Selling a startup: share deal or asset deal?

Share deal: what does the buyer actually acquire?

In a share deal, the buyer acquires shares in the target company. The company remains the same legal entity and, as a rule, retains its contracts, business relationships, authorisations, licences, employees, accounting records and internal organisation.

This continuity can simplify relationships with customers, suppliers and employees. But the buyer takes control of a company together with its entire history: potential liabilities, disputes, debts, tax issues or intellectual property problems remain with the target. From the perspective of third parties, the legal entity does not change.

A share deal therefore tends to be more appropriate where value depends on the continuity of the company as a whole.

In practice, this structure should be considered where:

• the main contracts are entered into by the target company;
• customers, suppliers and licences need to remain uninterrupted;
• value depends on the company’s commercial reputation;
• authorisations, accreditations or regulated relationships are difficult to transfer;
• the business operates as an integrated organisation;
• the buyer wants to preserve relationships, teams, systems and operations without fragmenting the business scope.

As a rule, the transaction may be subject to restrictions arising from the articles of association or shareholders’ agreements, pre-emption rights, change-of-control provisions, consents, authorisations and antitrust or sector-specific rules. However, the advantage of continuity in receivables, contracts and other relationships belonging to the target also carries a potential downside, because debts, potential liabilities and disputes remain within the company. Due diligence must therefore assess the target’s historical risks and, where appropriate, translate them into price adjustments, conditions, warranties or indemnities.

For the seller, it may be useful to anticipate this step through vendor due diligence commissioned by the target or the selling shareholders. Its purpose is to identify documentary issues before negotiations, remedy what can be corrected and present the buyer with a more orderly picture of the business.

Asset deal: what is acquired and which risks can be left behind?

In an asset deal, the buyer acquires the assets and relationships identified in the agreement. The scope may include individual assets or, where the relevant requirements are met, a business or a business unit within the meaning of Article 2555 of the Italian Civil Code. This may include tangible assets, software, trademarks, databases, know-how, contracts, licences or the customer portfolio.

This structure may be preferable where:

• the buyer wants to limit exposure to the seller company’s historical risks;
• the acquisition concerns a specific business unit;
• some assets are strategic and others are to be excluded;
• the business can be separated from the rest of the company;
• the transaction requires a carve-out;
• the startup owns technology, data, software or contracts that can be transferred independently.

The asset deal makes it possible to select what is to be acquired, but the label given to the agreement is not enough to exclude the rules governing a transfer of business. If the transferred set of assets is organised and functionally capable of carrying on the business, the rules on non-compete obligations (Article 2557 of the Italian Civil Code), contracts (Article 2558 of the Italian Civil Code), debts (Article 2560 of the Italian Civil Code) and employment relationships (Article 2112 of the Italian Civil Code) may apply. In carve-outs, therefore, correctly drawing the line between individual assets and a business or business unit changes the parties’ obligations and risks.

Innovative startups: why does asset ownership affect the choice?

In innovative startups and SMEs, business value is increasingly concentrated in intangible assets: software, trademarks, databases, designs, content, algorithms, repositories, procedures, commercial methods, licences and operational expertise.

Before choosing between a share deal and an asset deal, it is necessary to understand where the value lies, who owns it and subject to what limitations it may be used or transferred. The company’s daily or long-term use of an asset does not, by itself, prove legal ownership or full transferability.

This is particularly relevant for innovative startups, where an acquisition often focuses more on the asset’s potential value than on the company’s current market position and existing customer base. A problem concerning ownership or the ability to exploit an intangible asset can reduce its value and, in more serious cases, call the scope of the transaction into question.

Software may be essential to the business but may have been developed by external contractors without a clear assignment of rights. A trademark may be used by the company but registered in a founder’s name. A database may have commercial value but raise privacy issues or be subject to usage restrictions. A SaaS or technology licence may support operations but may not be assignable or transferable upon a change of control.

A share deal may be more appropriate where contracts, licences, teams, repositories, know-how and intellectual property are effectively held within the target company and continuity forms part of the value. The company’s historical risk remains, however, and should be identified through due diligence and managed in the agreement.

An asset deal can instead define the scope of what is acquired or leave out unwanted activities. Contractual selection alone, however, is not enough: the chain of rights, i.e. the legal titles that allow the company to lawfully use and transfer software, trademarks, content and know-how, must be reconstructed.

An asset deal does not neutralise intellectual property risks. Under intellectual property law, infringement tends to follow the asset along the chain. If the asset uses third-party rights without an adequate legal basis, the buyer may find itself with an asset that cannot be exploited as intended. It is therefore necessary to verify whether the seller can transfer it and whether the buyer can use it for its intended purpose.

The absence of intent, the buyer’s good faith or lack of knowledge of the infringement may affect certain aspects of damages or their quantification, but do not necessarily preclude a finding of infringement or prevent remedies such as injunctions, withdrawal from the market, removal, destruction, publication of the decision or other remedies available under the applicable law.

This assessment, including in cases involving the ‘mere’ transfer of an asset, therefore becomes an economic condition of the transaction. It serves to determine whether the transferred assets can actually be used by the buyer after closing, whether they can be integrated into its products or services, licensed, enforced against third parties, and whether they expose the buyer to subsequent claims.