March 8, 2018
At Leapfunder, we often hear people are asking: why do we need to go through so much paperwork when setting up our company? Why is there so much legal paperwork to divide the shares? Well, the answer is that you could probably get away without most of these formalities as long as everybody is friends, right? Just the same, you can probably have dinner and split the bill fairly at the end of the evening. But what happens if you're no longer friends a few years later? It's important to have a proper legal process when forming a company, no matter whether you are doing this alone or with your best buddy. In many countries, the company registration process and several of the next steps you will take require a notary. Need some help navigating? Here are our guidelines on when and where you need a notary for creating your own business and organizing your seed round.
Make sure to get a formal registration!
When you’re generating value within a company, written agreements about how that value is to be divided are crucial. They have to be strong enough to be stand up in court later. That’s why almost every country requires companies register with a central agency. In many countries, the signature of a notary who acts as a witness to the accuracy of the registration is required.
The two main things for which a startup needs a notary in Germany are the creation process and the transfers of shares.
Creation Process: A notary is necessary for the creation of the company and its registration with the authorities. Company formation is considered a very significant event under German law, and you could literally be committing a crime if you take things too lightly. So for this one, you really need a professional to assist you.
Transfer of Shares: In general, a notary is also necessary in Germany for any contract which may later imply a transfer of shares between parties. In Germany a transfer of shares need to be notarized, and a contract that implies a later transfer needs to be notarized just the same. Since a contract leading to the transfer of shares needs to be notarized, a classic shareholders’ agreement (SHA) also needs a notary. A classic SHA contains a “drag along” clause, which allows some of the shareholders to force the others to sell their shares. A clause like that is a classic case of a contract that may imply a later transfer of shares.
The Netherlands (where Leapfounder is based) and Germany have more or less similar accounting systhems. In both countries, you would need a notary for creating and registering your company, and for any transfer of shares. However, in Netherlands if you close a contract between parties which may later imply a transfer of shares, then the original contract doesn’t need to be notarized. That’s different in Germany. The eventual transfer of shares has to be notarized, but the contract that leads to the later transfer does not. That implies that the notarization requirements in the Netherlands are less strict than in Germany.
Because of this difference it is not typical for a shareholders’ agreement to be notarized in the Netherlands. But it is smart to involve an experienced lawyer when drafting it.
It’s not strictly necessary to involve a notary in your seed funding round in the Netherlands, nor in Germany. The use of convertibles is common in both countries and they are often closed without a notary. However, any contract which may force a transfer of shares needs to be notarized in Germany so you do need to watch the exact wording of the convertible contract. The contract has to be drafted in such a way that it doesn’t force a transfer of shares at some point. So there should be an option to refuse such a transfer. It's important to note that a transfer of shares is different from a creation of new shares. An experienced lawyer in Germany can help you with all this.
In the Netherlands, seed funding can also be done without a notary as long as you use convertibles. It’s very rare for convertibles of any type to be notarized. The only seed funding that requires a notary is a straight equity funding round in which shares have to be issued. Issuing of shares always requires a notary in both countries.
It’s common for people setting up a company to approach a notary they already know. It could be someone they did family business with or just a good friend who works in the field. However, this is not always the best option.
Startups are a very special area of the law and entrepreneurs are well advised to look for a notary that has plenty of startup experience.
Involve yourself with someone who has a good sense of the market. Make sure that the notary is handling your case as a service provider. They should think through your needs, look through all the options that are legally possible and select something really efficient. A notary acts as a witness and has a duty that’s greater than serving you as a customer. Nonetheless they ought to be flexible, think through your problem, and come with a creative solution if needed.