Startups and Venture Capital in Greece
Start-ups companies: The new form of entrepreneurship, which has brought, during the last decade, significant changes in the business foreground, by attracting an ever-growing volume of investors both from within as well as from outside the country. What are the start-ups though and what are the characteristics that distinguish them from the other companies?
The main element of the start-up mentality is innovation. The core of the start-up is the innovative idea in combination with a groundbreaking and viable business plan. They are characterised by impressive growth rates in relation to their personnel and furthermore, they are intensely outward-looking, as they interact directly with international competitiveness. In Greece, start-ups are growing mainly in the sector of technology, whereas great perspectives are also created in the agri-food and tourist sector, adding value to the business and economic activity of the country and to the boost of employment rates. Companies such as Taxibeat, E-food and Workable are characteristic examples of successful Greek start-ups.
In lack of a special legislative regime for establishing and running a start-up, the provisions of company law are applicable, depending on the selected corporate form [usually, the form of a Private Company (IKE) is selected, being more flexible].
Funding Methods- Venture Capital
Finding the proper funding method is one of the biggest challenges with which a start-up is confronted and probably the most frequent reason why groundbreaking and ambitious ideas do not advance.
Apart from the classic funding methods, namely own-capital funding and bank lending, a variety of newly-emerging alternative methods is used, mainly abroad and lately also in Greece. Such methods include ‘crowdfunding’ (otherwise called ‘internet microcredit’), investment funds, Business Angels (BAs), i.e. private investors who invest their own capital in a company in return for company parts or capital shares and the Venture Capital (VC), which constitutes the most popular source of funding.
The VCs are organised investor funds engaging in high-risk investments in new start-ups, principally in the sector of technology. The Venture Capitalists invest significantly more funds in comparison to the BAs; however, BAs invest in an idea, whereas the Venture Capitalists invest after the company has completed its first steps and is presented with growth and progress.
Under Greek law, the VCs are in essence the capitals of a Société Anonyme which is established with the sole purpose of conducting the specific investment activity. This company is within the scope of Greek law 2367/1995 when it participates in the capital of companies registered in Greece, or in an EU Member-State or even in a third country, as long as these companies are providing their services in Greece. It is characteristic that the company which is run as a Venture Capital must notify its establishment to the Hellenic Capital Market Commission. This provision signifies that this is a regulated activity entailing a great deal of risk.
The law provides for a non-exhaustive list of investment activities of a Venture Capital Company, which –amongst others- are investments in bonds, deposits of capitals in bank accounts and collective investment institutions, guarantees in favor of start-ups so that the latter can be further financed, as well as provision of services for the support of their research and investment projects. The minimum capital for establishing a Venture Capital Company is €300,000, while the law provides for tax benefits, such as lower tax rates and tax deductions.
It is noted that although the European market of VC as well as the start-up sector are on an upturn, it seems that they have been constantly falling short of the respective U.S. market. The Greek VC market had been presented with a promising dynamic in the late 1990s, but it was diminished later on due to inherent capital market distortions. The rebirth of the internal VC market as well as of the start-up ecosystem commenced in 2009, while, according to published figures, the total invested capitals from VC to Greek start-ups during 2010 – 2018 are calculated to an approximate of $2,4 billion.
In order to fund a start-up through a VC, it is usual that a participation agreement is initially signed between the company, the founders and the investors, under a template which is called ‘Simple Agreement for Future Equity’ (‘SAFE’), which is widely used in the U.S.A. and in Canada, thanks to its simple mechanism. It is a private agreement between the investor and the company and its founders which provides a right to the investor to acquire company parts or capital shares in the future, when a specific investment event takes place. The exact terms of the SAFE vary, however the basic mechanism is funding of the company upon signature of the document with a fixed amount granted by the investor. In return, it is agreed that the investor will acquire company parts or capital shares at a later time, depending on the criteria defined as investment events. Usually, the shares granted to the investor are privileged, so that in case for example of a new funding round the investor retains his participation rate or in case of acquisition of the company, the investor can collect the value of the shares prior to the rest of the shareholders. In contrast to the typical share transfer, the shares are not evaluated upon concluding the SAFE. The investor and the company are negotiating instead the mechanism and the terms, according to which the shares will be issued and evaluated in the future. Typically these terms include a valuation cap for the company and/or a deduction on the valuation upon the investment event. In that way, the investor profits from the potential rebound of the company generated between the time that the SAFE is signed (when the funds are channelled to the company) and the time the investment event occurs.
Although this is a seemingly simple mechanism, its application in the Greek company practice is confronted with difficulties. The divergence between the legal system of Greece and other jurisdictions’, the terminology used in the SAFE following the American templates, and the special provisions of Greek company law for the entry and participation of investors in companies, the issuance of privileged shares etc., render SAFE a highly impractical tool which fails to fulfil its purpose. As a result, the compliance of SAFE with the Greek standards, the addition of alternative methods of participation of an investor, as well as an analysis of the rights and obligations of the parties, is deemed necessary for safeguarding the status thereof and the facilitation of the investment.
Participation of investors in Greek companies
In practice, the entry of an investor in a Greek (start-up) company can take place in one of the following ways:
a) transfer of company parts or shares from the partners/shareholders and/or
b) increase of share capital and subscription of the new contributions by the investor. The capital increase is usually completed by issuing new company parts/shares “above par”, i.e. by paying a higher amount than the nominal value of the company parts/shares. In that way, the investor pays the necessary amount for funding the company, without causing significant changes in the participation quota of the founders, hence securing the alignment of the rights of the new and old shareholders to the added value of the company.
For the regulation of the internal relations between the shareholders, the signing of ‘shareholders agreements’ between old and new shareholders is also common practice, i.e. agreements that are not included in the company’s statutes and usually relate to exercising of company rights in a certain way, undertaking of specific obligations or supplementing the provisions of the statutes.
Furthermore, especially for the corporate form of Private Companies, there is the provision for non-capital contributions, namely contributions which by nature cannot constitute capital contributions, such as undertaking the performance of specific work or the provision of services, in return for acquiring company parts. The value and kind of non-capital contributions, the duration of employment obligations or the provision of services and all particulars are agreed by the partners and are provided for in detail in the statutes of the company. This provision is significantly useful and beneficial for the company (and subsequently for its founders), as it takes advantage from important services for its development, e.g. promotion, administrative organisation, research, logistic and technical support etc., without additional cost.
It is undeniable that the emerging industry of Greek start-ups has gained remarkable ground. The start-ups are creating a prospect of economic and business development and they can contribute to the creation of new vacancies and to a modern business mindset. Nonetheless, for the encouragement of this innovating business activity and for a higher growth expectation, it is necessary, amongst others, to support alternative funding methods and to adapt the mechanisms and procedures used over the time in foreign jurisdictions to the provisions of the Greek (company) law.