Innovative startup: definition, requirements, advantages and examples
As you know, when we talk about an innovative startup we need to think of a high-value technology company with a business model that can grow rapidly and generate value and progress for the entire ecosystem.
On Oct. 18, 2012, the Italian government introduced through Decree Law 179/2012 the “Italian Startup Act“, a comprehensive framework aimed at fostering the birth and growth in size of new innovative high-tech companies.
Article 25 of that decree defined innovative start-ups as corporations, which may also be formed as cooperatives, that have as their exclusive or predominant corporate purpose the development, production and commercialization of innovative products or services with high technological value.
Thus, when we talk about “startup meaning” we must immediately think of the three characteristics that distinguish them from any traditional company:
- innovation: the startup brings a new, or significantly improved, product/service into the market that is capable of meeting a need or having a positive impact and being recognized as an advancement. Innovation may also involve the introduction of new processes, techniques, work organization, which lower production costs or open new markets;
- high technological value: the startup proposes a product/service with a strong technological matrix and capable of having a positive change impact in the sector in which it operates or intends to operate;
- scalability: the startup grows at exponential rates compared to traditional companies without having to disrupt its cost structure.
But being an innovative startup is not just that; in fact, it becomes a real status, granted to those companies that meet certain objective and subjective requirements, to benefit from advantages and facilities that help their birth, growth and, above all, access to capital.
Let us now look at the requirements.
Innovative startup: requirements
As we will analyze below, in order for an innovative startup to be recognized as such and to be registered in the appropriate section of the Business Registry, it must meet two classes of requirements, objective requirements (mandatory and necessary) and subjective requirements (one out of three will suffice).
Innovative start-ups objective requirements
According to the normative dictate, the facilitation measures can be accessed by corporations that meet 8 objective requirements.
Let’s look at the start-up requirements together:
- are newly established or otherwise have been established for less than 5 years (subsection 2(b));
- have their head office in Italy, or in another member country of the European Union, or in states party to the Agreement on the European Economic Area, provided that they have a production site or branch in Italy (lett. c);
- have an annual production value of less than 5 million euros (sub-paragraph d);
- do not distribute and have not distributed profits (lett. e);
- have as their exclusive or predominant corporate purpose the development, production and commercialization of innovative products or services with high technological value (subsection f);
- are not formed by merger, corporate demerger, or as a result of the sale of a business or business unit (subsection (g));
- are not listed on a regulated market or multilateral trading platform;
- are established in the legal form of joint stock companies (including in the form of cooperatives).
Innovative start up subjective requirements
The innovative content of the enterprise is identified with the possession of at least one of three subjective requirements (letter h).
Let’s look at the innovative start-up requirements together:
- R&D: a share of 15% of the greater of annual sales and costs is attributable to research and development activities;
- Highly qualified personnel: at least 1/3 of the total workforce is made up of doctoral students, PhDs or researchers, or at least 2/3 of associates or collaborators in any capacity with a master’s degree;
- Patents: the enterprise is the owner, custodian or licensee of a registered patent (industrial patent) or the owner of an original registered computer program.
Now that you know the requirements, let’s move on to analyze the benefits and facilities dedicated to innovative startups.
Innovative startup: advantages and benefits
The time has come to analyze the facilitation measures specifically dedicated to innovative startups, of which Decree Law 179/2012, Articles 26-31, and, to a lesser extent, Decree Law 3/2015 , Article 4, are the legal basis.
The measures, updated to June 2022, apply to innovative startups from the date of their registration in the special section and for a maximum of five years from their date of incorporation, a duration that corresponds exactly to the startup’s stay in the special section of the Companies Register.
The benefits are many, but 21 “innovative startup advantages” are really important; let’s look at them one by one.
Incentives for investment in the capital of innovative startups
As of January 1, 2017, an important tax relief is available for investors who make investments in venture capital of innovative start-ups (Budget Law 2017). The investment incentive is configured as follows:
- for individuals, a deduction from gross Ires tax liability equal to 30 percent of the amount invested, up to a maximum of 1 million euros;
- for legal persons, deduction from Ires taxable income equal to 30 percent of the amount invested, up to a maximum of 1.8 million euros.
Beginning in 2017, the use of the incentive is conditional on maintaining a stake in the innovative startup (holding period) for a minimum of three years.
De minimis tax incentives for innovative startups
The incentive provides a 50 percent IRPEF deduction intended for individuals who invest in the venture capital of innovative startups. The benefits are granted under the “de minimis” Regulation (Commission Regulation EU No. 1407/2013 of December 18, 2013).
