Venture Capital Comparative Guide

1 Legal framework

1.1 Which general legislative provisions have relevance to venture capital investment in your jurisdiction?

In Italy, there are four main legislative provisions that govern venture capital investment:

• Civil Code: This sets out the general framework for company formation, corporate governance and contracts, which are crucial for venture capital investments.
• Consolidated Law on Finance (Legislative Decree 58/1998): This governs the securities market, covering initial public offerings, stock trading and public offerings, all of which may be relevant for exits or fundraising.
• Startup and Innovative Small and Medium-Sized Enterprises (SME) Regulation (Decree-Law 179/2012): This:
• • defines innovative startups and innovative SME and their requirements; and
  • provides:
  • • derogatory provisions from the corporate regulations in favour of innovative startups and SMEs;
    • exemptions from some taxes; and
    • incentives on venture capital investments.
• The Startup Act (193/2024): This provides a favourable environment for innovative startups, including tax breaks and more flexible rules for venture capital investments.

1.2 What specific factors in your jurisdiction have particular relevance for, or appeal to, venture capital investors?

Italy offers several compelling factors that make it an attractive jurisdiction for venture capital investors. One of the key advantages is the Innovative Startups Act, which provides a favourable framework for early-stage companies by offering:

• tax benefits;
• simplified administrative processes; and
• the ability to issue stock options to employees.

Additionally, Italy's flexible corporate structures, such as the limited liability company, allow for efficient equity financing and limited shareholder liability, which are particularly attractive to venture capital investors looking to scale businesses.

Italy's commitment to fostering innovation is another major draw for venture capital investors. The country offers significant R&D tax credits and grants, which can help to offset the risks associated with funding technology-driven ventures. Furthermore, the patent box regime provides tax incentives for income derived from intellectual property.

Furthermore, as an EU member, Italy offers access to the broader European market, allowing for cross-border investments within the European Union, which increases the scale of potential returns.

Italy also boasts a growing entrepreneurial ecosystem, particularly in cities such as Milan, Turin and Bologna, where there is a concentration of startups, accelerators and incubators. This vibrant network helps to foster innovation and provides valuable support for early-stage companies. Government programmes and regional initiatives also offer subsidies and financial backing for startups, further reducing the risks for venture capital investors.

Lastly, Italy's stable legal system and dispute resolution mechanisms, such as commercial courts and arbitration, ensure that investors are protected and can resolve conflicts efficiently.

2 Parties

2.1 What types of investors typically provide venture capital investment in your jurisdiction?

Typical venture capital investors in Italy include the following:

• Corporate venture capital investors: Large corporations seeking innovation and strategic synergies.
• Angel/private investors: Often individuals or small investment groups that provide early-stage funding (also jointly by means of 'club deals', which are investment agreements structured within a limited liability company as a dedicated investment vehicle).
• Government funds: Particularly the Fondo Nazionale Innovazione and regional development funds.
• Private equity firms: Both domestic and international players, often part of larger investment funds. This is a residual category, as they usually invest only when the target's earnings before interest, taxes, depreciation and amortisation are positive.

2.2 What types of companies do venture capital investors typically seek to invest in in your jurisdiction? Is the investment done directly or through foreign holding structures?

Venture capital investors in Italy typically target early-stage, high-growth companies in sectors such as:

• technology;
• life sciences;
• fintech;
• renewable energy; and
• digital media.

These companies are often innovative, scalable and positioned to disrupt existing markets.

Venture capital investors seek startups with strong management teams, particularly those:

• with experienced founders or domain expertise; and
• that have the potential to expand internationally.

The growing focus on tech-driven startups – including artificial intelligence, blockchain and healthcare technologies – aligns with the interests of many venture capital investors.

Regarding investment structures, venture capital funding in Italy is typically made either directly or through holding companies, depending on various factors such as:

• tax optimisation; and
• investment strategy.

Direct investment occurs when the investor is based in Italy or within the European Union, particularly when the startup is a local business or at an early stage. This can involve equity funding or convertible notes in Italian corporate structures such as joint stock companies or limited liability companies. However, many international investors prefer to structure their investments through holding companies or special purpose vehicles set up in tax-efficient jurisdictions such as:

• Luxembourg;
• the Netherlands; or
• Ireland.

In some cases, a hybrid approach may be used, where international venture capital investors create holding structures to streamline investments across multiple countries while maintaining a local presence. Ultimately, the choice between direct investment and using foreign holding structures depends on:

• the investor's location;
• tax considerations; and
• the specifics of the investment.

2.3 How are these companies typically structured?

Startups are typically incorporated as limited liability companies; while the joint stock company structure is common in larger, later-stage companies or those planning an initial public offering (as they also have stricter governance requirements and higher costs).

The limited liability company is characterised by limited liability and a smaller starting capital. Unlike a joint stock company, whose capital is divided into shares, the capital of limited liability companies is divided into quotas, which are not represented by stock certificated and require a notarial deed for transfers. However, quotas allow the creation of either special rights or different classes of quotas with customised rights (eg, multiple voting rights, preferential dividends, veto rights). As result, the limited liability company is the most common choice for venture capital companies, offering greater flexibility in structuring investors' and founders' rights.

