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Why invest in a Lithuanian startup?

The Lithuanian startup ecosystem is becoming world known as it shows exceptional results. The country with a population of just 2,8 million people counts about 1000 startups and 2 unicorns (Vinted and Nord Security). In December 2021 (even before the second unicorn was announced) Lithuanian startups were valued at €7.1 billion, up from 17x since 2016 – according to Lithuanian startups attract investments from world-known venture capital funds: Accel, Insight Partners, Plug & Play, Intel Capital, Inventure, etc. Last year, 14% of the venture capital funding in Lithuanian startups came from Baltic investors. 45% came from the rest of Europe and 37% from the US.

What are the legal terms for the successful startup ecosystem in Lithuania? Although the only legal term specifically dedicated to startups is the definition (a micro or small enterprise with a high and innovative business development potential that is registered for no more than 5 years), several other generally applicable legal rules make the startup’s life easier.

1. Lithuania has substantially adopted e-services, allowing one to manage a business from anywhere in the world. Provided that you obtained access to the e-means of the Governmental system of Lithuania you can register the company, file tax and other documents by e-platforms, see and check the e-documents of the company while making the due diligence, sign the documents, and perform other every day e-actions needed to run the company. Also, the latest amendment of the Company law includes e-voting in e-shareholders’ meetings of the company. In principle, any investment can be made online and no physical presence is mandatory.
It is also easy to coordinate and control the company – the investors are allowed to include special terms and conditions in the investment agreements that would preserve their rights. Upcoming amendments to the law on companies will allow different classes of shares as well as include the minor shareholders’ buy-out clauses.

2. We know that talents are the main asset of the startup and we care about how to keep them within the company. The stock option incentive was introduced in Lithuania on 1 Feb 2020 – every employee that exercises the stock option not earlier than 3 years after the agreement was signed is exempted from the social security and personal income tax. Also, the employer can implement the clauses of non-compete, and protection of confidential information, while the investment agreement can include clauses of the founders’ obligation to stay with the company for a certain period. The government offers a variety of incentives if you want to bring a person from another country.

3. The tax system provides for a profitable tax regime (0%) for the first year for the small companies that in many cases applies to the growing startup companies. Also, the stock option benefit contributes to the growth of these. Even though our employment taxes are not the most favourable in the region, the freelancers are charged only a very small percentage if they perform the work under the service contracts. The investors may benefit from the profit tax exemption applicable to funds received from their investment in small and medium-sized companies. And last, but not least, Lithuania has around 60 double taxation avoidance treaties with various countries.

4. Proper protection of intellectual property is the core of nearly every startup. Lithuania places itself as the country with the most modern system of IP protection: we have all main international and European instruments: International and European patents and upcoming Unitary patents, International and EU trademarks and design. The copyright made by the employee is protected and assigned to the employer by the law in case proper employment contracts are made while freelancers are regulated by the clauses of the service agreements. Also, the enforcement of IP rights is rather straightforward in Lithuania.

These are only the main legal conditions that are applied to the startup ecosystem. Startups form the strategic part of Lithuania’s economic situation, thus, are important for the Government and it is believed that they will allow creating even more favourable conditions in the upcoming period.