By Orestes Omran*
The Greek venture capital market showed increased sizes in 2021, a trend that is expected to continue in 2022. Of course, we still lag significantly behind the relevant markets in most EU Member States, although the €4.5 billion raised last year by start-ups with Greek founders seems impressive. This is because most of these start-ups are based and/or operate outside Greece.
It therefore becomes important to tap into the talented Greek startups from Greece and within Greece. Legislative initiatives that include, among other things, sufficient tax incentives are not enough on their own. A complete modernisation of the relevant ecosystem and know-how is required to enable the State to implement effective policies for attracting young Greek entrepreneurs from abroad and the capital they manage on the one hand, and for exploiting the highly capable human resources already doing business in our country on the other.
These transactions depend for their success not only on their economic rationale but also, to a large extent, on their design. The vast majority of them are equity-based, i.e. the fund in question finances the company in return for a percentage of its share capital. This is where a first imbalance is found. The design and negotiation of the transaction is usually handled by the investor’s lawyers – often large foreign law firms – who have a wealth of experience in similar deals and know how to use their special weight, where necessary, to the detriment of the founders. It is therefore recommended that young entrepreneurs choose effective legal representation based on experience in the relevant market. The costs may be higher but are not comparable to the risk and cost of losing complete control of the company in the event that the contractual documents are “mined” to the benefit of the investors by the latter’s lawyers.
A similar risk for the investors is the proper legal and technical control of the company. Investments have failed and money has been lost because pending litigation and other contractual disputes have been underestimated, particularly over intellectual property rights, trademarks, patents, which are often the main asset of a start-up. The same is true of disputes involving current and former shareholders, which take time to resolve definitively. In legal terms, investor protection can be implemented in a variety of ways, linking the results of legal control to the transaction price and/or compensation in the event of ex post losses arising from issues existing before or after the closing of the transaction and up to a certain point in time.
Moreover, the subjection of such transactions to foreign law – in particular English law – and to the jurisdiction of foreign courts or, even better, to international arbitration becomes in the interest of both parties as Greek company law cannot easily cover the specific circumstances of such transactions and Greek courts do not have experience in adjudicating such cases due to the small size of the Greek market. The applicable law also helps to maximise the internationalisation of the transaction, which will in turn contribute to attracting further capital to the company in subsequent rounds of financing from international venture capital funds. It should be noted, of course, that the possibility of securing the entry of new investors is also subject to negotiation and the detailed procedure is reflected in the relevant shareholders’ agreement.
Finally, attention must also be paid to the retention of the founders in the active management of the company, which is provided for in the relevant transactions. The aim is to ensure a balance. On the one hand, the founders should ensure flexibility of action to continue the company’s development. On the other hand, effective cooperation with any new members of the management that the investor may appoint is required. Often, moreover, the latter is a condition of investment for institutional investors. And this is achieved by properly drafting the relevant provisions in the transaction documents.
A venture capital transaction is not a typical acquisition of a minority or majority stake in a company. On the contrary, all such transactions present their own practices, patterns and rules that determine, to a large extent, their success. Understanding between the parties to the transaction, knowledge of the market and reliable legal advisers can ensure the success of such deals.
*Orestis Omran is a Lawyer, Partner and Head of Greece Country Group at DLA Piper.
The article Greek Venture Capital Market.