Such venture capital companies (which, as mentioned above, are primarily limited liability companies) are also usually qualified as 'innovative startups' or 'innovative small and medium-sized enterprises' (SMEs) – a qualification that grants access to:

• tax incentives;
• regulatory benefits; and
• simplified corporate governance rules.

To qualify, companies must meet specific criteria, such as:

• investing in R&D;
• owning intangible assets; or
• adopting an innovative business model.

Innovative startups must be less than five years old; while innovative SMEs have no age limit and can operate with a higher revenue threshold.

3 Structuring considerations

3.1 How are venture capital investments typically structured in your jurisdiction (eg, equity, quasi-equity (SAFE/KISS), debt, other), and how does structuring typically differ between seed-stage, early-stage and later-stage investments?

Equity investment: This is the most common, particularly in the later stages of funding:

• Seed stage: Equity investments are typically made in the form of ordinary or preference quotas. Seed investors usually receive a significant share of the company in exchange for their early risk exposure.
• Early stage: At this stage, venture capital investments often involve equity, sometimes with special rights or preferred quotas offering:
• • liquidation preferences;
  • board seats; or
  • veto rights.
• Later stage: By the time companies reach later stages (eg, Series B, C), equity investments often include preferred stock with more intricate terms, such as:
• • liquidation preferences;
  • anti-dilution protections; and
  • participation rights.
• These terms allow investors to have priority in returns in case of liquidation or exit events.

Quasi-equity instruments: These are increasingly used in Italy as alternative ways to invest in startups. They offer flexibility and are often less complex than traditional equity rounds.

Instruments such as SAFEs and KISS are commonly used in seed and early-stage rounds. They allow investors to provide capital without immediately determining the company's valuation, since they are based on the investor's right to convert their investment in equity.

Today, SAFEs are widely used, while KISS agreements are still relatively uncommon.

Debt: Debt is less common in early-stage funding but may be used in later stages or in hybrid financing structures (eg, venture debt).

Hybrid structure: In some cases, a hybrid structure combining equity and debt is used (eg, convertible loans. These are typically used:

• to bridge the gap between funding rounds; or
• when the company's valuation is difficult to establish.

3.2 What are the potential advantages and disadvantages of the available investment structures?

• Equity:
• • Advantages: Provides capital with no immediate repayment obligations. Investors are aligned with the company's long-term success and growth.
  • Disadvantages: Dilution of ownership for founders. Complex negotiations for terms, especially at later stages.
• Quasi-equity (SAFE/KISS):
• • Advantages: Simplified structure, faster and cheaper to implement. Flexibility in future financing rounds.
  • Disadvantages: Investors take on more risk (no immediate valuation or equity stake) and there is uncertainty about when the conversion happens.
• Debt:
• • Advantages: Non-dilutive to equity holders. Ideal for more mature startups with predictable cash flow.
  • Disadvantages: Increases financial obligations. If the company struggles with repayments, it may lead to financial distress.
• Hybrid structures (convertible notes):
• • Advantages: Provides a mechanism to defer valuation until later rounds. It is easier to manage for both the company and the investors.
  • Disadvantages: Can result in significant dilution for founders if the valuation increases substantially at conversion.

3.3 What specific issues should be borne in mind in relation to cross-border venture capital investments?

Cross-border investments introduce additional complexities and some issues may arise in relation to the following:

• Legal and tax implications: Different jurisdictions have different tax laws and investors may be subject to:
• • withholding taxes;
  • double taxation treaties; or
  • different tax treatment of capital gains.
• It is important to structure the investment with tax-efficient vehicles, such as a holding company.
• Regulatory compliance: Investors must comply with the regulatory requirements of both their home jurisdiction and the jurisdiction of the investee company. These include:
• • securities laws;
  • data protection regulations (eg, the General Data Protection Regulation in the European Union); and
  • foreign investment rules.
• Currency risk: If the investment is made in a different currency, there may be fluctuations in exchange rates, affecting the value of the investment over time.
• Dispute resolution: It is important to specify:
• • which country's laws govern the investment agreement; and
  • the process for resolving disputes (eg, arbitration).
• This is particularly important in case of disagreements over terms or exit strategies.

3.4 What specific issues should be borne in mind when multiple investors are involved (eg, pooling)?

When multiple investors are involved in a venture capital deal, key issues include the allocation of control and decision-making rights. It is crucial to define how control is distributed to avoid conflicts. In pooled investments, where investors contribute capital to a single entity, careful legal and operational management is necessary to ensure fair treatment.

Aligning exit strategies is another important consideration, as investors may have differing expectations regarding the timing and nature of exits (eg, initial public offerings, Euronext Growth Milan or acquisition). Setting clear expectations in the investment agreement helps to prevent future disputes.

Finally, in order to foster trust and facilitates smooth collaboration. governance and reporting structures should be defined to ensure transparency, consistency and effective communication among investors.

