Search for...

Variable Capital Company: A New Incentive for Bulgarian Startups to Grow Their Businesses Locally

Commercial Law
Image credit: Canva
, ~

 

Only have 1 minute? Check out these 3 takeaways:

  • Bulgaria has introduced the Variable Capital Company (VCC), which is expected to reduce the need for startups to register abroad, allowing them to retain more control and contribute positively to the local economy.
  • Тhe VCC is expected to make fundraising easier and implementing incentive plans like convertible debt or share options safer and in a more structured way, thus enhancing the credibility of Bulgarian startups.
  • The VCC is a key piece of legislation needed to unlock the resources of Bulgaria’s National Recovery and Resilience Plan.

 

In a game-changing move to boost its entrepreneurial landscape, Bulgaria’s Parliament approved amendments to the Commercial Act, introducing the Variable Capital Company (VCC), aimed at propelling the growth of innovative startups in the country. The initiative was championed by the Bulgarian Entrepreneurial Association (BESCO), who hailed it as the most radical change to the Commercial Act in the past three decades and an alternative option to the existing Limited Liability Companies (LLCs) and Joint-Stock Companies (JSCs). With an overwhelming majority of 178 votes in favor, the VCC is set to provide new opportunities for startups, as it eliminates the requirement to specify the capital size upon establishment.

Unlike traditional companies, a VCC doesn’t have a fixed capital that needs to be registered in the Commercial Register. Instead, its capital, which is formed from the contributions of partners, can change constantly without the need for registration. Moreover, the partners themselves can change without the need for registration. This new legal form is designed to meet the unique needs of startups, making it easier for them to operate efficiently and thrive within Bulgaria’s business landscape. The VCC’s flexibility is its main selling point, blending the best elements of Limited Liability Companies (LLCs) and Joint-Stock Companies (JSCs).

The VCC isn’t just a standalone initiative. It’s a key piece of legislation needed to unclock the resources of Bulgaria’s National Recovery and Resilience Plan.

Read more:  Mountains, Sea and IT: Montenegro, From a Breathtaking Travel Destination to a Tech Cradle

The impact of the Variable Capital Company (VCC) on Bulgarian startups

The approval of the Variable Capital Company (VCC) in Bulgaria has garnered widespread support and enthusiasm, particularly from key figures within the startup community.

Dobromir Ivanov, CEO of BESCO, praised the legislation, highlighting its potential to significantly benefit local startups and technology companies. He emphasized that the VCC addresses a crucial issue faced by many Bulgarian startups – the need to register their companies abroad, often in the UK, Estonia, or other countries, in order to offer employee incentives, implement vesting contracts, or seek investments through convertible debt.

“This new legislation aims to solve this problem by providing a legal framework that allows these options to be offered and implemented in Bulgaria, thus keeping the companies in the country. It’s crucial because registering a company abroad from the beginning can lead to losing leverage in negotiations with investors. By having the option to register the company in Bulgaria from the start, they can retain more control and potentially keep their research and development and headquarters in the country, contributing positively to the local economy and society”, Ivanov says for The Recursive.

Furthermore, Ivanov calls the VCC the most significant reform in Bulgaria’s commercial law, with crucial political backing from all parties who voted in favor of it. He acknowledges that while the initial application of the legislation is limited to companies with up to 50 employees, it presents a compelling option for smaller and younger startups. However, Ivanov also emphasizes the importance of addressing some issues in the joint-stock company format.

“Currently, founding joint-stock companies from day one is impractical due to excessive bureaucracy and high costs”, Ivanov explains. He emphasizes that this new legislation will make the process much more appealing for startups and younger companies, potentially fostering a more favorable environment for entrepreneurial ventures in Bulgaria.

Read more:  Ten companies enter Endeavor Bulgaria’s growth accelerator program

Momchil Vassilev, Managing Director of Endeavor Bulgaria, echoes the optimism surrounding the VCC’s impact on the local startup ecosystem.

“Until now, achieving similar results required various legal complexities, leading to unstable company structures. However, with this new legislation, fundraising and implementing incentive plans like convertible debt or share option plans will be much safer and more structured, making these companies appear more reliable and credible to potential investors.”, Vassilev explains for The Recursive.

