Start-Up Companies in Germany

Before founding a start-up in Germany, the founding team needs to decide on the proper type of company for their business idea. The economic and entrepreneurial goals should be clearly defined in advance. This is because the different company forms offer various opportunities and risks, for example, regarding the company’s liability, the board of directors or managing directors, the ability to act and tax obligations. For example, partnerships, such as general partnerships, limited partnerships and civil law partnerships in Germany, which are inexpensive to set up, are contrasted with companies with limited personal liability – including the GmbH and the UG. Mixed forms such as the GmbH & Co. KG or UG & Co. KG are also conceivable.

Once the company’s objectives have been defined, a business plan and articles of association should be drawn up, and the company should be entered into the German commercial register (Handelsregister) and registered for tax and trade. Another area that is particularly important for start-ups is corporate transactions. Mergers, reorganisations and conversions should also be mentioned in this context. To weigh up all the advantages and disadvantages, a careful due diligence process that considers legal and financial aspects proves to be very useful.

German corporate law issues can also arise for a start-up long after its foundation, for example, in the context of joint ventures. This primarily involves the preparation, organisation and actual implementation of a joint venture.

On the one hand, a product’s trademark is the company’s figurehead; on the other hand, it conveys product quality and trust and creates a recognition value, so its successful establishment and further development are essential. To successfully register the trademark in the trademark register in Germany, the first step is to find a brand name that is as clearly distinguishable as possible. If a similar trademark registration already exists, the first registration takes precedence according to the priority principle, meaning a new name must be found. The next step is to decide to what extent the trademark should be protected.

In the event of trademark infringements, the respective owner of the trademark is entitled to claims for damages, warnings and claims for injunctive relief and removal. If competitors intend to register similar trademarks, oppositions can be filed against these trademark registrations. To further exploit the economic potential of the start-up, licence agreements can be concluded for the lawful use of the business idea and trademark by third parties, with various types of possible licensing available.

There are many different financing options for start-ups in Germany. The best known include

• funding through government funding programmes, grants or competitions,
• sale of shares: Venture Capital, Innovation Accelerator, Business Angel, Crowd investing,
• loans: bank loans, promotional loans and microloans, crowdlending,
• other: sponsors among friends and acquaintances, crowdfunding.

Particularly when negotiating with banks and investors, it is advisable to work with German lawyers to avoid the risks of conflicts and excessive influence on the company in advance. In the context of venture capital, in which the financing provider receives company shares as a strategic partner of the start-up, careful selection is recommended. The financing provider should have the necessary qualifications and a great deal of experience.

Early research is advisable regarding the deadlines for applying for state funding. For example, the start-up loan German bank KfW assumes 80% of the credit risk to make it easier for founders to access loans. Regional subsidies from some federal states also exist.

To enter the business market, many contracts are concluded during a start-up’s foundation and development phase, for example, rental agreements for business premises, purchase contracts, contracts for work and services with manufacturers or suppliers and employment contracts. Their specific requirements must always be considered. For example, in standard terms law, the differentiated case law, the frequent amendments to the law, and the different requirements for effective terms and conditions must be considered – depending on whether the transactions are in the B2B or B2C area.

Even before the first employees are hired, employment law challenges can arise for start-ups and business founders. For example, the question arises as to how the founders’ salary as managing directors is regulated and whether social security contributions must be paid for the managing director.

This depends on the position of the respective shareholder-managing director in the company, the initial relationship between the founders, the articles of association and the managing director contracts. The more influence a managing director has in the company, and the fewer instructions bind them, the more likely it is that social security contributions will not be payable.

In addition, further regulations on social security obligations, minimum wage, working hours, staff qualifications and work premises must be made when the first full-time and part-time employees, interns, working students and other employees are hired. How employee participation should be legally organised and implemented must also be decided. Whether it is a profit-participating loan, silent partnership, virtual participation, variable remuneration agreement or granting a shareholder position – employee participation can bring many advantages to start-ups. For example, it can make it easier to finance the remuneration of employees. Performance incentives can be created, and the founding team can be supported more sustainably.

In the context of a company sale, the company’s valuation, which must be carried out before prospective buyers are identified, is decisive for the purchase price. In addition, the contractual guarantees that the buyer enters into are of particular importance. The legal form of the start-up is of secondary importance for the buyer, apart from tax issues.

Furthermore, the preparatory phase for the company acquisition enables risk minimisation and a higher purchase price. Adjustments can be made to the company’s balance sheet and personnel policy in line with economic developments. In addition, the shareholders should remain capable of acting to prevent the purchase from being jeopardised. Ideally, this should be recorded in writing.

A company exposé must then be prepared as a source of information for prospective buyers, and the company’s value-forming factors must be disclosed to potential buyers as part of a due diligence review. If a purchase agreement is concluded, the business, tax, and legal framework conditions determined as part of the legal analysis must be regulated.