4 Investment process

4.1 How does the investment process typically unfold? What are the key milestones?

In Italy, the investment process usually entails five steps:

• Initial contact and screening: The process begins when a startup or entrepreneurial team approaches a venture capital investor or vice versa. Startups may submit their business plans or pitch decks, which are evaluated by the venture capital investor.
• Term sheet negotiation: If the initial review is positive, the next step is drafting and negotiating a term sheet (or letter of intent). This document outlines the basic terms of the investment, such as:
• • valuation;
  • investment amount;
  • equity share;
  • board representation; and
  • exit strategy.
• It is usually non-binding, but it sets the framework for the investment.
• Due diligence: Once the term sheet is agreed upon, due diligence is conducted to assess the startup's business, legal, financial and technical aspects. This is where venture capital investor dig deeper into the company's:
• • operations;
  • finances;
  • intellectual property; and
  • team.
• Investment agreement: After successful due diligence, the parties move on to negotiating and finalising the investment agreement, which details the specific terms and conditions of the investment, including:
• • equity ownership;
  • rights of investors; and
  • governance.
• Closing: After all documents have been signed and agreed upon, closing takes place, which involves the transfer of funds from the investor to the company in exchange for quotas or other securities.

4.2 What types of due diligence (eg, legal, financial, technical) do venture capital investors typically conduct into prospective portfolio companies? What are key red flags for venture capital investors?

In Italy, venture capital investors perform thorough legal, financial and technical due diligence to evaluate potential risks and opportunities in a startup.

Legal due diligence involves reviewing the company's:

• corporate structure;
• contracts (including shareholders agreement, if any);
• intellectual property; and
• potential legal liabilities.

Red flags include:

• unregistered intellectual property;
• unresolved legal disputes; and
• imbalanced governance structures.

Financial due diligence focuses on the company's financial health, including its:

• financial statements;
• tax returns;
• capital structure; and
• projections.

Investors look for:

• inconsistencies in financial reporting;
• excessive liabilities; or
• unrealistic revenue projections.

Lack of transparency or accounting irregularities can raise concerns about the company's financial integrity.

Finally, for technical due diligence, investors assess the startup's:

• technology;
• product development roadmap; and
• intellectual property.

This is especially important for tech-based companies. Red flags include:

• unproven or incomplete technology;
• reliance on immature products; and
• lack of technical expertise.

Investors are wary of easily replicable products that could harm the company's competitive edge.

4.3 What documentation is typically prepared during the investment process and who is responsible for preparing this?

Several key documents are prepared during the investment process, including:

• the term sheet (or letter of intent);
• due diligence reports;
• the investment agreement;
• the shareholders' agreement; and
• new bylaws.

Usually, all of these are prepared by the legal team of either the target or the investor (but more frequently by the investor's legal team, which tends to have more resources available for these activities).

4.4 Are standard investment documents available for venture capital investments in your jurisdiction? If so, who (eg, industry association, organisation) provides them and how frequently are they used in practice?

While there are no universally binding standard documents for venture capital investments in Italy, industry associations such as the Italian Private Equity and Venture Capital Association provide templates and guidelines for venture capital deals. These documents often serve as a starting point for negotiations but are customised depending on the specifics of each deal. Standard templates are used frequently, especially in seed and early-stage deals, but their use can vary depending on the complexity of the transaction.

However, all Tier 1 law firms with a desk dedicated to venture capital have been elaborating templates based on their experiences (frequently shared) and their effective and concrete role as founders and/or venture capital investor advisers.

4.5 What disclosure requirements and restrictions may apply throughout the investment process, for both the venture capital investor and the prospective portfolio company?

Throughout the investment process, both the investor and the prospective portfolio company must adhere to specific disclosure requirements and restrictions:

• The investor must disclose:
• • potential conflicts of interest;
  • compliance with regulatory requirements; and
  • sometimes the source of the invested funds, especially for institutional investors.
• The company must provide full and accurate information during due diligence, including:
• • financial records;
  • contracts;
  • IP rights; and
  • any risks that might affect the business.
• The company must also:
• • comply with regulations such as General Data Protection Regulation; and
  • disclose any sensitive or material information to the investor.
• Finally, both parties typically sign non-disclosure agreements during the due diligence phase to protect proprietary information (ie, intellectual property, knowhow and copyrights) from being disclosed to competitors or third parties.

4.6 What advisers and other stakeholders are involved in the investment process?

The venture capital investment process usually involves:

• legal advisers for both the investor and the company; and
• financial advisers such as accountants.

If the operation requires it, technical experts may also be involved. Tax consultants may additionally be engaged to address tax planning and cross-border taxation issues. Lastly, in larger or more complex deals, investment banks may assist in structuring the deal or raising additional capital.

4.7 What is the process and what (corporate) approvals are required for a portfolio company to issue shares or debt instruments to investors in your jurisdiction?

In Italy, the issuance of quotas/shares or debt instruments typically requires the following corporate approvals:

• Issuance of quotas/shares: For any capital increase, the approval of the shareholders' meeting is required. The board of directors can deliberate on the issuance of quotas only if so provided by the bylaws of the company (but this is quite uncommon). The resolution to issue must be taken before a notary public and registered with the Companies Register.
• Issuance of debt instruments: The issuance of debt instruments is made by the corporate body (shareholders' meeting or board of directors) provided for by the bylaws or the articles of association. In the case of bonds, it is made by the directors (unless otherwise provided); and in the case of convertible bonds, it is made by the shareholders' meeting. The resolution to issue must be taken before a notary public and registered with the Companies Register.
• Regulatory filings: If the company is publicly traded or if the investment involves a significant amount of capital, regulatory filings with authorities such as the Commissione Nazionale per le Società e la Borsa (the Italian securities regulator) may be necessary.

