Austria’s Start-Up Offensive: Major Changes Ahead

For years, start-ups have been instrumental in Austria’s business landscape and provided lucrative opportunities for venture capitalists. In 2021, total start-up financing skyrocketed to over EUR1.23 billion. In 2022, start-up financing remained bullish, amounting to EUR830 million.

Prompted by feedback from practitioners on the need for a more start-up-friendly corporate law, Austrian lawmakers have proposed the creation of a novel legal entity, known as a Flexible Company or “FlexCo”. Essentially, the FlexCo will be an Austrian LLC incorporating elements of an Austrian stock corporation, but with significantly fewer formal requirements. To make FlexCos more attractive for start-ups, the minimum capital threshold has been set at EUR10,000, a marked reduction from the EUR35,000 for an LLC and EUR 70,000 for a stock corporation.

The FlexCo model also allows for flexible capital raising instruments, including management-authorised share issues, a privilege previously restricted to stock corporations. Stock corporations, given their rigidity and complexity, are not a good fit for most start-ups; FlexCos, on the other hand, are much cheaper to establish and provide the flexibility needed to raise capital.

Start-ups typically cannot afford high salaries for employees. This makes employee incentivisation a crucial factor. The proposed legislation aims to address this issue by introducing a special type of share in a FlexCo – the company value share (CVS). In brief, a CVS will not grant voting rights, but it will provide for a share in the company’s dividends and liquidation proceeds. The upside of not having voting rights is that CVS holders are not obliged to inject additional funds into the business, thereby eliminating the economic risk. CVS may constitute up to 25% of the share capital and can be issued for as little as one cent. These features simplify employee participation, potentially rendering schemes such as phantom shares obsolete. Moreover, CVS holders are granted a tag-along right if the founding shareholders divest over 50% of their shares.

The proposed introduction of CVS is also expected to coincide with new tax benefits relating to employee participation schemes. Currently, employees who are offered shares in a company are taxed as soon as they receive the shares, despite receiving a non-cash income (the so-called dry income problem). The proposed legislation aims to alleviate this issue by deferring the tax obligation until the employee sells their shares or their employment is terminated, provided that certain conditions were met when the shares were issued.

Usually, the transfer of a share in an Austrian LLC requires a notarial deed. To maximise the flexibility of CVS, this requirement has been removed for CVS. A simple written agreement will suffice. Moreover, CVS holders will not need to be registered in the commercial register, thereby eliminating another administrative formality. However, the company will be required to maintain a share ledger.

The anticipated adoption of the draft legislation outlined above will significantly enhance Austria’s appeal to start-ups, and will likely lead to a surge in the establishment of FlexCos. Austria is poised to take a significant step towards fostering a more start-up-friendly environment.