Swiss startups can select either a stock corporation or a limited liability company as their legal entity. Whilst a limited liability company may be attractive for founders due to lower capital requirements at incorporation (CHF 20,000 for a limited liability company vs. CHF 50,000 for a stock corporation), stock corporations are typically preferred as shareholders and share transfers  do not require registration with the commercial register (as is the case with a limited liability company) which is burdensome (e.g., in case of a broad shareholder base due to an ESOP) and unattractive for investors from a confidentiality standpoint.

There are no particular Swiss legal rules that require startups to have a certain equity structure. Like in other jurisdictions, the equity structure of Swiss startups is typically layered with common shares being held by the founders (and employees), and preferred shares being held by investors. Preferred shares typically carry non-participating liquidation/exit preferences and conversion rights.

The principal legal documents for a VC investment in Switzerland are typically a non-binding term sheet which sets out the commercial and legal cornerstones of the investment, the investment agreement (incl. subscription form), the shareholders’ agreement, the articles of association and the board regulations. Of these documents, only the articles of association are filed with the commercial register and become publicly available. For confidentiality reasons, the parties therefore often abstain from “hardwiring” detailed provisions from the shareholders’ agreement into the articles, thereby relying on contractual protections only.

The key venture capital industry body in Switzerland is the Swiss Private Equity & Corporate Finance Association (SECA). SECA provides model documentation for VC investments, including templates for term sheets, convertible loans, investment agreements, shareholders’ agreements, articles of associations and board regulations.

SECA’s templates often form the basis of the investment documentation in early-stage financing rounds but it should be noted that the templates are on the investor friendly side. One relatively common deviation from SECA’s template investment agreement is to include a compensatory capital increase as remedy mechanism for misrepresentation and breach of warranty, which has gained popularity in recent years. The nature and extent of deviations are otherwise primarily driven by the specifics of the transaction, including the negotiation power and preferences of the involved parties. On the timeline, deviations from templates tend to increase along the funding stages as initial deviations are typically carried forward and new deviations are negotiated in each round.

The public offering of securities to investors in Switzerland is, as a general matter, subject to a requirement to publish a prospectus pursuant to the Swiss Financial Services Act (FinSA). The same goes where securities are to be admitted to trading on a Swiss trading venue. Prior to publication, in most cases, the prospectus has to be signed off by a prospectus review body (currently there are two, operated by the stock exchanges SIX and BX Swiss, respectively).

Companies will typically aim to structure VC investments and the associated funding rounds as private placements not subject to the FinSA prospectus rules. In this context, it should be noted that an offering can relatively quickly be considered public if it is not clearly limited to a very small and clearly determined group of potential investors. However, even public offerings do not trigger the prospectus requirement if one of several exemptions can be invoked, e.g. (i) limiting the offering to investors qualifying as professional clients in the sense of the FinSA (non-retail offering), (ii) directing the offering at fewer than 500 prospective investors, or (iii) offering securities of a denomination larger than CHF 100,000 only or where investors are required to purchase at least CHF 100,000 in securities (wholesale offering). An exemption further applies if the total value of the offering does not exceed CHF 8 million during a rolling 12-month period.

Where debt securities are offered, Swiss companies are required to make available certain basic information to the creditors, even in the absence of prospectus requirement in the strict sense, to avoid the proceeds raised qualifying as deposits from the public under the Swiss Banking Act.

The FinSA also governs the activities of financial intermediaries that are considered “financial services providers”. The definition of a “financial service” is quite broad, covering, inter alia, any activity addressed directly at certain clients that is specifically aimed at the acquisition or disposal of securities or other financial instruments. As such, certain brokerage, intermediation or similar activities in the VC space might in principle be caught by financial services regulation under the FinSA. However, as a matter of law and practice, activities broadly in the area of corporate finance are excluded from the financial services definition. This concerns, in particular (a) the consultation on structuring or raising capital as well as on business combinations and the acquisition or disposal of participations and the services associated with such consultation (corporate M&A and corporate finance services), (b) the placement of financial instruments with or without a firm commitment as well as associated services (underwriting activities), and (c) financing within the scope of aforementioned services.

Separately, where VC investments are structured as commingled funds or other forms of collective investment, Swiss investment fund regulation may come into play.

