SWEDEN Law and Practice Contributed by: Corinne Ekman, Mikael Nagy and Joacim Kanstedt, Gernandt & Danielsson Advokatbyrå KB
ticularities , these funds have played a crucial counter-cyclical role, particularly during periods of global downturn or tightening capital markets. Furthermore, to address the asymmetric tax treatment of equity and debt – where returns on equity are subject to double taxation, while interest on debt is taxed solely at the level of the lender – Sweden implemented general inter - est deduction limitation rules effective as from 1 January 2019. Under these rules, companies may deduct net interest expenses up to 30% of their EBITDA or, alternatively, up to SEK5 million on a Swedish group level under a de-minimis rule. In Sweden, the long-term commitment of found - ers and other key employees is typically secured through a combination of equity-based incentive structures and contractual mechanisms. These typically include the following elements. • Equity-based incentive schemes: It is market standard for founders and key employees to be offered equity incentives – either through direct share ownership or participation in incentive programmes (such as options or warrants) – in order to align their interests with the long-term value creation of the com - pany. 5. Employment Incentives 5.1 General • Vesting and lock-in provisions: Vesting and lock-in provisions are widely used for founders and key employees in early-stage financings, particularly where founders retain significant ownership stakes. Such provisions typically make continued equity ownership conditional on ongoing engagement with the company over a defined period.
• Leaver provisions: Swedish venture capital transactions regularly include leaver provi - sions, distinguishing between “good leavers” and “bad leavers” , with differing consequenc - es in terms of equity retention or forfeiture. Participation in equity programmes is typically contingent upon continued employment or consultancy engagement, although the scope and duration of such conditions may be lim - ited due to applicable Swedish tax rules. • Transfer restrictions: To maintain ownership stability and ensure alignment among key stakeholders, share transfer restrictions are commonly imposed on founders and key employees. These may include contractual lock-ups, rights of first refusal, and tag-/drag- along rights, typically set out in the share - holders’ agreement to ensure that founders and key employees remain invested in the company. • Restrictive covenants: Non-compete pro - visions are routinely included in both the shareholders’ agreement and the individual employment contracts. Under Swedish employment case law, non-compete provi - sions in the employment contract are subject to specific statutory limitations, including requirements for post-termination compen - sation. By including such restrictions in the shareholders’ agreement, the company and its investors is provided an additional layer of protection against competitive activity by founders and key individuals, beyond the confines of employment law. 5.2 Securities In Sweden, both equity and equity-based instru - ments are used for purposes of incentivising founders and employees as well as aligning the interests of founders and employees with the company’s long-term success. The choice of instrument often depends on the stage of the
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