FRANCE: An Introduction to Private Equity: Venture Capital

Introduction

The first half of 2025 for French venture capital unfolded against a backdrop of global political uncertainty following Donald Trump’s return to the White House, alongside sustained investor appetite for high-potential sectors such as AI, deeptech, and healthtech (notably “braintech”).

Despite ongoing challenges in raising funds from LPs and VCs, the French market is displaying a cautious recovery, supported by easing interest-rate pressures and valuation stabilisation since 2024.

On the tax side, two issues have been clarified:

• methods for determining the fair market value (FMV) of shares underlying bons de souscription de parts de créateur d’entreprise (BSPCE); and
• the risk of capital gains being reclassified as salary, with associated tax consequences.

Clauses familiar to international VCs – liquidation preference, anti-dilution, veto rights, pro-rata rights – have been customised to meet the French legal setting over the past 30 years. As we say, the French play with the same deck of cards but organised in a different order.

Yet, the main contractual documents are the same: term sheet, representation and warranties agreement and shareholders agreement.

Term Sheet (TS)

A non-binding document issued by the lead investor, the TS sets out:

• valuation and investment amount;
• governance;
• management package;
• liquidation preference;
• anti-dilution mechanisms (equity and value);
• pre-emption, drag-along and tag-along rights; and
• exclusivity, governing law, and jurisdiction.

Once signed, deviation from the TS is difficult, particularly for the entrepreneur – hence the need for early legal counsel.

Shareholders’ Agreement (SHA)

Early shareholders are often friends, family, or business angels, sometimes via crowdfunding platforms, before professional VCs invest. This typically leads to a fragmented shareholding structure. Given the fact that, unlike in US law, a contract may only be amended unanimously, shareholders agreements are divided into:

• a minority SHA for each small holder; and
• a master SHA for founders and major investors.

Key SHA provisions include the following:

• Governance – board composition, meeting rules, reserved matters, and information rights.
• Pre-emption right – shares must first be offered to existing shareholders on the same terms before any sale to an identified buyer.
• Tag-along – investors may sell their shares on the same terms as a selling shareholder; “full tag” protects minorities in change-of-control events, often extending to sales to competitors.
• Drag-along – if a certain majority (60% minimum) agrees to sell, remaining shareholders are obliged to sell on the same terms.
• Liquidation preference – preferred shareholders recover their investment before ordinary shareholders upon liquidation or change of control as follows:
• Non-participating – choose between recovering the initial investment or converting to ordinary shares.
• Participating – recover investment first, then share in remaining proceeds.
• In France, 1× non-participating preferences dominates (~96%) up to Series B.
• Different liquidation preference will accumulate over multiple financing rounds, making exits complex as the interests of various preference categories may differ, if not directly oppose each other.
• Anti-dilution – this is a two-folded right which protects both equity percentage (via a preferred subscription right) and value (via full or weighted average ratchet mechanisms).
• Liquidity – right to force an exit after three to five years.
• Key person provisions –lock-up, non-compete, key person insurance, and IP assignment.

Leaver Clauses

Good or bad leaver clauses are options to purchase shares granted to the employing company in the event that the employment relationship is terminated.

• Employees – French labour law prohibits fines or monetary penalties against employees (Art. L1331‑2 of the Labour Code). Accordingly, clauses must apply to all termination types, not only disciplinary cases. A bad leaver clause may still be valid should it (i) not be triggered directly by and give a benefit to the employer, (ii) relate to shares held as a shareholder.
• Managers (CEO, deputy CEO) – Holders of managerial roles are not subject to labour law; however, any discounted repurchase price must be reasonable.
• Employees and managers – Courts may reduce manifestly excessive discounts.

Management Packages

Stock options are a tool widely used by start-ups to arrange for their employees to hold a share of the increase in value to which they have contributed and to align employees’ interests with company growth.

• BSPCE – Introduced in 1997, granted for free, with no tax or social charges on grant or exercise. They are eligible to companies that are less than 15 years old and that have had at least 25% individual ownership from inception.
• Stock options – These are rarely used due to tax burdens.
• Free share awards – These are the French equivalent of a restricted stock unit, used when BSPCE eligibility is lost; however, they are costly due to a 30% social security charge on their fair-market value (FMV) upon delivery of the shares at least one-year after grant.

BSPCE valuation and taxation:

• FMV is set on the grant date;
• differences in rights (eg, liquidation preference) whether in the by-laws or in the SHA may justify value differentials; and
• since January 2025:
  • exercise gain (FMV at exercise minus purchase price) is taxed as a salary benefit at 12.8% (or 30% if under three years’ service) plus social charges; and
  • capital gain (sale price minus FMV at exercise) is taxed as capital gain at 12.8% plus 17.2% social charges (ie, 30%).

Representations & Warranties (R&W)

These have been imported from US M&A practice and adapted to French civil law. Typically, they are given by founders only (usually capped at one year’s salary) until the founders are minority shareholders and it is then the company that is liable for the balance.

Their purpose is to provide investor comfort regarding valuation factors. The indemnity is usually payable in cash or shares, depending on the investor’s preference and the level of detail varies with company maturity – from a few pages to over forty.

Negotiations over R&W should not undermine any future working relationships.

Leveraged Buyouts vs Venture Capital

While sharing some contractual tools, LBO and VC differ fundamentally:

• LBOs look to control acquisition, leverage through debt and focus on immediate returns.
• VC, on the other hand, is equity-based and typically represents a bet on future growth.

Tax abuse in LBOs has sometimes led to reforms that harming VC – for example, the 2025 BSPCE tax reform, partly triggered by preferred shares with extreme multiples in LBO-like structures.

Conclusion

In 2025, French venture capital operates at the intersection of market recovery, complex regulation, strong labour protections and evolving tax rules. BSPCEs remain a powerful incentive tool, though under increased scrutiny. Governance, liquidation preference and anti-dilution clauses – rooted in Anglo-Saxon practice – are deeply embedded in French VC deals, adapted to local law and increasingly incorporating ESG considerations.

For practitioners, the priority is clear: draft with clarity, align stakeholder interests, ensure compliance, and anticipate regulatory change. Contracts must be robust yet flexible – capable of adapting to shifting frameworks while safeguarding both investor capital and entrepreneurial ambition.

As the author once told his young associates in the early 1990s: “I have embraced venture capital so that you will be paid a pension when you retire”.