5 Equity investment terms

5.1 What key investment documents and terms (eg, valuation, share class, governance rights, liability concept, transfer restrictions, exit rights) typically feature in venture capital equity investments in your jurisdiction?

• Term sheet: A preliminary, non-binding and optional document that:
• • expresses the intent of the investor(s) to proceed with an investment in the company; and
  • outlines the general terms of the deal, including:
  • • valuation;
    • investment size; and
    • other key provisions such as investor(s)' rights.
• It can serve as a basis for negotiations and drafting of the final investment documents.
• Due diligence report: A report prepared during the due diligence process that helps investors to evaluate the risks, opportunities and overall viability of the investment.
• Investment agreement: The binding agreement between the investor(s) and the company, which sets out the final terms of the investment and often includes provisions on liabilities.
• Shareholders' agreement: This outlines the rights and obligations of the shareholders, including:
• • governance;
  • decision-making processes;
  • shareholder restrictions;
  • exit strategies; and
  • protections for investors.
• It is legally binding and is usually entered into by the investors and founders upon completion of the investment. The shareholders' agreement must comply with specific provisions of the Civil Code (especially Article 2479-bis and related articles), which regulate:
• • shareholder voting rights;
  • corporate decision-making processes; and
  • shareholder exit mechanisms.
• It is critical to draft shareholders' agreements carefully to align with local legal requirements. In addition, in Italy, pre-emption rights afford existing shareholders the right to purchase additional quotas before they are offered to third parties. This mechanism must be clearly addressed in shareholders' agreements, particularly when new funding rounds are anticipated.
• Articles of association: The company's constitutional document, which governs:
• • the company's operations;
  • shareholder rights; and
  • internal rules.

5.2 What type of security is typically issued to new investors as part of venture capital equity investments in your jurisdiction and what (economic) preference rights are typically attached to these securities (by operation of law, under constitutional documents and/or contractually)? What rules and requirements apply in this regard?

In Italy, venture capital equity investments typically involve the issuance of quotas with special rights or differentiated classes of quotas. These grant investors specific preferential rights, including liquidation preferences, which ensure that preferred shareholders are paid before common shareholders in the event of liquidation – often at a multiple of their initial investment (eg, 1x or 2x). Dividend preferences also typically apply, giving preferred shareholders the right to receive dividends before common shareholders, often on a cumulative basis (ie, unpaid dividends accumulate). Anti-dilution protection provisions, such as full ratchet or weighted average mechanisms, are also common, ensuring that investors' equity stakes are protected against future rounds of funding at a lower valuation. Voting rights for preferred shareholders are typically limited but may include veto powers on critical corporate decisions. These preferences and rights are set out in the company's bylaws and shareholders' agreements and are governed by the Civil Code, which regulates:

• shareholder rights;
• share issuance; and
• governance structures.

5.3 What anti-dilution measures or rights (eg, pre-emptive rights, down-round protection) typically feature in venture capital equity investments in your jurisdiction?

Anti-dilution rights are common in venture capital investments in Italy. Pre-emptive rights are often included, allowing existing shareholders to maintain their proportional ownership by purchasing new quotas in future funding rounds. In addition, down-round protection is frequently incorporated through anti-dilution provisions. The most common forms are full ratchet and weighted average protection. Full ratchet protection adjusts the price of the investor's original investment to match the lower price in a subsequent financing round, regardless of the number of quotas/shares issued. Weighted average anti-dilution protection, on the other hand, adjusts the conversion price based on a formula that considers both the lower price and the number of new quotas/shares issued, offering a more moderate form of protection.

5.4 What are the key features of the liability regime (eg, representations and warranties, disclosure concept, liability caps, remedies) that applies to venture capital investments in your jurisdiction?

The liability regime in venture capital investments in Italy typically includes representations and warranties made by the founders and the company regarding the business's:

• status;
• financial condition;
• IP rights; and
• compliance with laws.

These representations are meant to assure investors that the company is free from material liabilities and issues. Disclosure concepts are commonly applied, where the company discloses all known risks or liabilities in a disclosure schedule, limiting the liability of the founders or company for any misrepresentations or undisclosed issues. Liability caps are usually established, limiting the amount of compensation that a party can be required to pay in case of a breach of representations and warranties. In addition, remedies for breaches typically involve a combination of:

• financial compensation;
• in-kind indemnification (ie, by transferring quotas to the investor up to a certain amount);
• termination of the agreement; or
• specific performance, depending on the severity of the breach.

5.5 What key transfer rights and restrictions (eg, lock-up period, right of first offer/right of first refusal, drag/tag-along rights, purchase options) typically feature in venture capital investments in your jurisdiction? Are (reverse) vesting/good and bad leaver provisions commonly applied to founders in your jurisdiction? If so, how are these typically structured?

