GERMANY Trends and Developments Contributed by: Felix Blobel and Sascha Leske, Noerr
Legal developments and documentation trends Deal documentation in Germany has evolved in response to the changing funding environ - ment. In the growth years leading up to 2021, with high competition between investors for par - ticipations in funding rounds, deal terms were often founder-friendly, with limited due diligence and standardised terms. Today, investor protec - tions and thorough diligence efforts are back in focus. Term sheets now sometimes feature mul - tiple (eg, 1.5x or 2x) non-participating liquidation preferences, milestone-based tranches, anti- dilution protection (full ratchet in some cases), and enhanced information rights. Legal documents in the VC space have tradi - tionally been less standardised than in the US or the UK, for example, where templates issued and annotated by the National Venture Capi - tal Association and the British Venture Capital Association, respectively, are widely used. While the German VC market has also seen deal terms converge fairly significantly as it has matured, the lack of authoritative templates and prece - dents continues to trigger discussions around governance, vesting terms, reps and warranties and other items in early-stage equity rounds. This, together with the strict formalities around deal execution and procedural bottlenecks – including document notarisation, KYC formali - ties and local banking compliance – can create frustration for international investors doing deals in Germany. This lack of alignment increases transaction costs and prolongs negotiations. In recent years, there have been various attempts by stakeholders in the VC and legal communities to reach a more formal consensus on deal terms and to provide standard-form documents to the VC community. These efforts are ongoing and, coupled with advances in document automation
Germany remains legally ambiguous. Under Ger - man GAAP and commercial law, SAFEs may not clearly qualify as debt or equity, creating classifi - cation problems for both founders and investors. Some German tax authorities consider SAFEs a form of debt instrument, while others treat them more akin to advance payments or options. The lack of binding legal precedent has led to diverg - ing practices in documentation, accounting, and tax filings. As a result, structured hybrid SAFEs have emerged in the German market that incor - porate certain investor protections common to convertible loans such as valuation caps, pro rata rights, board observers, and veto rights on key matters. Nonetheless, the use of SAFEs has expanded overall, particularly in angel and pre- seed rounds, where speed and simplicity are critical. Convertible loans remain a widely accepted financing tool, particularly for bridge financing between priced equity rounds. These instru - ments are better understood under local law and offer similar benefits with clearer accounting treatment. Most convertible loans convert at a discount (typically 10–25%) in the next financ - ing round and often include valuation caps or most-favoured-nation clauses. They may also be structured with investor approval rights, govern - ance covenants, and redemption triggers in the event of non-conversion. While there had been some uncertainty around formal requirements following a recent decision of a higher regional court, market practice has adapted, and stand - ard term documentation has been refined. There is also continued uncertainty around the tax treatment of convertible instruments such SAFEs and convertible loans. Some SAFEs may trigger tax liabilities depending on their structure, particularly when tied to put options or deemed interest mechanisms.
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