13 April 2023

To The Point: Technology & Digitalisation | March 2023

Schoenherr Attorneys at Law


We are a full-service law firm with a footprint in Central and Eastern Europe providing local and international companies stellar advice. As the go-to legal advisor for complex commercial matters in the region, Schoenherr aims to use its proximity to industry leaders, in developing practical solutions for future challenges. We keep a close eye on trends and developments, which enables us to provide high quality legal advice that is straight to the point.
Welcome to the March edition of Schoenherr's to the point: technology & digitalisation newsletter (read online)! We are excited to present a selection of legal developments in the area of technology & digitalisation...
Austria Corporate/Commercial Law
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Welcome to the March edition of Schoenherr's to the point: technology & digitalisation newsletter (read online)!

We are excited to present a selection of legal developments in the area of technology & digitalisation in the wider CEE region.


Is the party over?

Forty years ago, on 17 October 1983 – just a few days after I was born – the Silicon Valley Bank (SVB) launched. At a time when start-up companies were still a novel concept, SVB became an early supporter of the local tech community. Together with it, SVB grew and expanded internationally until 10 March 2023, when it collapsed following a bank run. But what happened? In short: rising interest rates and increasing withdrawals forced SVB to sell its securities, realising a USD 1.8bln loss. Reports on these losses increased the withdrawals, fuelled by investors at several venture capital firms urging their portfolio companies to withdraw deposits from SVG. By the close of business that day, customers had withdrawn USD 42bln, leaving the bank with a negative cash balance of about USD 958m. The next day, the bank was taken over by regulators, marking the largest US bank failure by assets since the financial crisis of 2007-2008. Meanwhile in the UK, HSBC UK agreed to acquire SVB UK for one British pound. Yikes. More details, including the sources of these statements, can be found under this link.

The collapse of SVB was shortly followed by the collapse of Credit Suisse and its subsequent takeover by UBS on 19 March 2023.

To put it nicely, a banking crisis does not help tech industries to grow. Although the technology ecosystem is far more advanced than in 1983, it still depends on players like SVB for growth and stability. The current market environment is sad evidence that start-ups struggle to raise funding when the banking system destabilises. For instance, according to the Austrian Startup Monitor 2022 (, 42 % of start-ups state that the opportunities to raise risk capital worsened (27 %) or severely worsened (15 %) already in 2022. This trend seems set to continue in 2023.

But the party isn't over. According to PitchBook Data's 2022 Annual Global Private Market Fundraising Report, venture capital dry powder was still at a very high level (USD 583.1bln) in 2022. These funds must be spent, and we would expect venture capital investments to come back later in 2023. We shall see.

I hope you enjoy another edition of our to the point newsletter for technology. Have fun!

Thomas Kulnigg

Venture Capital Glossary

Niklas Kerschbaumer & Dominik Tyrybon

Valuation (pre- and post-money) and price

If you are seeking financing as a start-up founder, the valuation of your company that is agreed upon with the investor will determine the percentage of the company that you are selling (i.e. your dilution). Understanding the concepts of "pre-money valuation" and "post-money valuation" is crucial.

Pre-money valuation

Pre-money valuation is the estimated value of a company before it receives any external investment. For example, if a start-up has a pre-money valuation of EUR 3m and an investor invests EUR 1m, the post-money valuation would be EUR 4m. The investor now owns 25 % of the company (1/4) and the founder or founders still own 75 %.

Post-money valuation

Post-money valuation is the value of a company after it receives external investment. It is simply the pre-money valuation plus the amount invested by the investor. In the above example, the post-money valuation of the start-up after the investment is EUR 4m. If the investor had invested EUR 1.5m, the post-money valuation would be EUR 4.5m. The investor would now own 33.33 % of the company (1.5/4.5), and the founders would own 66.67 %. In such a scenario, the founders sell more shares in the company and thus get more diluted.

Why pre- and post-money valuation matter and employee option pool

Knowing the pre- and post-money valuation is important because it affects the ownership percentage of the investor and founders after the investment. Always clearly communicate whether you are talking about pre- or post-money valuation and request the investor to be clear and transparent about this. If founders talk with an investor about a EUR 3m investment at a EUR 10m valuation, it is a significant difference whether EUR 10m is meant pre- or post-money. If pre-money is meant, the founders would sell only 23.08 % of the company (3/13). However, if post-money is meant, the founders would sell 30 % of the company (3/10). This is a huge difference.