In Italy, venture capital investments often feature transfer restrictions to maintain control and protect the interests of existing shareholders. These may include a lock-up period, during which investors or founders cannot sell their quotas. Rights of first offer or rights of first refusal are common, providing existing shareholders with the right to purchase quotas before they are sold to a third party. Drag-along rights allow majority shareholders to force minority shareholders to sell their quotas in the event of a sale; while tag-along rights allow minority shareholders to join in a sale initiated by majority shareholders, ensuring that they can sell on the same terms. Purchase options may also be included, giving the company or other investors the right to purchase quotas under specific conditions. Additionally, reverse vesting, good leaver and bad leaver provisions are commonly applied to founders. These provisions typically require founders to stay with and work for the company for a certain period to retain full ownership of their quotas and subject them to specific non-competition and non-solicitation obligations, with consequences if they leave the company early or are in default of such obligations, such as:

• penalties;
• discounted purchase of quotas of the defaulting party; or
• loss of certain rights.

5.6 What management incentives (eg, equity, options, phantom shares) typically feature in venture capital investments in your jurisdiction?

In venture capital investments in Italy, management incentives typically include equity-based compensation. Common structures include stock options plans or work for equity, which give management, key employees or collaborators of the company (as the case may be) the right to purchase quotas at a pre-determined price, often with vesting conditions to incentivise long-term commitment. Phantom quotas/shares are less common but may also be used, offering management the value of quotas/shares without actual ownership, often tied to performance milestones. These incentives align the interests of management with those of investors and are typically structured with vesting schedules and performance targets to ensure that management/key employees are motivated to drive the company's growth and success.

6 Debt investment terms

6.1 What terms typically feature in non-equity venture capital investments in your jurisdiction?

In Italy, non-equity venture capital investments typically involve debt instruments or convertible securities. These investments do not grant investors equity ownership but provide other rights and protections, such as repayment and the possibility of conversion into equity under certain conditions. The typical terms in such non-equity investments include the following:

• Convertible loans: These can be converted into equity at a later date, often upon a triggering event such as a new financing round or at the discretion of the investor. They usually come with a conversion discount or valuation cap to reward early-stage investors.
• Warrants: These are rights granted to investors to purchase quotas/shares in the future at a predetermined price, providing the potential for equity upside without immediate dilution. They can be attached to debt or other non-equity instruments as a sweetener.
• Interest and repayment terms: Debt-based investments usually include terms specifying:
• • the interest rate;
  • the repayment schedule; and
  • any provisions for early repayment or deferral of interest.
• The debt may be secured or unsecured, depending on the agreement.
• Redemption rights: Some non-equity investments may have redemption rights, giving the investor the right to demand repayment of the principal investment amount (and sometimes interest) after a set period, typically if certain performance criteria are met.
• Covenants: Clauses in the investment agreement that set out certain conditions or restrictions on the company, such as limits on additional borrowing or requirements for financial reporting. They are intended to protect the investor's interests and ensure that the company does not take excessive risks.

6.2 How are such non-equity investments typically treated in the event of (a) an equity investment, (b) a change of control and/or (c) maturity?

Equity investment: If a non-equity investment is in the form of a convertible loan, it typically converts during a subsequent financing round, often at a discount or subject to a valuation cap. In some cases, the investor might have the option to convert at the same terms as the new investors in the round. If the investment is in the form of warrants, these could be exercised to purchase quotas/shares in the equity round, typically at the predetermined price, granting the investor equity ownership at a later stage.

Change of control: In the event of a change of control, the terms for non-equity investments may require the company either to:

• repay the debt (including any accrued interest); or
• convert it into equity at a pre-agreed valuation or discount.

Additionally, warrants could be exercised; or the investor may have the right to sell the debt to the acquiring company under certain conditions. Exit clauses might be triggered, providing the investor with an early exit opportunity if the company is sold or merged.

Maturity: Upon maturity, if the non-equity investment is not converted into equity, the company is typically required to repay the principal amount along with any accumulated interest, unless the terms allow for an extension. If the debt is secured, the investor may have a claim on the company's assets in case of default. Where the investment includes redemption rights, the investor may demand redemption of the investment at maturity, potentially at a premium or subject to certain conditions.

7 Governance and oversight

7.1 What are the typical governance arrangements of venture capital portfolio companies?

Venture capital portfolio companies in Italy typically adopt governance structures that balance the control of the founders and the rights of investors. The structure often includes a board of directors with both founder and investor representation. In many cases, venture capital investors, especially in later-stage rounds, secure a board seat or a right to appoint one or more nominee directors. The governance structure will usually involve the following:

• Board composition: The board often includes a mix of:
• • independent directors;
  • founders; and
  • investor-nominated directors.
• Shareholder meetings: Regular meetings of shareholders are held to approve key decisions, particularly related to financial matters or changes in company structure.
• Voting rights: While founders typically retain control, venture capital investors often negotiate for preferred voting rights or veto rights on key decisions (eg, mergers, sale or changes in corporate structure).

This governance setup ensures that investors have input into strategic decisions without undermining the operational flexibility needed by the management team.

7.2 What legal considerations should venture capital investors take into account when putting forward nominees to the board of portfolio companies?

When nominating directors to the board of a portfolio company, venture capital investors in Italy must carefully consider several legal factors. The company's articles of association or bylaws are important as they define the rules for appointing board members. These documents typically specify:

• whether there are limits on the number of investor-nominated directors; and
• any quorum requirements for board meetings.

