Start-up financing in Central and Eastern Europe

Common financing instruments for start-ups in CEE

Start-ups in the CEE region employ a variety of financing instruments to support their growth, with each country adopting its own unique approach. Equity financing is one of the most prevalent methods, frequently used by venture capital, growth and private equity funds. This type of funding is often contingent upon achieving specific milestones. Convertible loans (CLAs) are popular alternatives, enabling investors to convert loans into equity at a later stage. Simple Agreements for Future Equity (SAFEs) are becoming increasingly popular, though legal and tax difficulties must be considered. Public grants and subsidies, provided by state agencies or EU funds, constitute another significant source of funding. Shareholder loans are also employed as financing instruments, subject to proper legal and tax structuring. The utilisation of these instruments varies across the region. Understanding the differences is crucial for effectively navigating the CEE start-up financing landscape.

What is the most common legal form of start-ups?

The limited liability company is clearly the most common legal form for start-ups across the CEE region. This structure is favoured for its simplicity, lower capital requirements and flexibility in corporate governance. The LLC form is accessible and provides a straightforward path for entrepreneurs to establish their businesses with minimal initial investment.

Despite the common preference for LLCs, each country has unique features and additional legal forms that cater to specific needs. For instance, Austria's introduction of the FlexCo offers a hybrid model combining elements of LLCs and stock corporations. Poland's PSA provides an ultra-flexible option with a minimal capital requirement, while Croatia's "simple" LLC caters to micro-enterprises with extremely low capital needs. Romania's dual option between LLCs and joint-stock companies reflects a balance between simplicity and the ability to raise significant capital.

How are start-ups organisationally structured?

The organisational structure of start-ups can vary depending on the country. However, start-ups typically have two main corporate bodies: the management body (e.g. management board, managing directors) and the shareholders' meeting. In many countries, the establishment of a supervisory board is voluntary and only mandatory under certain circumstances (e.g. if size-related thresholds are met). In addition to this, advisory boards play a crucial role in supporting and advising start-ups. However, the possibility and frequency of establishing such boards vary by country. While contractual advisory boards are common in countries like Austria and Poland, they are less frequent in Bulgaria, Croatia and the Czech Republic. Regardless of their prevalence, advisory boards provide valuable support and advice to start-ups and can be flexibly established on a contractual basis.

Employee participation programmes

Employee participation programmes in CEE share both similarities and differences. The most commonly used structures are contractual bonus entitlements, often in the form of virtual shares or phantom shares, due to prevailing tax regulations and local specifics. Austria recently introduced so-called Company Value Shares alongside its new legal form (FlexCo), allowing beneficiaries to hold real shares in the company and participate in its success, though without voting rights.

Duration, external costs, formalities

The duration of an equity financing round varies based on factors like investor involvement, due diligence and negotiation complexity. Follow-up rounds with existing investors take around six weeks, while larger rounds with new investors may take up to six months. Bridge rounds are quicker, often completed in one to two weeks with simple terms. Overall, the timeline depends on the specific context.

While the external costs for implementing an equity financing round in all the considered countries include notary and court fees, the specific amounts vary significantly. Costs tend to be higher in Austria and Slovenia and lower in Romania and Bulgaria. The exact costs often depend on the number of documents, the value of the transaction, and the number of investors.

The formalities for financing rounds vary by corporate form and jurisdiction. In Austria, share transfers in LLCs require an Austrian notarial deed, while FlexCos need a private deed by an attorney or notary. In Bulgaria, LLC share transfers require notarised signatures and registration with the Commercial Register. Croatia mandates either a notarial deed or a certified private deed. In Poland, capital increase documents must be in the form of a notarial deed. These formalities ensure legal security and enforceability across jurisdictions.

Conclusion

In conclusion, the start-up ecosystem in CEE is both dynamic and complex, presenting a broad range of financing options, corporate structures and employee participation schemes tailored to emerging businesses. While the region shares certain overarching traits, each country has distinct legal and regulatory nuances that entrepreneurs and investors must navigate to succeed. Overall, CEE provides diverse opportunities, underscoring the importance of a strong understanding of local regulations.

authors: Dominik Tyrybon, Thomas Kulnigg