Side note: Sometimes founders will come across a pre-money valuation, but an investor will at the same time request a new employee option pool (i.e. virtual equity that is reserved to incentivise employees). Let's look again at our previous example: if you agree on a EUR 3m investment at a EUR 10m post-money valuation, but the investor additionally requests a 10 % employee option pool, the founders would end up with an ownership of only 60 % (instead of 70 % without the employee option pool). Although the post-money valuation for the financing round will remain the same (in the above example EUR 10m) the requirement for a 10 % employee option pool will have a significant impact on the valuation and the ownership of the founders.

Price per share (nominal amount vs. contribution)

The price per share in a start-up financing round tells you (at least in relation to an Austrian limited liability company) how much EUR 1 of a fully diluted share capital of a company costs (see separate definition of fully diluted share capital). The price per share can be calculated by dividing the pre-money valuation by the fully diluted share capital of the company. For example, let's say a start-up has a pre-money valuation of EUR 4m and a fully diluted share capital of EUR 50,000. To calculate the price per share, we divide EUR 4m by EUR 50,000, which results in a price per share of EUR 80 (i.e. EUR 1 of the fully diluted share capital costs EUR 80). If an investor now wants to buy 20 % of the company, they must in total invest EUR 1m to get 20 % of a EUR 5m post-money valuation. At the same time the fully diluted share capital of the company needs to be increased by EUR 12,500 to EUR 62,500 (12,500 is again 20 % of 62,500).

In Austrian VC deals, the payment of the investment amount (EUR 1m in the above example) is typically split as follows:

In a first step the nominal amount is paid (in the above example: EUR 12,500) and in a second step the remaining amount (in the above example: EUR 987,500) is paid as a shareholder contribution. Here it is often a matter of negotiation whether the shareholder contribution is due immediately or only upon registration of the capital increase. Ultimately, it is a question of risk bearing, since in Austria shares are only created upon registration in the commercial register.

Legal vs. fully diluted share capital

In an Austrian limited liability company, the legal share capital and the fully diluted share capital represent various aspects of the company's ownership structure.

Legal share capital

The legal share capital refers to the total amount of capital that has been subscribed by the shareholders, paid into the company's account and registered with the commercial register. It is also the amount that is stated in the company's articles of association and it is fixed, meaning that it cannot be changed without amending the articles. The legal share capital reflects the legal ownership percentage of each shareholder in the company.

Fully diluted share capital

On the other hand, the fully diluted share capital refers to the total number of all outstanding (virtual) options, warrants, phantom shares or other rights convertible into shares. This considers any potential dilution of ownership that may occur because of these instruments. The fully diluted share capital is used to calculate the company's market capitalisation and to determine the economic ownership percentage of each shareholder in the company.

In summary, the legal share capital represents the fixed amount of capital that has been paid into the company by shareholders, while the fully diluted share capital considers the potential dilution of ownership that may occur because of outstanding instruments.

Friendly reminder: timely arrange for this year's ordinary shareholders' meetings of Austrian companies

Niklas Kerschbaumer

Covid-19 corporate legislation in Austria provided some relief in terms of deadlines for drawing up financial statements, holding ordinary shareholders' meetings and filing financial statements with the commercial register. Companies having a balance sheet date on or before 30 September 2022 are the last entities that benefit from some sort of relief (for details please feel free to reach out to us). All entities that have a balance sheet date on or after 31 October 2022 have to comply with the ordinary deadlines as follows:

  • draw up the financial statements within five months after the balance sheet date;
  • schedule an ordinary shareholders' meetings within eight months after the balance sheet date; and
  • file the financial statements with the commercial register within nine months after the balance sheet date.

New EUR 72m fund for Austrian start-ups

Thomas Kulnigg

Austria's Federal Minister of Labour and Economy, Martin Kocher, recently announced the establishment of another start-up fund with a total volume of up to EUR 72m. The fund aims to invest into Austrian start-ups and is expected to attract approx. EUR 500m of co-investments. Austria Wirtschaftsservice (aws) will manage the fund and will be looking at ticket sizes between EUR 100,000 and EUR 5m. While we generally appreciate such initiatives by the Austrian government, it will not be sufficient for the Austrian start-up ecosystem. Urgent reforms in the area of employee participation and transaction efficiency are required for Austria to continue to be an attractive place to establish a start-up.

