Thursday, December 01, 2005

The Toxic German Legal Landscape -- Part I

(Please see the July, 2007, update to the VAT comment below.)

I. The German Economic Landscape

At this point I want to return to the original them of this Blog -- commentary on the German venture capital scene today. We need to begin with a view of the current German economic landscape from 30,000 feet above the ground. That aerial view shows the follow features:
  • Germany is a high-tax jurisdiction, and its taxes are about to climb even higher -- the maximum income tax rate will move from 42% to 45%, and the VAT rate will climb from 16% to 19% -- this is the explicit policy of the new coalition government led by Angela Merkel.
  • German has high unemployment -- at this writing the rate is 11.2%
  • The Germany economy is in zero-growth mode and has been stuck there for several years.
  • Consumer demand in Germany is low.
  • The German population, including its representatives in the factions of the major political parties, have little appetite for reform of Germany's social welfare state, even though the costs have become unsustainable.
  • The level of technological innovation is presently at a dangerously low ebb.
  • The fires of entrepreneurial spirit in Germany burn dimly today, when they burn at all.
  • Germany is now governed by a tenuous coalition of the CDU and the SDP, who are not good friends in the best of times, led by an untried, untested and inexperienced Chancellor, Dr. Angela Merkel. (I have to admit, however, that I have tremendous admiration and sympathy for Angela Merkel -- this 51 year old Ossie with a PhD in Physics who has defied political gravity by ascending to the top position in a political party dominated by a rather unpleasant group of Alpha males. Notwithstanding this extraordinary achievement she somehow gets almost no respect among the German population, including, amazingly enough, among German women! The standard comparison is to Margaret Thatcher, the implication being, apparently, that Angela Merkel is not bitchy enough to be taken seriously.)

Most of these observations are truisms and I need not dig deeper into them here. The critique of the current German economy has been done many times by numerous other writers, including Dr. Norbert Walter, Chief Economist of the Deutsche Bank, to name one of the best.

My purpose in re-capping these features of the current German economic landscape is to remind us all of the sad state of current affairs in Germany and of the self-evident need to create and foster a powerful, vibrant, well-financed, and cleverly-managed venture capital and private equity fund industry. It is precisely such an industry that can fan the entrepreneurial flame, stimulate technological innovation, finance the formation and growth of new German companies, create new employment and help get the Germany economy back on track.

Notwithstanding this obvious need, the German government, above all the Federal Ministry of Finance (the Bundesministerium der Finanzen), instead of making Germany a haven for venture capital and private equity investment funds is marching exactly in the opposite direction and appears to be hell-bent on making Germany a venture-capital-free zone. And that claim leads to my thesis, namely, that the German legal and tax landscape as it applies to such investment funds is toxic.

My critique has three main parts, which will be addressed in subsequent installments:

A. Taxation of Venture Capital and Private Equity Funds

The Federal Ministry of Finance (the BMF) promulgated a decree on November 20, 2003, pertaining to the taxation of venture capital and private equity funds which contains a set of rules which make impossible the competent and intelligent management of such funds when organized under German law. The decree is in fact having the effect of driving existing funds out of the country.

B. The Application of VAT to Management Fees

Effective April 1, 2004, the management fees received by general partners of German venture capital and private equity funds are subject to Germany's 16% VAT. As indicated above, that tax is about to go to 19%. This is an historic change and sets Germany apart from almost every other important venture capital/private equity jurisdiction. This tax charge undermines the economics of the fund business for German general partners, having in mind that German funds are on the whole much smaller than US funds and German management fees are accordingly much smaller. There is no room for 19% off the top.

July 2007 Update:

Another Shot in the Foot

The response of the tax bar in Germany to the April 1, 2004, imposition of VAT on management fees was to create a work-around known as the "priority profit share." This work around, though admittedly artificial, worked and was tolerated by the BMF. On June 1, 2007, however, the BMF ended its tolerance and published an administrative pronouncement on its website declaring that as of June 1, 2008, the priority profit share will be subject to the 19% VAT. It appears that the BMF has taken a policy decision that venture capital is not an appropriate form of financing for Germany.

C. The German Stock Corporation is a Dysfunctional Legal Form

The German Aktiengesellschaft is outdated, outmoded, complicated, expensive and dysfunctional as a corporate vehicle for growth companies. The German AG is not new, but its dysfunctionality as a vehicle for growth companies has only become painfully evident in the last several years. German corporate lawyers and German notaries, however, love the AG and have been very slow to take advantage of the new flexibility to adopt other EU country corporate vehicles flowing from the 2002 Ueberseering decision of the European Court of Justice.