In order to take advantage of the incentive and prior to making the investment, the legal representative of the innovative startup is required to submit an application on the IT platform “Tax incentives under the “de minimis” regime for startup investments.”
Free and simplified access to the SME guarantee fund
Innovative start-ups benefit from a simplified, free and direct intervention of the Guarantee Fund for Small and Medium Enterprises, a publicly funded fund that facilitates access to credit by providing guarantees on bank loans. The guarantee, applicable both directly and on operations carried out through confidiums, covers up to 80 percent of the credit disbursed by the bank, up to a maximum of 5 million euros.
The guarantee is granted in the form:
- automatic: the Fund does not perform any merit assessment of the startup’s balance sheet data, relying on the due diligence performed by the lending institution in charge of the transaction;
- prioritized: applications from an innovative startup are evaluated more quickly than ordinary ones;
- free of charge: there are no fees for accessing the Fund.
In addition, the lending institution involved cannot require collateral, insurance or bank guarantees on the part of the loan covered by the public guarantee.
Smart & Start Italia
Smart&Start Italia is the incentive created and managed by Invitalia, in collaboration with the Ministry of Economic Development, with the aim of supporting the birth and development of innovative startups through the provision of zero-interest financing for business development projects with an expenditure program of between 100,000 and 1.5 million euros. The financing covers, without any guarantee, up to 80 percent of eligible expenses; this percentage can rise to 90 percent if the startup is made up entirely of women and/or young people under 35, or if the partners include an expert with the title of Italian PhD (or equivalent) who works abroad and wants to return to Italy.
Startups based in Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily can enjoy a non-repayable grant equal to 30 percent of the loan and thus repay only 70 percent of the financing received.
The financing is to be repaid in 10 years starting from the 12th month following the last tranche of financing received and is approved after a medium/long process that includes evaluation of the business plan.
ICE agency services
The ICE Agency provides assistance in regulatory, corporate, tax, real estate, contractual and credit matters: innovative startups are entitled to a 30% discount on the purchase of catalog goods and services (excluding external costs).
In addition, if the company reaches the threshold of €1,000.00 of expenditure (excluding external costs and VAT) on catalog services purchased during the calendar year, it accrues the right to a 10% discount on the cost of catalog services to be provided in the following year.
Seamless transformation into an innovative SME
If successful, innovative startups that have become mature and continue to be characterized by a significant innovation component can transform themselves into innovative SMEs, moving directly from the special section of the Register of Companies dedicated to innovative startups to that of innovative SMEs, while continuing to maintain registration in the special section and thus without losing the right to the available benefits.
Waiver of chamber fees and stamp duties
Innovative startups from the moment of their registration in the special section of the Register of Companies are exempt from paying stamp duty and secretarial fees due for fulfillments related to registrations in the Register of Companies, as well as from paying the annual fee due in favor of chambers of commerce.
Capital raising through equity crowdfunding campaigns
In 2013, Italy regulated the equity crowdfunding market, including through the creation of a special register of authorized online portals. Initially intended for innovative startups only, equity crowdfunding was gradually extended first to innovative SMEs, UCIs and corporations that invest primarily in startups and innovative SMEs (2015) and then, with the 2017 Budget Law, to all Italian small and medium-sized enterprises.
Exceptions to ordinary corporate discipline
The innovative startup incorporated as an LLC is allowed to:
- create categories of shares with special rights (e.g., categories of shares that do not grant voting rights or that grant rights that are not proportional to the shareholding);
- carry out transactions on its shares;
- issue participatory financial instruments;
- offer equity shares to the public.
Provisions on employment
The remuneration of workers hired by an innovative startup consists of a part that is not less than the minimum table provided by the applicable collective agreement, and a variable part consisting of treatments related to the efficiency or profitability of the enterprise or other indicators agreed upon by the parties.
Remuneration through equity instruments
Innovative startups can remunerate their employees with equity instruments (such as stock options), and external service providers through work-for-equity schemes. Income from the allocation of such instruments does not contribute to taxable income, either for tax or contribution purposes. In addition, subject to a minimum stipulated in collective bargaining agreements, the parties may determine fixed and variable components of remuneration in complete autonomy, agreed upon, for example, on the basis of the efficiency or profitability of the enterprise, the productivity of the worker or work group, or other performance objectives or parameters, including through corporate equity instruments.