Designs: classification of products for virtual environments clarified

Gudrun Irsa-Klingspiegl

The appearance of the whole or a part of a product resulting from the lines, contours, colours, shape, texture and/or materials of the product itself and/or its ornamentation can be protected as a design. One mandatory requirement in a design application is the clear indication of the nature of products for which the design is intended. For administrative purposes, the Locarno Classification is used to classify products to enable the public to search for designs for specific products in databases.

As a growing number of people spend time in virtual worlds, the interest in protecting the appearance of products for virtual environments as designs has increased. The European Union Intellectual Property Office (EUIPO) has clarified (see here) that such products for virtual environments are to be classified in design applications as "screen display" in Class 14-04 of the Locarno Classification. If the same design can also be applied to a physical product, a second class needs to be listed for the real-world product. In this case no multiple design application can be filed, as applications with more than one class can only be filed as single-class applications.

Could copyright restrictions impact the speed of AI development?

Özgür Semiz

There is currently a lot of hype around artificial intelligence, but the use of copyrighted data for AI has raised concerns about copyright law infringement. Many AI models are accused of accessing data from various sources without permission, acknowledgement or compensation, leading to complaints from copyright holders. The music industry has been reminded of the rise and fall of Napster, which facilitated the illegal sharing of songs and was eventually taken down by copyright law. The fear is that some AI platforms may be disregarding copyright laws just as Napster did, leading to pending lawsuits in various countries and sectors.

This issue is not limited to the creative industry, as other sectors like self-driving cars or medical diagnostics are also affected. While the EU has issued a directive on copyright law which refers to data mining, common-law countries face a lack of case studies and precedents, leading to discussions about the admissibility of AI and data mining under the "fair use doctrine". An interesting lawsuit is already pending in the US, in which Getty Images is accusing Stability AI of infringing its copyright on photos for subsequent use in an image-generating AI model.

The battle over copyright will be a big one, with large grey areas still existing in many jurisdictions.

About clouds and fogs

Veronika Wolfbauer

The European Union Agency for Cybersecurity (ENISA) is the EU's agency dedicated to achieving a high common level of cybersecurity across Europe. The ENISA has recently published a report on fog and edge computing in 5G. It explained that the technology in question provides computing, storage data and application services to end users, while being hosted at the network's edge. In addition, the report provides an overview of the architecture, attributes and security aspects which fog and edge technologies should take into account.

Read more

EDPB: 2023 coordinated enforcement action

Daria Rutecka

On 15 March 2023, the European Data Protection Board launched its 2023 Coordinated Enforcement Framework (CEF 2023) action within which the 26 data processing authorities will participate in joint works focused on the designation and position of data protection officers. This aims at determining whether data protection officers have the position (in their organisations) as required by Art. 37-39 of the GDPR and the resources needed to carry out their tasks. CEF 2023 will be implemented at a national level as the following: (i) commencement of formal investigations; (ii) follow-up of ongoing formal investigations; (iii) sending questionnaires to data protection officers to aid fact-finding exercises or questionnaires to identify if a formal investigation is warranted. A report of the above will be further published by the EDPB. The CEF 2022 report focused on public sector use of cloud services was published on 18 January 2023 and can be found here.

GPT-4 shows the ever-increasing importance of legal considerations pertaining to AI

Alexander Pabst

Generative AI has made quantum leaps in the last year. Aside from multiple text2 image models there are large language models producing largely accurate and convincing texts in reply to prompts provided by a user. In November last year OpenAI made available the functionality of their vast 175 parameter model GPT-3.5, which was fine-tuned to interpret prompts formulated as questions. ChatGPT is a turning point in the public perception of AI, as it provided compelling texts with comparatively high factual accuracy.

Read more

North Macedonia: The Data Protection Act and enforcement challenges

Marija Vlajkovic & Oliver Vidikov

The legal framework of personal data protection in North Macedonia

After the adoption of the General Data Protection Regulation of the European Union (EU) 2016/679 ("GDPR"), as an obligation based on the Stabilisation and Association Agreement between EU and North Macedonia, a new data protection regime was adopted. Since 2020, the matter of personal data protection in the Republic of North Macedonia is regulated by the new Act on Personal Data Protection (Official Gazette of the Republic of North Macedonia, nos. 42/20, 294/21) ("LPDP"), effective as of 24 February 2020.

