issues are particularly complex and not very employee-friendly. While there was a major law reform in 2021, the regulations are still inadequate. Even after the 2021 reform, employee option pools will continue to be structured via phantom stocks, as this is the only way to reliably avoid the dry-income problem. This topic is important and complex, so I dedicated a separate chapter (chapter 20) to it in the German edition.
Regulatory framework: There are major differences between the U.S. and Germany in the regulatory framework, which in Germany is supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This affects not only the large IPO in the late stage but also the small crowdfunding round in the early stage.
Other special features: At various points in the book, there are references to the German Standards Setting Institute (GESSI), which was founded by the Business Angels Netzwerk Deutschland e.V. (BAND) and the Bundesverband Deutsche Startups e.V. (German Startups Association). GESSI develops standardized sample contracts comparable to the National Venture Capital Association in the USA, which are available online at www.standardsinstitute.de. The book also contains information on the INVEST program, with which the Federal Republic of Germany supports investments in early-stage companies. Unfortunately, some of the explanations in this regard are already out of date following the most recent amendment to the law on February 6, 2023.
Samples: The samples in the Annex of the German edition, i.e., the Term Sheet and the Letter of Intent, are essentially based on the samples of the U.S. edition. The detailed work here was probably the most time-consuming. In the case of sample contracts, every word and every concept must be correct and corresponds 100% to the German legal situation. Both samples are bilingual. I partially dealt with the additional space requirements associated with bilingualism by merging the two-term sheet samples from the US edition into a single document.
Florian – thank you for the incredible and time-consuming effort here.
The course is free and starts on March 21, 2023.
This is the third time we are running the new version of the course (v2!) that was co-created with Techstars and Kauffman Fellows.
If interested, sign up now. I hope to see you there in one of the AMAs we will host for anyone who takes the course.
Amy and I have been sponsors of the Boulder International Film Festival for a while. We’ve also been helping fund documentaries and have received several executive producer credits. Two of these films are in the 2023 Boulder International Film Festival on March 2 – 5, 2023.
Afghan Dreamers is the story of an all-girls robotics team in Afghanistan who risks it all to prove that they can compete against anyone worldwide. Working in secret in a province under strong Taliban influence and the threat of violent retribution, the high-school-aged team members struggle in the face of immense odds and ever-present danger. They single-handedly begin to change perceptions in their entrenched Islamic culture. The film focuses on three team members – Fatemah, Somaya, and Lida – who become role models for the next generation.
I met David Cowan in 1988 when he was an undergraduate at Harvard and I was a graduate student at MIT. We became friends and regulars at Maven’s Deli in Harvard Square. Our first project was Feld Technologies reselling (not very successfully) a software product called DataRoute that David wrote for his father’s law firm. The phrase “Today is the day to route with DataRoute” still hangs out in the dark recesses of my memory.
David has produced several films and called me up when he started working on Afghan Dreamers. He knew I’d be an easy mark for joining in on the film based on my support of women and girls in computing. He did all the work, so I merely provided some money and moral support. I saw an early cut, but that was before the final withdrawal of U.S. troops from Afghanistan, which added some extreme plot twists to the story. Amnesty International gave the film the Best Human Rights Film Award for 2022 at the Galway premiere, and the Woodstock Film Festival gave it Honorary Mention for Best Documentary Feature.
I look forward to seeing the final cut at Boulder High School on Saturday, March 4th.
My Sister Liv is the story of two inseparable sisters, Tess and Liv. However, as Liv enters adolescence and struggles with the relentless pressures of social media, depression, body dysmorphia, and, often, suicidal thoughts, her big sister Tess desperately struggles to save her. My Sister Liv is a rare and riveting journey into Liv’s raw emotions and fears as a young life on the edge. As Tess and her family learn to cope after unthinkable loss, they begin the heartbreaking journey to understanding the circumstances that led to Liv’s death and talk to experts to provide hope and solutions for this ever-growing epidemic.
Three of our friends—Grant Besser, Melissa Grumhaus, and Jason Lynch—introduced or mentioned Olivia Ahnemann, one of the producers of My Sister Liv, to us. After some discussion, we also decided to provide financial support for this film. We will also be watching it for the first time at Boulder High School on Saturday, March 4th.
Amy and I will have a double feature day at the Boulder International Film Festival on March 4th. I hope to see you there.