In addition, directors – including those nominated by venture capital investors – have legal duties under the Civil Code (Articles 2381 to 2391), which mandates that they act in the best interests of the company. Directors are subject to fiduciary duties such as the duty of care, loyalty and good faith. Therefore, venture capital investors need to ensure that their nominated directors fully understand and adhere to these obligations. Furthermore, investors must be mindful of potential conflicts of interest that may arise if their nominated directors have competing interests, such as involvement in other portfolio companies or investments. Investors should also ensure compliance with corporate governance law in Italy, which may impose specific requirements depending on the company's status.

7.3 Can a venture capital investor and/or its nominated directors typically veto significant corporate decisions of a portfolio company? If so, what are the common types of corporate decisions over which a venture capital investor might request veto rights?

Venture capital investors can typically negotiate veto rights over certain significant corporate decisions. These veto rights are often included in the shareholder agreement or bylaws. Common decisions that might be subject to veto rights include the following:

• Mergers and acquisitions: A veto right might be granted over the sale of the company, mergers or other significant transactions that could alter the company's structure or ownership.
• Issuance of new quotas: Investors often seek veto rights over the issuance of new quotas to prevent dilution of their ownership stake.
• Changes to the business plan or strategy: Significant shifts in the company's operational or financial strategy could require investor approval.
• Changes in key management: Decisions on appointing or removing senior executives, particularly the chief executive officer or chief financial officer, may require the consent of the investors.
• Amendments to the company's articles of association: Any changes to the governance structure, including shareholder rights, will typically need investor approval.
• Dividend distribution: Investors may require a veto over decisions related to the distribution of profits or dividends, especially if it impacts the company's growth strategy.

These veto rights are usually negotiated as part of the investment agreement and are aimed at:

• protecting the investor's financial interests; and
• ensuring that strategic decisions align with their expectations.

7.4 What information and reporting rights do venture capital investors typically enjoy in your jurisdiction (by law and contractually)?

Venture capital investors in Italy have statutory and contractual information rights to monitor portfolio companies. Under Italian law, companies must provide annual financial statements to shareholders and investors can request additional financial and operational information. Contractually, investors:

• often negotiate more frequent updates, such as quarterly or monthly financial reports; and
• may request meetings with executives to discuss strategic plans.

Investors also typically have the right to appoint auditors and inspect company records. These rights help to ensure that investors stay informed about the company's performance and financial health.

7.5 What other legal tools and strategies are available to venture capital investors or other minority investors to monitor and influence the performance of portfolio companies?

• Board representation: Investors often secure board seats, allowing them to participate in strategic decision making and monitor the company's direction.
• Shareholders' agreements: These may include provisions that grant investors specific rights, such as information rights and veto rights, ensuring they can protect their interests and influence key actions.
• Performance milestones: Investors may structure their investment to include performance-based milestones, such as:
• • revenue targets;
  • product development goals; or
  • market expansion objectives.
• These milestones are typically tied to future funding rounds or convertible securities, ensuring that the company meets specific objectives before additional capital is deployed.
• Observer rights: In addition to formal board representation, investors may negotiate the right to attend board meetings as observers without voting rights, to stay informed and influence the company's direction without direct involvement.
• Management incentives: Investors often push for management incentive schemes (eg, stock options or performance quotas) that align the interests of the company's management with those of the investors, to ensure that the company's leadership remains motivated to achieve growth targets.
• Exit clauses: Investors may also include provisions that allow them to initiate an exit strategy under certain conditions, such as a drag-along, tag-along right or trade sale right, giving them control over a potential sale of the company or ensuring they can exit alongside major shareholders.

8 Exit

8.1 What exit strategies are typically pursued by venture capital investors in your jurisdiction?

• Recapitalisation: Where companies restructure their capital, often by taking on debt to buy out the venture capital investors or refinance the company. This provides liquidity to the investors without a full exit.
• Secondary sale: It involves selling the investor's equity stake to another investor, often in a later-stage funding round, or to other institutional investors. This exit allows the investor to realise a return while the company continues to operate and grow.
• Sale to financial buyers (private equity): In this exit route, the company is sold to a private equity firm or other financial buyers that may wish to:
• • restructure the company;
  • enhance its value; and
  • eventually resell it for a profit.
• This exit strategy is often pursued by companies in growth or turnaround phases.
• Sale to strategic buyers (M&A): In this strategy, a company is sold to a larger company or strategic buyer, often within the same industry. Strategic acquisitions often occur when a company has developed valuable intellectual property or a unique market position.
• Listing: An initial public offering (IPO) is often pursued by more mature portfolio companies with a proven business model and strong growth prospects. In Italy, in 2009 Euronext Growth Milan (formerly AIM Italia) was established. It is a market designed for dynamic small and medium-sized enterprises seeking capital to fuel growth, offering a simplified listing process and tailored regulatory support. It provides lower access requirements and ongoing guidance from a Euronext Growth Advisor throughout the company's market presence.

8.2 What specific legal and regulatory considerations (if any) should be borne in mind when pursuing each of these different strategies in your jurisdiction?