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Serbia incentiveses start-up-ecosystem

Vlajkovic Marija & Andrija Saric

To attract investors in the area of innovation technologies, Serbia has adopted a set of subsidies relating to employees' salaries and corporate income taxes. In recent years, the country has set its sights on being one of the largest European hubs for EU and overseas IT companies using talented IT workforce only as an outsourcing service supplier while retaining actual project development in the countries of capital origin. This is seen as an opportunity to motivate foreign IT companies doing business in Serbia not only to shift their operations to Serbia on a larger scale, but to tie IP rights on their tech products to their affiliated Serbian companies. Read more

The two main sets of tax subsidies to be considered are: (i) the salary tax and contributions exemptions ("salary tax incentives") to which employers who perform research and development activities within the scope of their activities in Serbia are entitled to, and (ii) corporate income tax exemptions ("corporate tax incentives").

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Festival organiser wins lawsuit against internet platform Viagogo over misleading online ticket sales

Antonia Hirsch

Users of Viagogo, a platform for event ticket exchange and resale, were selling tickets to cancelled festival events and festival event tickets which had not yet been issued. Viagogo then falsely informed the buyers by e-mail that the events were only postponed and that the personalisation of the tickets in someone else's name had no effect on admissions. This did not sit well with the organiser of the festival (the renowned Salzburger Festspiele), who decided to sue the platform.

In its defence, Viagogo tried to rely on the host provider liability exemption under Section 16 of the Austrian E-Commerce Act ("ECG") claiming that they neither knew about their users' unlawful activities (i.e. providing false information about ticket validity) nor promoted such activities. However, the Austrian Supreme Court found that Viagogo cannot rely on Section 16 ECG, since it had actively contributed to causing or intensifying ticket buyers' misconceptions. Furthermore, the Austrian Supreme Court held that Viagogo created the impression of being part of the selective distribution system authorised by the festival organiser. This was because Viagogo used the Salzburger Festspiele name in keyword advertising for a separate ticket category on its platform and sent out e-mails stating that Viagogo cannot expedite the issuing of tickets by the Salzburger Festspiele.

The Austrian Supreme Court therefore upheld the decisions of the lower courts who had banned Viagogo from (i) allowing for the purchase of said tickets, (ii) misleading market participants regarding the tickets offered by their users by not disclosing the user's identity and the fact that the ticket was personalised, and (iii) using the name Salzburger Festspiele without authorisation.

Is e-commerce at odds with sustainability? The European Parliament's Committee on Internal Market and Consumer Protection delved deeper

Veronika Wolfbauer

At the end of 2022, the Policy Department for Economic, Scientific and Quality of Life Policies, commissioned by the European Parliament's Committee on Internal Market and Consumer Protection, published its research results on the impact of e-commerce on the European Green Deal. The growth of online sales and marketplaces presents new obstacles in product safety, consumer protection and combating unfair business practices. Simultaneously, e-commerce can enable more environmentally friendly production methods and consumption habits, promoting greater circularity.

As e-commerce continues to grow in the EU, it becomes increasingly vital to ensure its compatibility with EU sustainability objectives while maintaining a high level of consumer protection. This study aimed to investigate e-commerce's role in implementing the European Green Deal, focusing on consumer protection standards, the environmental footprint of e-commerce and policy recommendations.

The rise of e-commerce presents challenges for consumer protection, particularly regarding information provision, personalisation practices and presentation of information. Issues such as misleading practices, greenwashing and the use of "dark patterns" to manipulate consumers' choices have been identified. Although the environmental footprints of online and offline retail commerce are becoming intertwined, there is currently no single approach to fully capture the environmental footprint of e-commerce. The study found that existing approaches are insufficiently sound from a scientific point of view.

Legislation and policies are being developed to address sustainability issues, but there is potential for further synergies to enhance sustainability and circularity in online sales. The study recommends ensuring compliance with existing legislation, improving information provision and transparency, incentivising consumers and businesses to be more sustainable, and ensuring reliable information on sustainability impacts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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