Exemption from compliance visa requirement for vat credit offsetting
Ordinary regulations, which require the affixing of a compliance visa for the offsetting of VAT credits exceeding 5,000 euros via the F24 form, can be a disincentive to the use of so-called horizontal offsetting (i.e., to offset types of tax other than VAT). The exemption from the requirement to obtain an endorsement for the offsetting of VAT credits up to 50,000 euros may result in significant liquidity benefits for startups.
Extension of the deadline for loss coverage
In the event that operating losses result in a reduction of the company’s capital by more than one-third, by way of exception to the Civil Code, the deadline by which the loss must be reduced to less than one-third is postponed to the second subsequent fiscal year (instead of the first subsequent fiscal year).
Exemption from the rules on shell companies and companies with systematic losses
Innovative start-ups are not subject to the discipline of shell companies and companies with systematic tax losses. Therefore, in case they earn “non congruous” revenues or have systematic tax losses, the tax penalties provided for so-called shell companies are not triggered against them.
In case of failure, innovative startups can rely on faster and less burdensome procedures than ordinary ones to conclude their activities. Specifically, they are subject exclusively to the procedure of over-indebtedness crisis settlement and liquidation of assets, with exemption, in particular, from bankruptcy, composition with creditors and administrative compulsory liquidation procedures.
The measure “Voucher 3i – Investing in Innovation” aims to support the enhancement of the innovation process of innovative startups by providing facilities for the acquisition of patent consulting services.
National Innovation Fund
The National Innovation Fund aims to bring together and multiply public and private resources dedicated to the strategic theme of innovation. The operational tool of intervention of the National Fund is Venture Capital, or direct and indirect investments in qualified minorities in the capital of innovative companies with generalist, vertical or Funds of Funds, supporting startups, scaleups and innovative SMEs.
Creative enterprise fund
The Fund for Small and Medium-sized Creative Enterprises was established to promote the establishment, development and consolidation of enterprises operating in the creative sector through the provision of grants, facilitating access to credit and promoting innovative financing instruments, as well as other initiatives for the development of the sector.
Experimentation Italy allows startups, companies, universities and research centers to be able to experiment with their own innovative project for a limited period of time through a temporary exemption from current regulations. If the outcome of the experimentation is positive, a regulatory amendment will be requested to remove the impediment.
The Transition 4.0 Plan includes a focus on innovation, green investments, and for design and aesthetic ideation activities. The main actions of the Transition 4.0 Plan:
- tax credit for investments in capital goods: serves to support and incentivize companies that invest in new tangible and intangible capital goods functional to the technological and digital transformation of production processes intended for production facilities located in the territory of the State
- research, development, innovation and design tax credit: serves to stimulate private spending on Research, Development and Technological Innovation to support the competitiveness of companies and encourage processes of digital transition and in the circular economy and environmental sustainability
- training 4.0 tax credit: serves to stimulate business investment in staff training on subjects related to technologies relevant to the technological and digital transformation of businesses.
Call for digital transformation
The call is aimed at supporting the technological and digital transformation of the production processes of micro, small and medium-sized enterprises through the implementation of projects aimed at the implementation of enabling technologies identified in the Impresa 4.0 National Plan, as well as other technologies related to digital supply chain technology solutions.
Now that you know what the requirements and facilities are, one final question remains: how does the formation of an innovative start-up take place?
Establishing an Innovative Start Up
The incorporation of a startup is done through the drafting of the articles of incorporation, with the involvement of the notary and advisor, indicating the requirements, seen earlier, to qualify the company as innovative.
You should know that from February 2016 to March 29, 2021, those who wanted to establish an innovative startup in the legal form of an LLC could also do so online and without the mandatory involvement of a notary. But, just since last March, the Council of State in its ruling No. 2643 rejected online and free innovative startup incorporation, declaring the rule approved in 2016 null and void.
Therefore, it remains confirmed and certain that only the method of drafting the articles of incorporation in the form of a public deed thus making use of the notary public, who must also carry out the appropriate checks required by law before proceeding with the registration of the start-up in the appropriate section, the special one, of the Register of Companies.
Once the start-up is established, the legal representative must:
- complete its personalized profile on the startup.registroimprese.it portal, within 30 days of registration in the special section of innovative start-ups;
- confirm or update its personalized profile on the startup.registroimprese.it portal and file the statement of maintenance of the requirements of innovative start-ups at least once a year, within 30 days of the approval of the financial statements and in any case within six months of the end of each fiscal year, or by June 30. In the case of companies with a deadline of 180 days from the end of the fiscal year for calling a meeting to approve the financial statements, the deadline is seven months, subject to compliance with the 30 days from the approval of the financial statements. It is not allowed to attach the declaration to the application for the filing of the annual financial statements, as it must be submitted through a special and separate application with ComUnica. Please note that failure to update/confirm the profile on startup.registroimprese.it will result in the blocking of the transmission of the application containing the filing of the declaration to the Companies Register.