Swiss merger control and anti-trust regulations are set out in the Swiss Cartel Act and its ordinances. An investment is notifiable in Switzerland if the investor(s) acquire(s) (sole or joint) control over the target company and if additionally, either the applicable turnover thresholds ((1) combined turnover of all undertakings concerned of at least CHF 2bn worldwide or at least CHF 500m in Switzerland and (2) individual turnover of at least two of the undertakings concerned of at least CHF 100m in Switzerland) are met or if one of the undertakings concerned has been held by the Competition Commission to be dominant and the investment concerns the same or a neighbouring/upstream/downstream market. Due to high turnover thresholds, VC investments are rarely notifiable in Switzerland. Anti-trust considerations otherwise often play a role in connection with non-compete/non-solicit undertakings in shareholders’ agreements.

Unlike many other jurisdictions, Switzerland does not (yet) have a comprehensive FDI regime in place. Political efforts to introduce an FDI regime are ongoing and in December 2023, the Swiss Federal Council has proposed a draft Federal Law on Control of Foreign Direct Investments which now will go into parliamentary debate. The proposed draft legislation is relatively liberal in that it would in principle only apply to foreign direct investments by state-controlled foreign investors into certain critical sectors in Switzerland, and further subject to certain turnover thresholds of the target company. A Swiss FDI legislation will most likely not enter into force before 2025/2026.

With respect to equity investments, VC investors usually subscribe for separate share classes to benefit from a liquidation preferences or other preferences. Cash contributions trigger 1% stamp duty for Swiss companies but create capital contribution reserves which could be repatriated at a later stage without Swiss withholding tax.

Foreign resident investors are generally not subject to Swiss capital gains tax upon a later sale of their shares in a Swiss company which makes a direct investment attractive from a Swiss tax perspective.

Financing via convertible loans is another option for investors. Interest on such loans may be subject to 35% Swiss withholding tax in case the Swiss company has loans from more than 10 (in case of same conditions) or more than 20 (in case of different conditions) non-bank lenders. For so called classic convertible loans, only the periodic coupon is subject to withholding tax in these scenarios but not the value of the call option granted to the lender. This requires that the shares upon conversion are only sourced by newly created shares, the loan is granted to a Swiss borrower, no offering discount or redemption premium exists, and the conversion discount is no more than 20% (compared to the FMV at the time of conversion, based on the current practice of the Swiss tax authorities).

A Swiss stock corporation (or limited liability company) can issue shares by way of an ordinary share capital increase, a share capital increase out of conditional capital, or a share capital increase based on a capital band (authorized share capital). The issuance of shares to investors in the context of VC investments is typically done by way of an ordinary share capital increase for which broadly the following process applies:

In a first step, the board proposes a share capital increase and convenes an extraordinary general meeting (EGM) with 20 days prior notice. If all shares are represented (universal meeting), no convocation is required. In a second step, the EGM (with simple majority in case of a cash capital increase and qualified majority in case of a non-cash capital increase or if the statutory subscription right of the shareholders is curtailed or excluded) resolves on the capital increase in front of a notary public. The capital increase must then be implemented by the board within six months, i.e., investors subscribe for the new shares (by executing a subscription form) and pay the subscription (or at least the nominal) amount onto a blocked bank account in the name of the company whereafter the board issues a capital increase report (which must be audited in case of non-cash capital increases or in case the statutory subscription right of the shareholders is curtailed or excluded) and resolves on the ascertainment of the capital increase and the amendment of the articles of association in front of a notary public. In a last step, the board submits the commercial register application for registration of the capital increase. The capital increase takes effect with registration in the commercial register (upon which funds are released from the blocked bank account and paid onto an operating bank account of the company). In the context of VC investments, the above steps (until and including the commercial register application) are typically done on the same day after pre-payment of the subscription (or nominal amount) onto the blocked bank account. The registration of the capital increase with the commercial register typically takes between three to seven business days from submission of the application.

The issuance of shares by a Swiss stock corporation (or limited liability company) is subject to a 1% stamp duty on invested funds which exceed a one-time exempt threshold of CHF 1m. Fees for notarization depend on the canton and the notary but are generally based on the transaction value with caps (e.g., fees for notarizations in connection with capital increases in the cantons of Zurich and Zug amount to 1‰ of the capital increase amount with caps ranging between CHF 10,000 – CHF 15,000).

Angel investors, family offices, and high net worth individuals play an important role in the Swiss VC ecosystem. Their participation is particularly prevalent in seed and early-stage financings.  Corporate venture capital, like most VC funds, in general tend to target later financing rounds.

