What U.S. Venture Capitalists Should Know About Backing Startups with Swiss Entities

As global startup ecosystems expand, U.S. venture capitalists increasingly invest in Swiss-registered startups, especially in fintech, biotech, SaaS, and deep tech. Switzerland’s legal predictability, tax advantages, and financial stability make it an attractive base. However, Swiss entities bring distinct legal, tax, and governance complexities unfamiliar to investors used to U.S. C-Corps and Delaware LLCs. Navigating these differences is critical to structuring sound investments and planning effective exit strategies.

This article outlines why founders choose Swiss entities and explores the key legal, tax, and governance factors U.S. investors must address when backing these startups.

Why Founders Choose Swiss Entities

Swiss startups often select local incorporation for strategic reasons:

• Tax Efficiency: Corporate tax rates typically range from 11.85% to 21.6%, with many cantons offering effective rates as low as 8.5% for qualifying intellectual property income through the Swiss IP box regime.
   
• Legal Certainty: Switzerland’s business-friendly laws, robust creditor protections, and neutral regulatory environment provide long-term stability.
   
• Market Access: A Swiss base grants access to the European market without the administrative complexity of EU incorporation.
   
• Reputation and Investor Appeal: Swiss entities benefit from the country's reputation for transparency, governance, and financial reliability.
   
• Startup Hubs: Growing ecosystems in Zurich, Zug, Geneva, Lausanne, and Basel attract talent, capital, and advisory expertise.

Key Legal and Governance Considerations for U.S. VCs

While Swiss companies offer clear advantages, their legal and governance frameworks differ significantly from U.S. corporate structures. U.S. venture capitalists must address these differences early in negotiations to avoid complications after the investment.

Share Structure and Voting Rights

Swiss Aktiengesellschaften (AGs) issue registered shares (Namensaktien) by default. Bearer shares are prohibited primarily under the Swiss Federal Act on the Implementation of the Recommendations of the Global Forum, which has been effective since 2019, thereby enhancing transparency.

Key considerations:

• Authorized share capital increases and conditional capital (used for employee stock options) require shareholder approval, unlike U.S. models, where board approval often suffices.
   
• Voting rights may be proportional or restricted (e.g., preference shares with limited voting). Swiss law permits multiple share classes; however, super-voting shares, common in U.S. tech startups, require careful structuring and may face regulatory resistance.
   
• Share transfer restrictions can be embedded in the articles of association. While common in Swiss startups, they can limit exit flexibility if not properly negotiated.
   
• Drag-along and tag-along rights must be explicitly drafted into the shareholder agreement or the articles of association; unlike standard U.S. VC term sheets, they are not implied by law.

Investor Protections

Swiss corporate law does not automatically provide U.S.-style investor protections.

• Liquidation preferences, anti-dilution provisions, and participation rights must be fully negotiated and inserted into shareholder agreements. Swiss courts enforce these clauses when properly documented, but do not recognize implied investor protections as Delaware courts might.
   
• Under Swiss law, pre-emptive rights are granted by default for new share issuances but can be waived or modified; therefore, investors must carefully review and negotiate these terms.
   
• Information rights (e.g., quarterly financial reporting, budget approval rights) should be formalized, as Swiss law only mandates minimal disclosure obligations to minority shareholders.

Board Representation

Swiss AGs must appoint at least one Swiss-resident director. For international startups, it’s common to appoint a fiduciary or corporate service provider to fulfill this residency requirement.

Key differences:

• Board fiduciary duties focus solely on the company's best interests (similar to U.S. standards), but directors may bear personal liability for breaches, including tax or social security obligations.
   
• Observer rights for investors (common in U.S. deals) are not standard and must be explicitly added to the contract.
   
• Depending on the articles of association, board decisions often require unanimous or qualified majority voting, which may limit unilateral decision-making by founder-controlled boards.
   
• Annual general meetings (AGMs) are mandatory and can be held virtually; however, certain resolutions, including capital increases or share transfers, require notarial deeds and formal shareholder approval.

Tax Implications and Exit Scenarios

Cross-border investments involve complex tax considerations that impact returns and exit planning.

Dividend and Exit Tax Treatment

Swiss dividend distributions are subject to a 35% withholding tax, but the U.S.–Switzerland tax treaty can reduce this to 5% or eliminate it, depending on the investor’s ownership percentage and structure. Capital gains from share sales are typically exempt from Swiss taxation but may be subject to U.S. tax depending on the investor’s circumstances.

Cross-Border Repatriation

U.S. investors must carefully structure their investments to minimize exposure to Controlled Foreign Corporation (CFC) rules and Global Intangible Low-Taxed Income (GILTI) taxation. Proper structuring can reduce or defer U.S. tax liabilities on foreign income.

IP Holding Structures

Many Swiss startups establish IP holding subsidiaries to benefit from cantonal IP box regimes. VCs should assess where IP assets reside, as this affects tax treatment and valuation at exit.

Aligning Term Sheets and Shareholder Agreements

VCs and founders must customize term sheets and shareholder agreements to bridge the gap between Swiss and U.S. legal expectations.

Key considerations include:

• Defining liquidation preferences and anti-dilution provisions.
• Aligning vesting schedules and founder equity terms with U.S. standards.
• Formalizing investor consent rights and protective provisions.
• Ensuring enforceability under Swiss law while preserving U.S. investor protections.

Engaging experienced legal counsel in both jurisdictions is critical to drafting agreements that satisfy all parties and anticipate potential disputes or exits.

How SIGTAX Supports Cross-Border VC Structures

SIGTAX assists startups and investors with forming Swiss entities, cross-border tax structuring, and aligning shareholder agreements to meet Swiss legal standards and U.S. venture capital expectations. We advise on share structure, corporate governance, tax efficiency, and regulatory compliance, helping investors and founders structure deals that support growth and successful exits.

Conclusion

Swiss entities offer founders and investors a compelling platform for international growth, financial stability, and tax efficiency. Understanding the legal, tax, and governance differences for U.S. venture capitalists is essential to mitigating risk and maximizing returns. With the proper structuring and expert advice, investments in Swiss startups can deliver competitive advantages and smoother exit pathways in an increasingly globalized market.