• Recapitalisation:
• • Shareholders' approval: This requires the shareholders' approval, as it involves changes to the capital structure.
  • Debt considerations: If recapitalisation involves raising debt, the company must comply with bankruptcy laws and ensure that the terms of existing debt obligations are not violated.
• Secondary sale:
• • Shareholders' agreement: This typically requires compliance with the terms of the shareholders' agreement (eg, right of first refusal or right of first offer).
  • Regulatory compliance: If the company is listed/near listing, the transaction might need to be reported to CONSOB.
• Sale to financial buyers (private equity):
• • Regulatory approvals: Competition scrutiny may apply if the transaction has a significant market impact.
• Sale to strategic buyers:
• • Regulatory approvals: Depending on the size/nature of the deal, the transaction may need approval from the Italian Competition Authority.
• IPO:
• • Regulatory approval: An IPO is subject to approval by CONSOB and must comply with the EU Prospectus Regulation and the Market Abuse Regulation.
  • Corporate governance requirements: Stringent corporate governance standards apply, including those set out in the Corporate Governance Code.
• Listing on Euronext Growth Milan (EGM):
• • Regulatory approval: The advantages of listing on EGM include the following:
  • • Ease of access: Simplified and less stringent listing requirements, allowing more companies to go public.
    • Minimal Bureaucracy: Streamlined bureaucratic procedures, reducing listing costs. Since the EGM is an unregulated market, it operates without the strict supervision/authorisation of regulatory authorities (as result, approval from CONSOB is not required).
    • Regulatory flexibility: Flexible regulatory framework.
  • Corporate governance requirements: No strict corporate governance of financial reporting requirements.

9 Tax considerations

9.1 What are the key tax considerations in relation to venture capital equity investment in your jurisdiction?

In Italy, venture capital equity investments benefit from key tax incentives. Investors can claim a 30% tax deduction on investments up to €1 million per year, applicable to individuals and corporations. From 1 January 2025, individual investors can access a 65% tax deduction (previously 50%) for investments up to €100,000 per year under the de minimis regime, although this will no longer apply to innovative small and medium-sized enterprises (SMEs).

A major advantage is the capital gains tax exemption for investments made between 1 June 2021 and 31 December 2025, if held for at least three years. This exemption:

• applies only to investments qualifying for the 30% deduction; and
• excludes those under de minimis rules.

Certified incubators and accelerators investing in startups benefit from an 8% tax credit, capped at €500,000 annually, if the investment is held for at least three years. Additionally, from 2025, pension funds must allocate 5% of their portfolios to venture capital funds, increasing to 10% from 2026, with non-compliance leading to loss of tax exemptions.

These measures promote venture capital investment, encouraging long-term support for Italy's innovation ecosystem while optimising tax efficiency for investors.

9.2 What are the key tax considerations in relation to venture capital debt investments in your jurisdiction?

In Italy, venture capital debt investments are primarily subject to a 26% withholding tax on interest income for non-resident investors, though reductions may apply under double taxation treaties. Investors may also benefit from the de minimis tax regime, which, from 1 January 2025, increases the deduction from 50% to 65% for investments in innovative startups, up to €100,000 annually for individuals. However, this regime will no longer apply to innovative SMEs from 2025.

If debt instruments include convertible features, their tax treatment depends on classification. If reclassified as equity-like instruments, capital gain exemptions may apply if:

• held for at least three years; and
• acquired before 31 December 2025.

Certified incubators and accelerators investing in startups can access an 8% tax credit on direct investments, capped at €500,000 annually, provided that the investment is held for three years. Additionally, pension funds must allocate 5% of their portfolio to venture capital funds from 2025, rising to 10% from 2026; non-compliance results in loss of tax exemptions.

These measures aim to enhance venture capital debt financing while optimising tax efficiency for investors.

9.3 What are the key tax considerations in relation to equity-related incentive schemes in the context of venture capital investments in your jurisdiction?

Equity-related incentive schemes such as stock options are commonly used by venture capital firms to incentivise employees. In Italy, these schemes are taxed at the time of exercise, with the difference between the exercise price and the market value of the quotas/shares considered taxable income and subject to progressive income tax rates. Social security contributions may also apply to this income. Upon the sale of quotas/shares, capital gains are taxed, but the tax rate may be reduced if the quotas/shares are held for more than five years.

For innovative startups, employees receiving equity-based compensation may benefit from tax exemptions or reductions under Italy's favourable startup tax regime, which can include:

• deferred taxation; or
• lower rates on income from stock options.

Social security contributions also apply at the time of exercise, in addition to income tax. When valuing equity-based compensation, companies must adhere to transfer pricing rules to ensure compliance with the arm's-length principle.

Lastly, reporting obligations require both the company and the recipient to disclose equity compensation in tax filings, particularly if the scheme:

• is structured in a way that affects the company's tax obligations; or
• qualifies for special tax treatment under Italian law.

10 Disputes

10.1 What kinds of disputes typically arise in relation to venture capital investments in your jurisdiction and how are they typically resolved?