Like in other jurisdictions, the investment period for a VC fund in Switzerland is usually the first three to five years of a fund’s life cycle which typically ranges between 10 to 12 years (subject to extensions).

The key investment terms which a VC investor is looking for in Switzerland may vary depending on factors such as investment stage, equity stake, and investment approach but typically include:

• R&W: R&W are typically given by the company and/or the founders and cover fundamental, tax/social security, and business matters (often with a particular focus on IP, IT, and data protection in a tech-driven startup environment). As founders often lack in liquidity and Swiss corporate law puts restrictions on the distribution of funds to shareholders, investment agreements often provide for a compensatory capital increase and/or transfer of founder shares at nominal value as compensation mechanisms in case of damages resulting from a breach of R&W.
• Liquidation preference: preferred shares subscribed for by investors typically carry a non-participating liquidation/exit preference and conversion rights.
• Anti-dilution: anti-dilution provisions offering down-round protection for investors are standard in Swiss VC transactions. The broad-based weighted average method is the most common adjustment method.
• Governance/information rights: depending on the equity stake and investment approach, investors may seek board representation or at least board observer rights and in any case information rights (regular financial information, KPIs, budget).
• Reserved matters: investors always request (fundamental) veto rights for investment protection (e.g., amendment of articles, issuance of senior ranking shares, voluntary liquidation, etc.) and depending on acquired stake and investment approach may additionally request strategic or even operational veto rights.
• Exit rights: investors typically seek exit rights to secure liquidity for their investment such as the right to initiate an exit after a certain holding period, tag-along, and drag-along rights (with down-side protection).

VC funds who act as lead investors in financing rounds will regularly charge arrangement fees to the target company by requesting a discount on the issue price of the shares subscribed by the lead investor. Monitoring fees, on the other hand, are rather unusual in the VC context in Switzerland (as opposed to buyout transactions of PE funds).

Founders and senior management are typically subject to post-contractual non-compete/non-solicit undertakings in the shareholders’ agreement and/or employment agreements.

In terms of scope, non-compete undertakings generally cover the company’s current product/service offering whilst non-solicit undertakings generally prohibit the active solicitation of the company’s employees and customers. Geographically, non-compete/non-solicit undertakings typically cover the company’s current (main) sales markets and potentially markets where market entry is imminent.

In terms of permissible duration, Swiss competition and employment law sets certain restrictions. The permissible duration of non-compete/non-solicit undertakings in shareholders’ agreements depends on whether the relevant shareholder(s) has/have (sole or joint) control over the company. In case of control, non-compete/non-solicit undertakings of (co-)controlling shareholder(s) may be entered into for a duration of up to three years after the relevant shareholder ceases having control. For non-controlling employed shareholders, non-compete/non-solicit undertakings in shareholders’ agreements may from a Swiss competition law perspective be justified for up to 12-24 months after termination of the employment relationship of the relevant shareholder (although no reliable case law exists). Non-compete/non-solicit undertakings in employment agreements may be entered into for a period of up to three years after termination of the employment relationship (although typically the duration is limited to 12-18 months from termination as the enforceability of the non-compete/non-solicit undertaking generally decreases with increasing duration).

The most frequently seen incentive schemes for employees in Swiss VC backed companies are share option plans (for actual equity) or phantom share plans (for synthetic equity).

Whilst from a corporate law and contractual perspective, phantom share plans are administratively easier to implement as no share issuances/transfers and no adherence to a shareholders’ agreement is required, “hard” equity participation via share options is often preferable for employees from a tax perspective. Phantom shares are taxed as salary at the time of the realisation of the cash amount and are subject to ordinary income tax and social security charges. Therefore, there is no possibility of obtaining a tax-free capital gain. Employee shares are taxed at grant if they are acquired below fair market value, resulting in so-called dry salary income for the employee; a later sale, however, can qualify for a tax-exempt capital gain (generally after a period of five years).

Commercially, the dilution from employee incentive schemes is often a negotiated point with investors sometimes requesting that they are only diluted from employee incentive schemes which are implemented after closing of the relevant financing round and for founders/existing shareholders to take the full dilution from pre-existing employment incentive schemes.