[Coda: I do not want my critique of the German economic and legal landscape to be misunderstood as a critique of Germany per se. To the contrary, and apart from the sorry economic situation, I am prepared to argue that in terms of quality of life, standard of living, level of public safety, quality of infrastructure, transportation, health care, public education, cultural resources, cuisine, and adoption of new technology, including, in particular, broadband and mobile telephony, there is no better place to live on the planet -- including my native US, which is paradisiacal for the few but a hard row to hoe for the many.]

Saturday, November 19, 2005

No Convincing Reason -- The Execution of Elias Syriani

On November 7, 2005, the four children of Elias Syriani appeared on Larry King's show on CNN. Their story: 15 years ago their father Elias Syriani murdered their mother, Teresa, by stabbing her repeatedly with a screwdriver. One of the children, John, witnessed it. Syriani was tried, convicted and sentenced to death. After lengthy appeals his execution date was finally set for November 18, 2005. The four children appealed to Governor Mike Easley of North Carolina to commute the death and in the run-up to the meeting with Easley the four children appeared by remote hook up on Larry King's show.

The interview was heart-breaking. The four children, now adults, sat side by side on a couch -- all on the verge of tears -- while Larry conducted one of the clumsiest interviews he has ever done. Here are some excerpts to give you the feeling of the interview:

ROSE SYRIANI: We're just right now, living day by day, just trying to do what we can to stop this from happening. We're just begging that this does not carried out. And again, I mean, I said this is four lives. Four lives that will be destroyed.

I mean, this is going to devastate us. And this is something that was a gift from my mother and a gift from God. I mean, my mother doesn't want us to fear, to hate. You know, we've been grieving for all this time. I know this is from her. And there's not a day that goes by that we don't think about her. And now for the past two years, we've been able to move on without feeling such grief. And we're just hoping that the governor will please look at this as a unique case and we're able to regain our past.

I mean, we have memories that my father is able to share with us. We don't get to see him very often, but my sister Janet, every day, she runs to the mailbox to see. He's able to watch over us, as much as he can. He'll send my brother a letter and he'll tell him, your sister is having a hard time in school, watch over her. I know we have limited time, but there's so many beautiful stories.

LARRY KING: Janet, what is it like when you talk to your father?

JANET SYRIANI: I have a father-daughter relationship now. He calls me his baby. You know? I have that emotional side that I've been wanting for so long. And like my sister said, you know, I was having problems with school. And just everyday life, you know. And he would write me letters and tell me that I was going to make it and I was going to make his dream come true.


LARRY KING: Sarah, will your main argument at the clemency hearing be, we forgive him, therefore the state of North Carolina should forgive him?

BARBARI: I wouldn't go that far. I'm just hoping that more than anything that Governor Easley will look at these four lives and realize that it is us that is going to suffer.

My father has come to terms with his fate and what could happen to him. And the only fear that he has is that his children's hearts are going to break once again. And he's right, that is exactly what will happen.

I mean, it took us so long to come this far. You know, from hate and anger to forgiveness and love. It is just the most powerful thing that has entered our lives.

And just so much good has come out of it. I mean, we're all different people now and could live our lives whole and in peace and we just feel...


On November 10 the four children met with Governor Easley.

On November 17 the Governor announced his decision to deny clemency, on the following basis:

"After careful review of the facts and circumstances of this crime and conviction, I find no convincing reason to grant clemency and overturn the unanimous jury verdict affirmed by the state and federal courts,"


On Friday, November 18, at 2:00 a.m. Elias Syriani was put to death by lethal injection. See the graphic account of the execution at,

"No convincing reason," said the Governor.

Sometimes it Takes a Hawk

I am sure you have all by now seen reports of Congressman John Murtha's press conference calling for the U.S. to get out of Iraq . I was so overjoyed to finally hear someone in government say what he said that I looked up the entire statement -- it is only one page in length -- and am pasting it below. Too bad we are not hearing this kind of call from John Kerry or Hillary Clinton.

And you have to love Murtha's riposte to Darth Vader Cheney (the "Vice-President of Torture" according to ex-CIA chief Stansfield Turner), who criticized Murtha's statement:

"I like guys who've never been there who criticize us who've been there," Murtha said. "I like that. I like guys who got five deferments and never been there and sent people to war and then don't like to hear suggestions that what may need to be done."

Until now I did not know much about Murtha, other than that he was generally considered a full-on Democratic hawk, but I think I like the guy. He is a tough ex-Marine who lists his profession on his Congressional website as "Car Wash Proprietor" (the Johnstown Minute Car Wash).

