M&A Vocabulary – Experts explain: Venture Capital

published on 18 June 2025 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

Venture capital and its significance in the legal fields of corporate law and mergers and acquisitions (M&A)

Venture capital (VC) is now essential for progress, innovation and business growth – especially in tech-driven industries. VC is a type of business financing where investors put money into young, fast-growing and often not yet listed companies, usually startups. VC investments are characterized by high growth potential, but as investment objects they also carry an increased risk, as they often do not yet have stable revenues or proven business models and the capital invested as equity is not repaid. The investors' goal is usually to achieve the highest possible return by increasing the value of the shares at the so-called exit – the withdrawal from the investment.

In return for capital, investors receive shares in the company and typically accompanied by influence and information rights often. Investors frequently provide additional active support to the company in the form of consulting services. In many cases large corporations invest in VC in order to transfer innovative projects from their own research and development departments into independent companies.

In the areas of corporate law and mergers & acquisitions, VC investments raise a wide range of challenges and questions for investors, founders and companies.

Corporate structuring of VC investments

Already in the founding phase of the company, the courses are set that will influence future VC investments. The choice of legal form, particularly a limited liability company (GmbH) or a stock corporation (AG), has a decisive influence on the investment and influence opportunities of potential investors.

Furthermore, VC transactions focus on the structure of the investor's participation. Typical legal instruments include:

Conversion and preferential rights: Investors generally receive preferred shares or shares with special rights with regard to dividends, liquidation proceeds and voting rights.
Vesting arrangements: These are intended to ensure that founders only retain their full shares if they remain loyal to the company for a defined period of time.
Drag-along and tag-along rights: These rights set out the conditions under which investors and founders can sell their shares jointly or individually.
Liquidation preferences: In the event of a company liquidation, liquidation preferences guarantee investors preferential repayment of their capital ahead of other shareholders.

M&A transactions as part of the exit strategy

For venture capital investors, the so-called “exit” – i.e., the withdrawal from the investment – is the moment when their investment pays off financially. A successful exit means that the shares can be sold at a profit. In practice, this exit usually takes the form of M&A transactions, particularly in the form of a company sale.

Typical exit options for investors are:

IPO (Initial Public Offering) – the start-up enters the stock market,
Trade Sale – sale to a strategically interested company,
Secondary Purchase – sale to other venture capital companies,
Company Buy Back – repurchase by the company founders themselves.

A significant difference from traditional M&A transactions lies in the capital input: While in M&A, the purchase price usually goes to the selling shareholders, in venture capital investments, new capital is primarily invested in the company (primary) as part of financing rounds.

Conclusion

Venture capital is an essential tool for supporting young companies with great potential on their path to growth and market success, while at the same time offering investors the opportunity to earn above-average returns.

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