The Corporate Design of Investments in Startups: A European Experience

Abstract

This is the first European study to conduct an extensive empirical research of startup charters. Our aim is to test whether the significant reforms of the law on the Italian società a responsabilità limitata (the GmbH-type limited liability company) were successful in making Italian corporate law more amicable towards startups and venture capital contracting techniques. We explain why, in the Italian context, charters provide significant information on financing deals, and we analyse more than 5000 charters of Italian startups. We find almost 200 charters that reflect the features predicted by the financial contracting theory, albeit with some significant variations in comparison to the US experience. The main one is that convertible preferred shares are not used. We report the large use of (non-convertible) participating preferred shares but also the increasing adoption of preferred shares that are functionally equivalent to US convertible non-participating preferred shares. The absence of convertibility mechanisms also explains the different structure of antidilution clauses in the Italian market. Hybrids are used to provide SAFE- and KISS-like contractual solutions. Co-sale clauses (tag-along and drag-along) are widespread and also highly standardized. US-like vesting schemes are equally observed. Some of the peculiarities we report depend on Italian law idiosyncrasies that are mainly the product of doctrinal constructions. However, corporate practice is pushing the envelope in its efforts to adapt Italian charters to startuppers’ and investors’ needs. From this standpoint, the Italian reforms look, though not completely, successful. Startup law appears to be transforming the European corporate law tradition.

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Keywords: Empirical legal studies, startups; freedom of contract, venture capital, business angels, outside investors, comparative company law, legal transplants, corporate governance, entrepreneurial finance, closed companies, LLC

JEL Classification: K22, G24