Speaking of the Vice-President, did you see the recent Daily Show with Jon Stewart on CNN? Senator John McCain was the guest. Stewart"s opening question to McCain was, "Senator McCain is Vice-President Cheney insane?" McCain almost lost consciousness.


For Immediate Release
November 17, 2005

The Honorable John P. Murtha
War in Iraq

(Washington D.C.)- The war in Iraq is not going as advertised. It is a flawed policy wrapped in illusion. The American public is way ahead of us. The United States and coalition troops have done all they can in Iraq, but it is time for a change in direction. Our military is suffering. The future of our country is at risk. We can not continue on the present course. It is evident that continued military action in Iraq is not in the best interest of the United States of America, the Iraqi people or the Persian Gulf Region.

General Casey said in a September 2005 Hearing, “the perception of occupation in Iraq is a major driving force behind the insurgency.” General Abizaid said on the same date, “Reducing the size and visibility of the coalition forces in Iraq is a part of our counterinsurgency strategy.”

For 2 ½ years I have been concerned about the U.S. policy and the plan in Iraq. I have addressed my concerns with the Administration and the Pentagon and have spoken out in public about my concerns. The main reason for going to war has been discredited. A few days before the start of the war I was in Kuwait – the military drew a red line around Baghdad and said when U.S. forces cross that line they will be attacked by the Iraqis with Weapons of Mass Destruction – but the US forces said they were prepared. They had well trained forces with the appropriate protective gear.

We spend more money on Intelligence than all the countries in the world together, and more on Intelligence than most countries GDP. But the intelligence concerning Iraq was wrong. It is not a world intelligence failure. It is a U.S. intelligence failure and the way that intelligence was misused.

I have been visiting our wounded troops at Bethesda and Walter Reed hospitals almost every week since the beginning of the War. And what demoralizes them is going to war with not enough troops and equipment to make the transition to peace; the devastation caused by IEDs; being deployed to Iraq when their homes have been ravaged by hurricanes; being on their second or third deployment and leaving their families behind without a network of support.

The threat posed by terrorism is real, but we have other threats that cannot be ignored. We must be prepared to face all threats. The future of our military is at risk. Our military and their families are stretched thin. Many say that the Army is broken. Some of our troops are on their third deployment. Recruitment is down, even as our military has lowered its standards. Defense budgets are being cut. Personnel costs are skyrocketing, particularly in health care. Choices will have to be made. We can not allow promises we have made to our military families in terms of service benefits, in terms of their health care, to be negotiated away. Procurement programs that ensure our military dominance cannot be negotiated away. We must be prepared. The war in Iraq has caused huge shortfalls at our bases in the U.S.
Much of our ground equipment is worn out and in need of either serious overhaul or replacement. George Washington said, “To be prepared for war is one of the most effective means of preserving peace.” We must rebuild our Army. Our deficit is growing out of control. The Director of the Congressional Budget Office recently admitted to being “terrified” about the budget deficit in the coming decades. This is the first prolonged war we have fought with three years of tax cuts, without full mobilization of American industry and without a draft. The burden of this war has not been shared equally; the military and their families are shouldering this burden.

Our military has been fighting a war in Iraq for over two and a half years. Our military has accomplished its mission and done its duty. Our military captured Saddam Hussein, and captured or killed his closest associates. But the war continues to intensify. Deaths and injuries are growing, with over 2,079 confirmed American deaths. Over 15,500 have been seriously injured and it is estimated that over 50,000 will suffer from battle fatigue. There have been reports of at least 30,000 Iraqi civilian deaths.

I just recently visited Anbar Province Iraq in order to assess the conditions on the ground. Last May 2005, as part of the Emergency Supplemental Spending Bill, the House included the Moran Amendment, which was accepted in Conference, and which required the Secretary of Defense to submit quarterly reports to Congress in order to more accurately measure stability and security in Iraq. We have now received two reports. I am disturbed by the findings in key indicator areas. Oil production and energy production are below pre-war levels. Our reconstruction efforts have been crippled by the security situation. Only $9 billion of the $18 billion appropriated for reconstruction has been spent. Unemployment remains at about 60 percent. Clean water is scarce. Only $500 million of the $2.2 billion appropriated for water projects has been spent. And most importantly, insurgent incidents have increased from about 150 per week to over 700 in the last year. Instead of attacks going down over time and with the addition of more troops, attacks have grown dramatically. Since the revelations at Abu Ghraib, American casualties have doubled. An annual State Department report in 2004 indicated a sharp increase in global terrorism.

