The aim is to promote employee parti­ci­pa­tion via a “real” share­hol­der posi­tion instead of the more common virtual phan­tom stock models. The legis­la­tor initi­ally sought to solve the problem of dry income taxa­tion of the non-cash bene­fit upon trans­fer of “real” shares with the Fund Loca­tion Act for SMEs by post­po­ning wage taxa­tion to certain later points in time, namely until the trans­fer of the share­hol­ding, the termi­na­tion of the employ­ment rela­ti­onship and no later than 12 years after the trans­fer of the share­hol­ding. The weak­ne­s­ses of this regu­la­tion are now to be reme­died by the ZuFinG‑E: Accor­ding to the draft bill, the SME crite­ria will be doubled, thus expan­ding the scope of appli­ca­tion; compa­nies foun­ded 20 years ago will also be covered; in the case of a lower sever­ance payment (e.g. in the bad leaver case), only this sever­ance payment will be taxed, i.e. not the higher non-cash bene­fit in the case of a grant; taxa­tion will only take place in the case of a sale in which the employee assu­mes liabi­lity for wage tax upon leaving. In addi­tion, the possi­bi­lity of lump-sum taxa­tion at 25% is crea­ted for the employer.

All this leads to a high comple­xity of the control. The simp­lest approach would be to gene­rally tax the proceeds from an employee share­hol­ding at 25% only upon sale or trans­fer, and to include phan­tom stock as an asset holding with the same taxa­tion. This also avoids the still unre­sol­ved problem of valuing the invest­ment at the time it is gran­ted, unless it is in connec­tion with a finan­cing round. In addi­tion, for corpo­rate gover­nance reasons, genuine parti­ci­pa­tion by seve­ral employees is only advi­sa­ble if they are bund­led in an invest­ment company; Section 19a (1) 2 EStG expressly permits indi­rect parti­ci­pa­tion via a part­ner­ship for this purpose. — In my opinion, it will certainly take time before genuine employee parti­ci­pa­tion is conside­red as an alter­na­tive to virtual parti­ci­pa­tion. Howe­ver, it may be wort­hwhile to deve­lop stan­dard models for this as well. A propo­sal for the contract of an employee limi­ted liabi­lity company can alre­ady be found in the appen­dix of the 7th edition. of my VC manual.

GESSI stands for the German “Stan­dards Setting Insti­tute”. Here, on the initia­tive of BAND and the German Start-up Asso­cia­tion, German-English sample contracts with expl­ana­ti­ons are being deve­lo­ped, which are freely available for anyone to down­load. My ambi­tion was to create a contract struc­ture that was as simple and cost-effec­tive as possi­ble in the inte­rest of busi­ness angels and start-ups. In Germany, the compa­ra­tively high notary fees for the nota­riza­tion of an invest­ment contract are a burden that does not exist anywhere else in the world. The nota­rial form is used when trans­fer obli­ga­ti­ons for shares are regu­la­ted in the parti­ci­pa­tion agree­ment. Accor­ding to Section 15 (4) GmbHG, this requi­res nota­rial form, which covers the entire agree­ment. Then the notary costs are calcu­la­ted not only from the invest­ment, but addi­tio­nally from the post-money valua­tion minus the value attri­bu­ta­ble to the smal­lest invest­ment, as this deter­mi­nes the value of the co-sale obli­ga­tion. If, howe­ver, these rules are moved to the artic­les of asso­cia­tion, the requi­re­ment for certi­fi­ca­tion is satis­fied and it remains solely to calcu­late the amend­ment to the artic­les of asso­cia­tion, which is requi­red anyway and for which a small fixed amount is to be applied. Because of the ques­tion of whether the sepa­ra­tely agreed addi­tio­nal payment should also be applied to the nomi­nal capi­tal increase, I have filed a jump appeal with the Fede­ral Court of Justice (BGH), on which a decis­ion is pending.

In any case, howe­ver, the nota­riza­tion requi­re­ment for shares in a GmbH and also a UG (limi­ted liabi­lity company) is an alien concept, not only because no such form applies to share trans­fers, but also because suffi­ci­ent legal certainty regar­ding share owner­ship is provi­ded by the list of share­hol­ders to be depo­si­ted with the Commer­cial Regis­ter. The ZuFinG‑E provi­des for the digi­tiza­tion of shares. Howe­ver, no reform is being conside­red for the legal form of the GmbH and UG (limi­ted liabi­lity company), which predo­mi­nate in prac­tice. In this context, the aboli­tion of the nota­rial form requi­re­ment appli­ca­ble there, alre­ady through the ZuFinG, would be a real “game changer”.

Thanks to govern­ment support measu­res, the VC scene remained stable during the pande­mic. With the Ukraine war, the energy crisis and infla­tion with rising inte­rest rates, but also with new uncer­tain­ties at U.S. banks, inves­tors are holding back again. This leads above all to lower valua­tions, which in my impres­sion are thus moving back towards a normal level. Nevert­hel­ess, one does not see multi­pli­ers or inte­rest on liqui­da­tion prefe­ren­ces, nor does one see a rever­sal to the ineli­gi­bi­lity of such prefe­ren­ces. Dilu­tion protec­tion also remains weigh­ted in idR. Those who invest, ther­e­fore, usually do so accor­ding to the old rules. This is also a good thing, so as not to create an omen that burdens early-stage inves­tors and foun­ders for later rounds. A new inves­tor will not submit to “pay to play”, which crea­tes indi­rect pres­sure for follow-up invest­ments, in these uncer­tain times.

It can be obser­ved that considera­ble pres­sure in the sense of “reor­ga­niza­tion or exit” is gene­ra­ted in start-ups close to insol­vency by share­hol­ders willing to finance against co-part­ners not willing to do so. Howe­ver, an obli­ga­tion to resign cannot be deri­ved from the duty of loyalty in the case of a corpo­ra­tion. No capi­tal measure may be blocked for self-inte­rest unless it can be shown to lead to the rescue of the Company. The resul­ting dilu­tive effects, inclu­ding risk-based compen­sa­tion, are to be accepted. Howe­ver, since the content of the gene­ral fidu­ciary duty is largely deter­mi­ned by what the share­hol­ders have agreed, it is advi­sa­ble to stipu­late the condi­ti­ons of further finan­cing (such as the co-sale obli­ga­tion) in advance, namely in the sense of a duty to coope­rate if a majo­rity of the shareholders/investors vote in favor, provi­ded that no share­hol­der is impo­sed with an obli­ga­tion to make addi­tio­nal contri­bu­ti­ons, no special rights are with­drawn and the prin­ci­ple of equal treat­ment is obser­ved. The agree­ment of such a duty to coope­rate is essen­tial because the amend­ment of a parti­ci­pa­tion agree­ment other­wise requi­res the consent of all contrac­ting parties. As for the amend­ment of the Artic­les of Asso­cia­tion, a quali­fied majo­rity of 75% is requi­red. If the finan­cing serves to avert an immi­nent insol­vency, howe­ver, a simple majo­rity of the shareholders/investors should suffice. While this is not “self-execu­ting” without a power of attor­ney provi­sion, it at least crea­tes clarity in the rules of the game.

About Dr. Wolf­gang Weitnauer

Dr. Wolf­gang Weit­nauer focu­ses on advi­sing invest­ment compa­nies and young tech­no­logy compa­nies on all legal aspects of finan­cing rounds and sales tran­sac­tions. His prac­tice areas include corpo­rate and commer­cial law, mergers and acqui­si­ti­ons, corpo­rate finance and invest­ments, fund struc­tu­ring and regu­la­tory matters.
wolfgang.weitnauer@weitnauer.net