While not expecting an immediate widespread conversion from existing legal forms, Vassilev believes that over time, more companies will opt for the VCC, stating, “As a result of this new legal form, some existing businesses may choose to adopt it, especially those seeking new funding or wanting to implement share option plans.” He underscores the importance of monitoring the percentage of newly established companies adopting this legal form as a relevant key performance indicator (KPI) to accurately assess its impact.

According to Vassilev, transitioning to the new legal form may involve some administrative and internal factors, along with legal costs, as potential obstacles. However, from a practical standpoint, existing companies should not encounter significant impediments in changing their legal form.

What’s more, Vassilev stresses that the establishment of the VCC marks a significant step forward for the startup ecosystem and its relationship with the state. As he emphasizes, “The state is taking strides to create a more modern and supportive environment for this type of entrepreneurship, and the interests and voices of these companies are starting to be heard.”

The genesis of the Variable Capital Company (VCC) in Bulgaria

With one unicorn in its repertoire, complemented by several successful exits and bolstered by a burgeoning pool of seasoned venture capital funds, Bulgaria’s entrepreneurial community has experienced significant growth over the past decade, positioning the country as a regional hub for startups and innovation. However, a concerning trend emerged as successful companies opted to register abroad, depriving Bulgaria of tax revenue, intellectual property, and reputation.

Read more:  What’s the Roadmap for Smart National Innovation Strategy? Lessons from Bulgaria

One way to address these challenges and retain local talent is the adoption of the Variable Capital Company (VCC). The VCC takes inspiration from successful models such as the French SAS company (Société par Actions Simplifiée, a type of VCC), which has dominated the French corporate landscape since the mid-1990s, with over 70% of all French firms being SAS companies. Similar legal forms exist in Germany, Poland, Greece, Spain, Slovakia, and other European countries.

Future plans for enhancing the Bulgarian startup environment

Looking ahead, Dobromir Ivanov of BESCO emphasized the importance of securing a stronger foothold in the global tech investment landscape, as it holds the potential to drive GDP growth and improve the average lifestyle of Bulgarian citizens within the next 15 years. The following initiatives are on the horizon as part of the strategic roadmap to bolster Bulgaria’s startup ecosystem:

  • Introducing a bill in September to encourage foreign investors to invest more in Bulgaria and stimulate a more drastic increase in foreign direct investment (FDI). A pivotal aspect of this endeavor is focusing on attracting high-tech investors to enhance Bulgaria’s competitiveness vis-à-vis other countries in the region, including Serbia, Romania, Greece, Poland, the Czech Republic, and Hungary.
  • Working on educational reform and planning to present the first bills in October or November to enhance the skills and knowledge of the Bulgarian workforce.
  • Anticipating improvements in the startup visa process, among other topics, in December.

 

Ivanov believes these initiatives are fundamental for Bulgaria’s development and will be BESCO’s focus in the next 6 to 12 months.

Thank you for reading The Recursive!

Over 1 million people from all over the world have learned about the tech ecosystem in Central and Eastern Europe thanks to The Recursive. In order to keep our content free for everyone, we need your help. If you believe what we do is important and have the means to do so, support us in giving a voice to Central and Eastern Europe with as little as €7. Thank you!

DONATE Keep reading this article

Help us grow the emerging innovation hubs in Central and Eastern Europe

Every single contribution of yours helps us guarantee our independence and sustainable future. With your financial support, we can keep on providing constructive reporting on the developments in the region, give even more global visibility to our ecosystem, and educate the next generation of innovation journalists and content creators.

Find out more about how your donation could help us shape the story of the CEE entrepreneurial ecosystem!

One-time donation

You can also support The Recursive’s mission with a pick-any-amount, one-time donation. 👍

https://therecursive.com/author/snezhana/

Snezhana is an Innovation Journalist at The Recursive. She uses the power of storytelling to put the spotlight on the emerging innovation ecosystems in Central and Eastern Europe. With a keen eye for the bleeding edge, she delves into the depths of deep tech, unearthing captivating stories that bridge the realms of science and human imagination.