I said over a year ago, and now the military and the Administration agrees, Iraq can not be won “militarily.” I said two years ago, the key to progress in Iraq is to Iraqitize, Internationalize and Energize. I believe the same today. But I have concluded that the presence of U.S. troops in Iraq is impeding this progress.

Our troops have become the primary target of the insurgency. They are united against U.S. forces and we have become a catalyst for violence. U.S. troops are the common enemy of the Sunnis, Saddamists and foreign jihadists. I believe with a U.S. troop redeployment, the Iraqi security forces will be incentivized to take control. A poll recently conducted shows that over 80% of Iraqis are strongly opposed to the presence of coalition troops, and about 45% of the Iraqi population believe attacks against American troops are justified. I believe we need to turn Iraq over to the Iraqis.
I believe before the Iraqi elections, scheduled for mid December, the Iraqi people and the emerging government must be put on notice that the United States will immediately redeploy. All of Iraq must know that Iraq is free. Free from United States occupation. I believe this will send a signal to the Sunnis to join the political process for the good of a “free” Iraq.

My plan calls:

To immediately redeploy U.S. troops consistent with the safety of U.S. forces.
To create a quick reaction force in the region.
To create an over- the- horizon presence of Marines.
To diplomatically pursue security and stability in Iraq

This war needs to be personalized. As I said before I have visited with the severely wounded of this war. They are suffering.

Because we in Congress are charged with sending our sons and daughters into battle, it is our responsibility, our OBLIGATION to speak out for them. That’s why I am speaking out.

Our military has done everything that has been asked of them, the U.S. can not accomplish anything further in Iraq militarily. IT IS TIME TO BRING THEM HOME.


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Sunday, November 13, 2005

How To Choose a Mistress

While travelling this week, I happened to browse through a copy of The Autobiography of Benjamin Franklin and found this irresistible item:

To a Young Man

On How to Choose a Mistress

By Benjamin Franklin


June 25, 1745

My dear friend,

I know of no medicine fit to diminish the violent natural inclination you mentioned; and if I did, I should not communicate it to you. Marriage is the proper remedy. It is the most natural state of man and therefore the State in which you are most likely to find solid Happiness. [He goes on for a bit about the happiness of being married and then . . ]

But if you will not take this counsel and persist in thinking a Commerce with the Sex inevitable, then I repeat my former Advice, that in all your Amours you should prefer old Women to young ones. You call this a Paradox and demand my reasons.

They are these:

(1) Because they have more knowledge of the world, and their minds are better stored with observations, their conversation is more improving and more lastingly agreeable.

(2) Because when Women cease to be handsome they study to be good. To maintain their influence over men they supply the Diminution of Beauty by an Augmentation of Utility. They learn to do a thousand services small and great, and are the most tender and useful of Friends when you are sick. Thus they continue aimiable. And hence there is hardly such a thing to be found as an Old Woman who is not a good woman.

(3) Because there is no hazard of Children, which irregularly produced may be attended with much inconvenience.

(4) Because through more Experience they are more Prudent and Discrete in conducting an Intrigue to prevent suspicion. The Commerce with them is therefore safer with regard to your Reputation. And, with regard to theirs, if the affair should happen to be known, considerable people might be rather inclined to excuse an old woman who would kindly take care of a young man, form his manners by her good counsel and prevent his ruining his health and fortune among mercenary prostitutes.

(5) Because every animal that walks upright, the Deficiency of the Fluids that fill the Muscles appears first in the highest part. The Face first grows lank and wrinkled; then the neck; then the Breast and Arms; the lower parts continuing to the last as plump as ever; so that covering all above with a Basket, and regarding only what is below the Circle, it is impossible of two Women to know an old one from a young one. And as in the Dark all Cats are grey, the pleasures of corporal enjoyment with an old woman is at least equal and frequently superior; every Knack being by Practise capable of Improvement.

(6) Because the Sin is less. The debauching of a Virgin may be her ruin, and make her for life unhappy.

(7) Because the Compunction is less. The having made a young girl miserable may give you frequent bitter reflictions; none of which can attend the making of an Old Woman happy.

(8) and lastly - they are so grateful.

Thus much of my paradox. But, still I advise you to marry directly, being sincerely

Your affectionate friend,

Benjamin Franklin

Monday, January 24, 2005

VC Survey Spam

I wonder how many other VCs out there are as tired as I am of the constant barrage of surveys from trade associations such as (in our case) EVCA and the BVK, accounting firms, consulting firms, university professors and students of all descriptions and levels. These things have become a plague on the VC landscape, much like pigeons on public buildings. In earlier days I thought I should be helpful and make a contribution to the scholarship of venture capital by taking the time to conscientiously answer each survey that came in . Now, many dozens of these irritating requests later, I have had enough. I will fill out no more tedious questionaires full of badly thought-out questions in pursuit of subject matters that are trivial, irrelevant and/or passe. In the future, I am going to have to find a good reason to depart from this position and spend further time on surveys.

