Immigration|Mergers and Acquisitions|Real Estate description Article
There are several investment options in Spain that allow for the obtaining of investor visas (Golden Visa), these are residence visas that allow unlimited travel through the Schengen area, that do not oblige having a residence in Spain, and however, if wanting to do so, this could also be possible and would even enable to work.
The best-known investment option is the real estate investment, however there are other options that can be as or more attractive, such as investing in a business project of a Spanish company that is qualified, by the Spanish Ministry of Economy, as interesting for the country. The clearest example of this would be the investment in a startup of the technology sector.
According to the latest study carried out by the Institute of Valuations, Spain is a leader of the real estate recovery for Southern Europe, such Institute has analyzed the main trends of the real estate sector in Europe, as well as its effects on the Spanish market. Spain faces a 2018 uptrend: it is expected that the real estate investment will continue to grow above a 4%. Housing trading in Spain rose over a 25% last October in relation to the previous year, according to the National Institute of Statistics. Hereafter, the Spanish real estate market has concatenated 6 consecutive months to the rise, positioned near maximum values, in metropolitan areas, after the crisis. In the analysis carried out by the Institute of Valuations, growth occurred both for new housing, where it increased to almost 30%, and for used housing, with a 25% rise. As a result, the pressure for buying is already beginning to translate into a scarcity of available land in consolidated areas. Looking to 2018, the Institute of Economic Studies (IEE) foresees that real estate investment in Spain will continue to grow above a 4% thanks, mainly, to housing investment.
According to these estimates, it is clear that real estate investment in Spain is still a safe option, however, for the potential Chinese investor, it implies certain problems. To apply for the visa the purchase must be materialized and registered, therefore the money must have arrived in Spain, which is not always easy nor fast, partly due to the restrictions established by the Chinese Government to prevent capital outflowing the country and the obstacles linked to it, and partly due to the controls on money laundering to which both banks and real estate companies and Spanish legal advisors are obliged to comply with. It is not enough to manage the Chinese control, but it is unavoidable respecting the thread that allows adequate monitoring of capital to prove the origin of the money and complying with the European regulations for the prevention of money laundering.
There are, as we say, other investment options that would avoid these delays and obstacles, such as investing in projects that interest Spain, or investments in Venture Capital. The first benefit is that in these cases the visa is obtained with the approval of the project and the accreditation of the capital (without it being necessary to have this capital already in Spain). On the other hand, the amount can be significantly less than the half a million euros needed for real estate investment, for example in the case where a project would need an investment of € 250,000 for capital injection to enhance it and to give the startup the final accolade, such amount will be enough.
It should be taken also into consideration that in the case of an investment in a company in the technology sector, the Chinese government would more easily authorize the investment and therefore eliminate restrictions in regards to the transfer of capital abroad, since it can be considered that such investment will revert to a future benefit for the Chinese economy, something that is not considered at all in the case of real estate investments. All this will allow obtaining the investor visa in a shorter period, along with a 1-year margin to be able to materialize the investment and apply for a permanent residence.
Of course the Venture Capital investor assumes risks, that’s why it is important to protect such Venture Capital.
We understand by Venture Capital basically the name given to risk capital geared to the early stages of a company’s life, such as the seed phase, startup phase and until approximately the first 3 to 5 years of company life. Its growth is due to several factors, both relative to the company and the investor:
- It is an excellent form of alternative financing to bank loans.
- In addition to the capital injection, there are other benefits for entrepreneurs, such as the signal sent to the market showing that a third party found sufficient potential to invest, a network of contacts and the transfer of knowledge to the company, about the sector or about the management of the company.
- The valuation of the company starts from a business plan and not from a current state. So if the business plan is really good, you can get a bigger investment.
- The rate of return for the investor can be very high and in the short term.
From the previous points, the first 3 address a series of advantages for the entrepreneur and the last for the investor. However, to achieve such profitability, risks must be assumed.
The risks that are usually observed in projects are: that the equipment is not adequate, that the idea can not materialize, that even if it materializes, there is no market for it, etc., and its result may be the total or partial loss of the investment.
To protect venture capital, as far as possible, from the loss of your investment there are various legal and management formulas you can follow. Of course, the first step will be to choose a referenced project and that is already in a midway phase of development, getting good and correct advice when choosing the investment project is essential, but there are other recommended legal and management measures, here are some of them:
- Create transparency and accountability policies that allow a flow of economic information and periodic management, which should be included in the partners’ agreement.
- Incorporate permanence and exclusivity agreements with the entrepreneurial team.
- Even if there are permanence agreements, it can always be the case that one of the founders withdraws from the project; therefore, it is necessary to establish detailed assumptions about good and bad leavers that provide for the valuation for the purchase of their participation in each case.
- In the same case of the previous point, before the departure of any member of the entrepreneurial team, it becomes essential creating confidentiality, non-competition and non-capturing clauses.
- Establishing the business plan as a roadmap and establishing measurable milestones on certain dates. This way you can see if there were deviations to it, which if negative, can allow the venture capital to leave the company. To materialize this point you will need to establish at least 2 things:
- Put option (put option): allowing the venture capital to sell their share to the founders for the same price as their acquisition price.
- As there is a possibility that the entrepreneurial team does not have sufficient liquidity to pay the put option, it should be reinforced with guarantees on the assets of the company.On the other hand, if there are positive deviations, stock options can be established in favour of the entrepreneurs as a way of rewarding and encouraging milestones compliance.
Some of the above formulas can be quite aggressive and it will not always be possible to include them, since it will depend on the negotiating position of each party, but in any case it is advisable to be prudent when proceeding with their inclusion, since the relationship with the entrepreneurial team is essential for the business fruitfulness for both parties.