Late notification of maintenance of the requirements is subject to the fine provided by law that will be assessed against each legal representative in office (Article 2630 Civil Code and Article 25 Decree-Law No. 179/2012), while failure to provide annual notification of maintenance results in the company’s ex officio cancellation from the special section with consequent loss of the benefits provided for innovative startups.
Innovative startups that make use of the requirement for research and development expenses are required to quantify and describe these expenses in the notes to the financial statements (Art. 25 paragraph 2 letter h no. 1 Decree Law 179/2012, Art. 4 paragraph 1 letter e no. 1 Decree Law 3/2015); startups that submit financial statements in the simplified manner provided for micro enterprises report the information required by the regulations at the bottom of the balance sheet (Mise Opinion No. 50195/2017).
Innovative start-ups: examples
According to the latest report prepared by MISE, at the end of the 1st quarter of 2023, the number of innovative startups registered in the special section of the Business Register was 14,029, down 233 (-3%) from the previous quarter.
On the other hand, the total share capital declared overall by startups is on the rise compared to the last quarter (up about €20 million, +1.9 in percentage terms), now standing at €1,071,813,683 for an average capital of €76,399 per innovative startup (almost €3,000 more than the last survey).
As for the distribution by business sector, 76.7 percent of innovative startups provide business services, 15.1 percent operate in manufacturing, and 3.1 percent operate in trade.
Looking at the composition of the corporate structure, innovative startups with a predominance of women, i.e., in which the ownership shares and administrative positions are held by a majority of women, number 1,924, 13.7 percent of the total: a significantly lower incidence than the 20.4 percent observed when taking into consideration the universe of female-dominated startups. It is also added that although the percentage value of female-dominated innovative startups remained constant compared to the previous quarter, their absolute value decreased slightly (-34 units, or -1.7 percent, in line with the general decrease in the number of innovative startups). There are 6,228 innovative startups in which at least one woman is on the board (female-dominated innovative startups), 44.4 percent of the total, a share similar to that recorded by other new corporations (43.8 percent), but with the same decreasing dynamics highlighted for female-dominated innovative startups.
There are 2,281 youth-dominated (under 35) innovative startups, 16.3 percent of the total. This figure is significantly down from the previous quarter: -318 in absolute value and -12.2 percent in percentage terms. In any case, this is more than three percentage points higher than the figure found among new non-innovative firms (13.2 percent). The difference is even greater when considering companies in which at least one young person is on the board: these account for 39.1 percent of startups (5,492 in all), compared with 29.5 percent of other companies.
Analyzing the geographical distribution of the phenomenon, Lombardy, as always, is the region where the largest number of innovative startups is located: 3,750, or 26.7 percent of the national total. It is followed by Lazio (1,832, 13.1 percent of the total), Campania with 1,398 startups (10 percent), and Emilia-Romagna with 1,041 startups (7.4 percent). Close behind appears Veneto (928, 6.6 percent of the national total) in fifth place. Piedmont follows, with 779 (5.6 percent). At the back are Basilicata with 141 (1 percent), Molise with 80 (0.6 percent) and Valle d’Aosta with 16 (0.1 percent) innovative startups.
Friuli-Venezia Giulia is the region with the highest incidence of innovative startups in relation to the total number of new corporations less than five years old and less than five million in annual turnover: 5.1 percent are innovative startups. This figure places Friuli-Venezia Giulia in the ranking above Trentino-Alto Adige (4.8 percent) and Lombardy (4.8 percent), which had also often led this ranking. Puglia, Tuscany and Sardinia (all between 2.4 and 2.7 percent) close the ranking.
It will be clear to you from this data that the ecosystem of innovative start-ups in Italy is always in turmoil: an exciting and evolving environment from which to draw data, comparisons, experiences, failures and successes. But, at the same time, as you may have realized, it is not enough to be an innovative startup registered in the special register to be able to secure your future, although certainly being part of this status will allow you to leave with a leg up.
Remember however and always the words of Paul Graham, investor and co-founder of Y Combinator:
“Creating a successful startup requires three things: starting with talented people, doing something people want and spending as little money as you can”.