This outburst was triggered by my receipt last week one more request from a student writing a thesis at a university to take "a minute" to fill out fifty question survey form, with the promise that if I do so I will receive a "free" copy of the results. No deal. Hit "delete."

If anyone out there sees it differently, or has arrived at method of sorting out the meritorious from the merely time-wasting surveys, I would welcome hearing about it.

Saturday, January 22, 2005

A VC in Germany -- Observations, Comment and Opinion

Where are we ?

a quick recap

  • Venture capital in Germany began with such a burst of energy and enthusiasm somewhere around the end of 1996 and the beginning 1997. Perhaps March, 1997, was the pivotal date -- that is when the Neuer Markt (remember that?) launched. Venture-backed German-based technology start-ups had a hot IPO exit channel right at home. The Neuer Markt gave focus and momentum to a new Silicon Valley-style of venture investing. Yes, there were VC's and VC funds prior to the Neuer Markt, but it was a different game.

  • So we had a gold rush from 1997 through, when was it?, perhaps mid-2000. People poured out of consulting firms, accounting firms, law firms and major companies such as SAP and Siemens, and poured into venture funds and start-ups. I was then a lawyer at Arthur Andersen and took on a project to form a venture fund for a group of entrepreneurs sellings goods and services to start-ups in Germany's extensive network of technology centers. Before I could complete and circulate the first of the fund documents the entire team had quit and joined an Internet start-up (indeed, one of Germany's first Internet portals -- now long since bankrupt). It was typical of the times.

  • The nuclear winter set in sometime in the course of 2000 and laid waste to the German venture scene. The story does not need to be repeated. But think a moment how the landscape has changed: the Neuer Markt is long gone, almost every major German company has pulled out, or at least back, from their venture capital programs (selling their portfolios off at fire-sale prices), the proud governmental supporters of new venture, the TBG and the KfW, are no longer important factors, the German tax scene has changed for the worse (causing Germany to earn placement at the bottom of the list of VC-friendly European jurisdictions) and countless VC funds have disappeared.

and now?

  • Somewhere out there in the German universities, the Max Planck Institutes, the Fraunhofer Institutes, in the ashes of crashed start-ups, and, indeed, in the virtual garages of ganz Deutschland the fires of innovation may still be burning, but they burn weakly and cast dim shadows.

  • In the cheerless employee offices of Siemens and SAP the faint hearts of German code writers and engineers beat quietly and loyally, and no one any longer stays up all night writing business plans. Better not even to talk about such things on the job. At McKinsey, KPMG and Haarmann, the traffic is inbound only.

  • The once-vital Venture Capital Forum NRW, which I formed with group of friends in Duesseldorf in 1997 to serve as a catalyst and networking-platform for the exploding venture capital community, has just this month changed its name to the "Private Equity Forum," whatever that may mean. What it does not mean is "excitement" or "passion." It might as well now be called the "Consultants, Lawyers and Accountants Forum." No one without a necktie admitted.

  • Wellington Partners is one of Germany's best and most respected VCs, with savvy leadership from Rolf Christof Dienst, and a team of some of the best young VCs in all of Europe in Frank Boehnke, Bart Markus and Joerg Ueberla. Wellington reached a long-awaited first closing of its third fund just prior to Christmas -- at EUR 85 million. Enough said.

  • Cipio Partner is perhaps the most vibrant and exciting new fund in the German VC scene. Based in London and Munich, it was founded by three well-qualified guys from Atlas Ventures, Broadview and b-business partners. With the help of a deep pocket investor, Cipio has rapidly acquired a portfolio of 55 companies by buying secondaries from, among others, Infineon, Daimler Chrysler and Deutsche Telekom. Now they are staffing up and hiring some of the best and the brightest from the German VC community. Congratulations to them. But what does this say about the German VC scene, when the hottest action lies in working over the desolate portfolios of terminated corporate VC arms? The investment managers in this game must acquire a new skill set: bankruptcy law, employment contract termination, and venture triage. They must become experts in closing companies rather than starting them. Instead of start-ups, this is about finish-ups. We are at the beginning of this new era, and it bears watching.

In this blog, which will continue, I want to try to make sense of what is happening today in the German VC scene, and I hope to provoke comment from others who are out there trying to survive and make good things happen.