• Governance/control: One of the most common causes of disputes.
• Breach of investment agreements: Another common source of disputes. Investors may feel that their return on investment is being jeopardised due to mismanagement or lack of transparency, while entrepreneurs may argue that investors are not living up to their obligations or are interfering unduly in the business.
• Valuation disputes: Particularly common in early-stage companies, where valuations are often based on projections and assumptions rather than hard financial data.
• Exit strategy conflicts: These can involve disagreements about the timing or method of exit (eg, sale of the company, initial public offering or secondary sale). Investors may wish to exit earlier than the entrepreneurs are ready to sell; or there may be disagreements about the sale price or terms.
• Shareholders' disputes: These may occur when minority shareholders feel that their interests are being undermined by the actions of majority shareholders or management. These can include issues related to:
• • dividends;
  • share dilution; or
  • the exercise of shareholder rights.
• Employee and founders' disputes: Disputes between founders and employees – particularly around equity compensation, stock options or vesting schedules – are also common.
• Intellectual property: Disputes over the ownership, protection or commercialisation of intellectual property are especially common in startups.

In Italy, the preferred method for resolving venture capital disputes is through alternative dispute resolution (ADR), particularly mediation or arbitration. Both are often faster and less costly than litigation (many venture capital contracts include ADR clauses to encourage this approach). If ADR does not resolve the issue, disputes may be taken to civil courts.

11 Trends and predictions

11.1 How would you describe the current venture capital landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?

Italy's venture capital ecosystem has seen significant growth in recent years, shifting from a traditionally conservative market to one that is increasingly supportive of innovation and entrepreneurship. This shift has been driven by both government initiatives and increased private sector investment.

The surge in digital transformation has been a major trend, with startups in Industry 4.0, e-commerce and agritech gaining traction. The COVID-19 pandemic accelerated this digital shift, leading to increased demand for:

• automation;
• digital tools; and
• data-driven solutions.

In particular, Italy's manufacturing and automotive industries are embracing these innovations, creating new opportunities for tech-driven startups.

The life sciences sector – particularly biotech, medtech and healthtech – is also expanding rapidly, with Italy's strong healthcare sector providing a solid foundation for growth.

A key driver is the rising level of cross-border investment. The European Union's NextGenerationEU fund and Italy's own innovation incentives have further boosted this dynamic, creating an environment that fosters high-growth, tech-driven businesses.

However, several challenges remain. One issue is the lack of follow-on funding, particularly at the Series B+ stage. While Italy has seen a surge in early-stage investments, many startups struggle to secure the capital that they need to scale.

Moreover, Italy's exit environment remains underdeveloped compared to more mature European markets, with fewer IPOs and M&A opportunities for startups seeking to provide returns for investors.

Looking ahead, there are significant opportunities for growth in AI, biotech, healthtech and sustainability, particularly as these sectors align with both global trends and EU goals.

11.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?

In December 2024, Italy enacted the Scale-up Act (Law 193/2024), introducing new incentives to boost its startup ecosystem.

In the coming years, Italy is expected to adopt legislative and tax reforms to enhance innovation and investment (while addressing challenges faced by startups), with a focus on research and development, AI, blockchain and green technology. Key measures may include:

• expanded tax incentives (eg, the Patent Box and super-depreciation schemes); and
• new sustainability incentives aligned with EU climate goals.

Italy will also continue to refine its venture capital regulatory environment, with further support for early-stage startups through mechanisms such as the National Innovation Fund. The government may introduce clearer regulatory frameworks for blockchain and fintech, making Italy a more attractive destination for startups in these emerging sectors.

Additionally, tax reforms could simplify the tax treatment of venture capital investments, potentially offering capital gains tax relief and other incentives to encourage investment in high-risk ventures.

Reforms to employee stock options could improve talent retention for startups (especially in the tech sector); while alignment with EU programmes and initiatives, such as the European Innovation Council and Horizon Europe, will increase funding access and cross-border investment opportunities.

Overall, Italy's venture capital ecosystem is set to grow through these reforms, with:

• greater support for green technologies;
• simplification of the regulatory and tax environment; and
• more incentives for innovation-driven startups.

Successful implementation of these reforms could help Italy to strengthen its position in the European and global startup landscape.

12 Tips and traps

12.1 What are your tips to maximise the opportunities that venture capital presents in your jurisdiction, for both investors and portfolio companies, and what potential issues or limitations would you highlight?

Navigating the venture capital landscape in Italy presents both significant opportunities and unique challenges. For investors, one of the key advantages is the range of government incentives, such as the angel investor tax credit, which offers tax credits of up to 30% for investments in eligible startups. Italy also provides substantial R&D tax credits, making it attractive for investors in tech and biotech. Moreover, state-backed venture capital funds such as the National Innovation Fund and Smart&Start Italia help to reduce investment risks by providing matching capital.

Italy's position within the European Union also enhances its appeal, offering startups access to EU funding programmes such as Horizon Europe and InvestEU. Cities such as Milan, Rome and Turin are emerging as tech hubs, offering a growing ecosystem of accelerators and incubators. This provides investors with a strong network for discovering and funding high-potential ventures. Additionally, Italy's rich industrial heritage in sectors such as manufacturing and agritech provides a solid foundation for startups, creating opportunities for M&A and eventual exits – particularly through platforms such as Euronext Growth Milan.

However, there are several challenges to consider:

• Italy's entrepreneurial culture can be more risk averse than other countries, making it harder for startups to secure early-stage funding.
• Many businesses are family-owned and may resist external investment or disruptive business models.
• Liquidity and exit opportunities are also concerns. The IPO market in Italy is not as liquid as other European markets, limiting options for public exits.

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.