Five Areas in Which VC and Growth Equity Deal Terms Are Unique to France

Over the past decade, France has emerged as a powerhouse in the European tech ecosystem. The surge of French unicorns, supported by the government’s “French tech” initiatives — which include tax credits and the formation of Bpifrance, a French public investment bank — has propelled Paris to the top of the list of opportunities for many global investors.

Indeed, rising interest from international investors has persisted despite recent market turbulence, with innovative French start-ups continuing to receive substantial rounds of growth equity funding.

Amid a rise in foreign investment, venture capital (VC) terms have evolved in France, increasingly mirroring US or UK deal terms. But crucial differences remain, shaped by France’s unique legal framework and market practices. For international investors eyeing this vibrant ecosystem, understanding these differences is essential.

Below we highlight areas where terms are unique to the French market, providing important context for foreign VC and growth equity investors that may want to pursue opportunities in the country. 

1. Anti-dilution

French companies handle anti-dilution protection differently than their US counterparts. Instead of offering perpetual protection to preferred shareholders in case of a down round, they typically provide ratchet warrants that are attached to purchased shares. These ratchet warrants mimic US style anti-dilution protection, but they differ in three ways. French ratchet warrants:

• Can be exercised only once, and investors have sole discretion as to when to exercise, as long as the warrants have not expired
• Have a term of somewhere between 3 and 10 years, after which they cannot be exercised
• Are typically capped at somewhere between 2 and 10 shares per warrant, which means holders may not get the benefit of the full weighted average adjustment

2. Liquidation Preference

French liquidation preferences, while similar to US practices, are uniquely shaped by civil law constraints. French law prohibits any shareholder from receiving all proceeds or being entirely excluded in a sale or liquidation. This means all shareholders must first receive the par value of their shares pro rata, regardless of share class. Only then can excess amounts be distributed in a way that resembles the typical structure used for waterfall liquidation preferences in the US.

Consequently, French VC deals must include this initial pro rata distribution as the first tier of any liquidation preference waterfall. To maintain a founder-friendly approach, deals may offer a larger first-tier distribution to all shareholders. This structure balances investor preferences with French legal requirements, creating a distinct environment for VC investments.

3. Contractual Preferred Shares

French corporate law allows any company to issue statutory preferred shares, through which all the rights granted to the investors are attached to the shares and are set out in the bylaws of the company (not just in the contractual documents). These statutory preferred shares provide stronger legal protection in two ways: 

• The rights attached to these shares are enforceable against third parties. This is because the company’s bylaws are public documents, making the rights visible and binding to all parties involved. 
• Violation of certain rights associated with these shares (such as governance rights) can result in the nullification of relevant company decisions. This provision adds a significant layer of protection for investors, ensuring their rights are respected in critical company matters.

However, the corporate process for issuing statutory preferred shares is cumbersome. To do so, companies have to appoint an independent auditor to value the rights attached to the shares. And investors who hold stock options must approve the conditions of the issuance as part of any subsequent financing round. 

French start-ups usually issue contractual preferred shares instead, especially in early rounds. Legally, these are ordinary shares, labeled as “preferred” for identification purposes only, and rights they confer are set out only in contractual documents. Although contractual preferred shares offer less protection to investors, they are favored for VC and growth equity rounds because they support efficient deal-making. Investors are protected because they have the right to convert these shares into statutory preferred shares at any time, which can be valuable if their relationship with founders deteriorates or the company runs into difficulties.

4. Transfer Restrictions

The mechanisms restricting share transfers in France are similar to those in the US, with some differences due to legal constraints or market practices. For example:

• In France, companies may prohibit share transfer for up to 10 years but not longer. Companies that want to restrict the transfer of shares to competitors or strategic buyers indefinitely (excluding full exits) often provide a total tag-along right for all shareholders on any share transfer to such buyers.
• In France, in contrast to the US, the right of first refusal generally benefits all shareholders pro rata, including founders or key executives, and the proportional tag-along right applies to transfers by founders or key executives and investors. 

5. Departure of Founders 

Dismissing a corporate officer requires great care in all jurisdictions, including in France. 

French law offers flexibility in the dismissal process, and the rules governing dismissal may vary by company. Key considerations include:

• Which body makes the decision (board, shareholders, or both)
• What the voting requirements are (simple or qualified majority)
• Whether officers can be dismissed without cause or only with cause 

Given this flexibility, parities should carefully analyze dismissal rules before investing in a French company or initiating a dismissal.

Regardless, French law and jurisprudence tend to protect the interests of officers in such situations and require that the officer has the right to defend themselves and present their arguments before their dismissal is actually decided.

Shares held by founders and key executives, including those acquired at incorporation, often carry claw-back options triggered by departure. These options typically categorize departures into three scenarios:

• Bad leaver: Typically involves breaches of covenants or serious misconduct. This usually results in a call option on all shares at par value, without time limit.
• Medium leaver: Often defined as resignation within a specified period after a financing round.
• Good leaver: Covers other departure circumstances, including death or disability.

French market practice allows flexible terms for medium and good leaver scenarios. These may include time-limited claw-backs (often three to four years) or reverse vesting mechanisms applied to either the shares or their price. These provisions operate independently of any existing vesting schedules on stock options, adding nuance to the management of founder departures in French start-ups.

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These five distinctive aspects of French VC deals are critical for founders and key executives. Given their sensitivity, they’re typically negotiated early in the process, often before exclusivity agreements. The outcomes of these negotiations are usually reflected in the term sheet. 

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.