Search
Contact
04.03.2019 | KPMG Law Insights

Investments in start-ups – opportunities and hurdles

Investments in start-ups – opportunities and hurdles

Established companies – so-called corporates – can tap into innovative technologies and new business areas by investing in a start-up. But beware: start-up investments differ from other M&A activities in several ways. Those who enter the race with a standard approach accept unnecessary hurdles.

The typical start-up is dynamic, innovative and risk-taking. Many of these young companies are focusing on technologies such as artificial intelligence, autonomous driving, data & analytics, Industry 4.0, blockchain or virtual reality. They develop applications to market maturity and build business areas that corporates do not yet occupy. For these, start-ups can therefore represent an attractive cooperation partner, often in combination with financial participation.

If many corporates are nevertheless holding back on their involvement with startups, it’s partly because they need to venture into uncharted territory. Start-up investments differ from other M&A processes in terms of preparation and execution. Only those who know the specific challenges will master them and achieve the desired success.

Due Diligence – own focus

When investing in a start-up, due diligence must focus on particular areas. This is for four reasons:

– Start-ups usually focus on dynamic growth. Problems are solved pragmatically and with as little consulting effort as possible. Therefore, there may be significant undetected risks. These should be uncovered prior to the transaction.
– The business model is often limited to a single technology. If the start-up does not have all rights to this technology or is not entitled to the sole right to fully exploit this technology commercially, the basis required for the investment is missing. Similarly significant effects may exist if the innovative business model disregards regulatory requirements, such as lacking public law approvals (for example, a banking license) or bypassing legal restrictions (for example, in the area of data protection).
– The budget for due diligence is usually smaller than for other M&A transactions. Despite the risk nature of the investment, the consultant must therefore limit his due diligence. This requires a good level of experience and a cooperative working relationship during due diligence with the client and founders.
– Founders do provide guarantees about the status of the company in the transaction agreements. Unlike M&A transactions, however, these are often of little value – when push comes to shove.

Involvement of the founders – participation versus takeover

In a complete acquisition, there is a temptation to integrate and assimilate the start-up into the acquiring company. The founders then become normal employees and lose their previous – entrepreneurial – position. This change of role is typically not in line with how they see themselves and can be detrimental to the operational success of the investment.

In most cases, therefore, corporates only take a minority stake, which leaves the founders greater decision-making leeway and entrepreneurial incentive. The corporate can secure the necessary influence on decision-making by means of qualified majority requirements, which give it a say in the shareholders’ meeting and reservations of approval for certain management measures. He is thus actively involved in shaping the corporate governance of the start-up.

Since the corporate usually wants to use its share in start-ups in particular in the medium to long term, it must protect itself against the founders leaving the start-up or breaching agreements. The Corporate achieves this with a so-called vesting agreement. These are contractual provisions that obligate the founder to transfer his shares in the start-up to the corporate should the founder leave prematurely or violate agreements. Depending on the length of the founder’s activity for the start-up, the sum of the business shares to be (re)transferred by the founder decreases.

The schedule – cooperation instead of exit

In contrast to venture capital funds or business angels, a corporate usually invests in a start-up with staying power. Typically, he does not pursue a short-term profit interest, but would like to work with the start-up in the long term and use its creativity, dynamism and technology for himself.

Therefore, a corporate does not aim for an exit after three to five years, but usually contractually agrees on a longer-term cooperation with the start-up. Depending on the business model, R&D, licensing, supply and distribution agreements may be considered here. From the corporate’s point of view, this is often the central element of the investment, which is sensibly hedged by other arrangements such as rights of first refusal or call options. This is also in the interest of the founders, who often need know-how and market access in addition to fresh capital and also pursue a long time horizon.

Explore #more

29.10.2025 |

Fund Risk Limitation Act and Location Promotion Act create new scope for infrastructure funds

As the federal government’s special infrastructure fund of 500 billion euros will probably not be enough to finance Germany’s roads, networks and the energy transition,…

29.10.2025 | Deal Notifications

KPMG Law advises management board of Nürnberger Beteiligungs-AG on sale to Vienna Insurance Group

KPMG Law Rechtsanwaltsgesellschaft (KPMG Law) provided legal advice to the management board of Nürnberger Beteiligungs-AG throughout the entire public takeover process by Vienna Insurance Group…

29.10.2025 | KPMG Law Insights

BAG on pair comparison: How employers should deal with salary differences

The Federal Labor Court (BAG) has issued another landmark decision on equal pay. In its ruling of October 23, 2025 (Ref. 8 AZR 300/24),…

23.10.2025 | KPMG Law Insights

What the Federal Network Agency’s FAQs mean for storage system operators

On October 17, 2025, the Federal Network Agency published FAQs on the regulatory treatment of stationary battery storage systems (“BESS”). The FAQs are a guide…

23.10.2025 | KPMG Law Insights

What the “construction turbo” means for municipalities and building supervisory authorities

The Bundestag has passed the “construction turbo” and local authorities can now significantly accelerate certain construction projects. According to the law passed on October 9,…

22.10.2025 | In the media

KPMG Law guest article in Das Investment: Private debt for the masses: How the FRBG is turning the fund market upside down

Paradigm shift in the fund market: The new FRBG makes private debt retail-capable and creates citizen participation funds. In this article, KPMG Law expert Ulrich

20.10.2025 | KPMG Law Insights

Data centers: Requirements for emergency power generators continue to rise

When the power fails in data centers, the consequences are often severe: Data loss and system failures can cause considerable financial damage to companies. Emergency…

16.10.2025 | In the media

KPMG Law contribution to the anthology “Crypto-Asset Compliance”

KPMG Law experts Ulrich Keunecke and Marc Pussar have contributed chapter 3 on capital market and banking supervisory law aspects of crypto-assets to the anthology…

14.10.2025 | Deal Notifications

KPMG Law and KPMG advise Bühler Motor GmbH on the sale of Bühler Motor Aviation GmbH to Astronics Germany GmbH

KPMG Law Rechtsanwaltsgesellschaft (KPMG Law) and KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) have advised Bühler Motor GmbH on the sale of all shares in Bühler Motor Aviation…

10.10.2025 | In the media

KPMG Law guest article in NZG: Compliance due diligence in SMEs: Minimum scope and contractual mapping of compliance risks of the target company

In the context of M&A transactions, compliance usually still plays a subordinate role in legal due diligence. The purpose of this article is, on…

Contact

Dr. Christian Hensel

Partner
Site Manager Nuremberg
Cluster Lead Corporate/M&A

Bahnhofstraße 30
90402 Nürnberg

Tel.: +49 911 800929944
chensel1@kpmg-law.com

Stefan Kimmel

Partner

Heidestraße 58
10557 Berlin

Tel.: +49 30 530199115
skimmel@kpmg-law.com

© 2024 KPMG Law Rechtsanwaltsgesellschaft mbH, associated with KPMG AG Wirtschaftsprüfungsgesellschaft, a public limited company under German law and a member of the global KPMG organisation of independent member firms affiliated with KPMG International Limited, a Private English Company Limited by Guarantee. All rights reserved. For more details on the structure of KPMG’s global organisation, please visit https://home.kpmg/governance.

 KPMG International does not provide services to clients. No member firm is authorised to bind or contract KPMG International or any other member firm to any third party, just as KPMG International is not authorised to bind or contract any other member firm.

Scroll