(Reverse) vesting schedules for founders/senior management are a common feature in Swiss VC backed companies. Vesting schedules often provide for (reverse) vesting periods of three to five years with monthly or quarterly vesting after a one-year cliff period and accelerated vesting in case of an exit transaction (IPO, change of control or asset sale). For founder (reverse) vesting, the initial percentage of shares which is subject to vesting is often heavily negotiated as founders, with progressing financing rounds, become increasingly reluctant to subject their shares to reverse vesting.

Good-/bad-leaver provisions typically refer to “good cause” (which justifies immediate termination of the employment relationship; higher threshold) and/or “justified reason” (inapplicability of a post-contractual non-compete/non-solicit undertaking contained in the employment agreement, if the employee terminates based on justified reason set by the employer or if the employer terminates without justified reason set by the employee; lower threshold) as defined in the Swiss Code of Obligations as applicable threshold for good-/bad-leaver qualification in case of termination of the employment. Both thresholds are relatively high and underperformance on its own does typically not justify a bad-leaver case under either threshold. In terms of purchase price, (vested) good leaver shares are typically subject to a call option at FMV with bad leaver shares typically callable at nominal value (or significant discount to FMV).

The main areas of negotiation between investors and founders in the past 24 months have been valuation and related topics (e.g., valuation caps, discounts, etc.), reverse vesting for founders, reserved matters, and preference rights.

In Switzerland, convertible loans are a prevalent instrument to provide startups with seed or bridge funding. Equity instruments such as advance subscription agreements / SAFEs are not common in Switzerland as certain aspects of Swiss corporate, accounting, and tax law make these instruments tax-inefficient and burdensome to implement from a corporate perspective. Under the revised Swiss corporate law, the requirements for a conversion of convertible loans into equity have been clarified and slightly modified. While it has been clarified that a loan can be converted into equity in the full amount even if the company is over-indebted (i.e., if the loan is not fully covered by assets), the articles of association must newly reflect the amount of the converted loan, the name of the shareholder who converted the loan, and the number of shares issued to the shareholder in exchange for the converted loan.

Swiss convertible loan agreements (CLAs) regularly provide for an interest rate (often between 3-8%), a valuation cap and/or discount (particularly in seed financing), conversion triggers with mandatory conversion in case of a qualified equity financing round or a change of control transaction and voluntary conversion at maturity of the loan, and a subordination clause according to which the loan (incl. interest) is subordinated towards all current and future claims of creditors of the borrower but is ranking pari passu with other unsecured debt (such as other convertible note holders). The subordination clause is key in CLAs to avoid over-indebtedness and the resulting obligation of the startup to file for bankruptcy. The subordination may only be removed if audited (interim-) financial statements show that the borrower is not over-indebted or if the subordination is replaced by another equal subordination. Therefore, subordinated convertible loans granted to startups are in reality typically converted into equity at maturity as repayment of a subordinated loan is prohibited and a removal of the subordination is often not possible. Swiss standard form CLAs are provided by SECA.

Although there is no reliable data on the use of venture or growth debt in Switzerland, venture debt financing is less prevalent in Switzerland, particularly as compared to the US. Nevertheless, venture debt has become increasingly popular in the last 24 months as a supplementary or even alternative (low-dilutive) financing source for startups with a proven business model, (realistic potential for) stable revenue streams / cash flows, and therefore debt servicing capacity.

Swiss venture debt agreements typically contain certain conditions precedent, covenants (e.g., financial covenants, negative covenants such as negative pledge undertaking, and information covenants), R&W of the borrower, an (extensive) list of default events (e.g., breach of R&W, breach of covenants, default, cross-default, deterioration of collateral/creditworthiness, etc.), collateral provisions (guarantees, sureties, assignment of receivables and pledges of assets such as bank accounts, shares, IP-rights, real estate) and an equity kicker in the form of subscription rights or warrants for the venture debt provider. There are currently no standard form documents available in Switzerland.

Switzerland, like many other jurisdictions, experienced a sharp decline in VC activity in 2023 compared to 2022 with an overall decline of investments by 34.8% and a 43% decline in exits according to the Swiss Venture Capital Report 2024. However, coming from record-high levels in the past years, 2023 was still the third best year in the past 10 years by invested capital (CHF 2.6bn) and set a record with almost 400 completed financing rounds. According to the Swiss Venture Capital Report 2024, fundraising remained active, and investors generally reported to be more optimistic for prospective fundraising and investment activities than was the case in 2022. With interest rates seeming to have hit a ceiling, we are generally confident that VC activity as well as exits of VC backed companies will pick up again in the next year.