Ownership Arrangements of Finnish Startups

PART 1 – INTRODUCTION

In the early stages of a startup, the focus is usually on product development, sales, and securing funding — not on drafting documents. However, the company's ownership arrangements define who owns what, on what terms, and what happens when things go well — or badly. These decisions are made once and follow the company throughout its entire lifecycle. When the company's value increases, when new investors come in, when someone wants to leave, or when founders drift in different directions — that's when what was actually agreed upon becomes clear.

DIY ownership arrangements are like furniture assembled without instructions — extra parts are left on the table and the end result looks functional, until moving day arrives. This article covers what goes wrong when convertible notes, sweat equity, or founder vesting are built "DIY" — Do It Yourself style.

Three Regulatory Frameworks the DIY Practitioner Overlooks

In Finland, ownership arrangements are affected by multiple regulatory frameworks, the three most central of which in the majority of cases are contract law, corporate law, and tax law.

These domains do not automatically communicate with each other. A contract can be valid but ineffective under corporate law. An arrangement can be flawless from a corporate law perspective but expensive from a tax standpoint.

The most typical problem with the DIY approach is that one or two of these layers are left unaddressed. The contract looks good, but the corporate law implementation hasn't been done — or the structure works legally, but the tax consequences come as a surprise.

When you understand how these three layers work together, you can build arrangements that function at every level.

How Freedom of Contract Misleads

Freedom of contract is broad. You can agree on almost anything, but mandatory provisions of the Companies Act or, for example, the Income Tax Act cannot be overridden.

The DIY problem arises when reliance is placed solely on freedom of contract without protective mechanisms. The contract exists, but what happens when the other party doesn't comply with it? Without a contractual penalty clause or other sanction mechanism, legal protection remains unclear.

In practice, this can manifest in startups' contract-based "YC SAFE"-inspired DIY convertible notes that lack Finnish corporate law implementation. The consequence may then be damages or a contractual penalty — or at the very least, ambiguity during the next funding round.

PART 2 – CONVERTIBLE NOTES

A convertible note is a tool through which an investor provides money now and receives shares later. A simple idea, but in DIY implementation, three things regularly go wrong.

Problem 1: Contract-Based vs. Companies Act-Based — Without Knowing Which Is Being Used

In a contract-based convertible note, it is agreed that the general meeting will decide on the share issue later. This is a promise, not a registrable special right to shares.

In a Companies Act-based convertible note, the general meeting decides on special rights, and the decision can be registered with the Trade Register. The investor then has the right to convert directly by virtue of law.

Both can work. The difference lies in the level of protection and what happens when disagreements arise. In DIY implementation, the choice is often made randomly or by copying another company's template without understanding the difference. This leaves either the investor or the company without protection.

Problem 2: Share Subscription Price Definition Is Missing

The subscription price must be defined in advance, or a clear mechanism for calculating it must be agreed upon. Without this, disagreements can arise when conversion becomes relevant. How is the discount calculated? Is interest included? What is the pre-money, what is the post-money? Rights in share issues before conversions?

In DIY documents, the subscription price calculation mechanism is typically vague or entirely absent. What remains unclear in the early stage turns into a dispute during the funding round.

US Templates Don't Work as Such

Y Combinator's SAFE and other American templates are designed for Delaware law. In Finland, the Companies Act requires a general meeting resolution and a Trade Register filing. According to the Finnish Accounting Standards Board ruling KILA 2032/2022, a standard SAFE is treated in Finland primarily as debt.

Inspiration can be drawn, but the implementation must be adapted to the Finnish system. In DIY implementation, the SAFE is copied as-is and assumed to work the same way. It doesn't.

PART 3 – SWEAT EQUITY

Sweat equity means issuing shares in exchange for work contribution. An advisor, key employee, or co-founder receives a stake in the company in return for their contribution. This is where DIY goes wrong most often.

Problem 1: Attempting to Use Work Contribution as Contribution in Kind

Under the Companies Act, issuing shares is in principle subject to payment. The subscription price is paid in cash, by offsetting a matured receivable, or through contribution in kind (apportti).

Work contribution is not contribution in kind. Contribution in kind can only be property that has economic value to the company at the time of transfer.

In DIY implementation, this detail is bypassed. Shares are "given" for work without a legal chain that would make the arrangement valid.

Sweat equity can be implemented correctly, for example, by offsetting the subscription price against a receivable. When this chain is in order, the arrangement works — and the best way to get the chain in order is to draft proper agreements.

Problem 2: Valuation Is Missing and Tax Consequences Come as a Surprise

Both the value of the work and the fair market value of the shares must be documented. If the value of work is 10 units and the fair market value of the shares is 50 units, the difference of 40 units is a tax question. In DIY implementation, values are either not documented at all or are based on gut feeling rather than calculations. The tax authority makes its own assessment, and it is rarely more favorable.

In practice, fair market value affects all incentive arrangements. If employees are given shares, the benefit constitutes earned income, and the employer incurs withholding and social contribution obligations. If, for example, an advisor receives shares, their services require either an offsettable receivable — as discussed above — or alternatively a free share issue, which in turn requires compliance with the Companies Act's strict formal requirements.

Stock Options Should Be Considered

The DIY problem: a stock option program is left undone because it seems complicated, and instead ad hoc arrangements are built that are both more complex and more expensive. For the reasons mentioned above, options are often still the most sensible way for a company to retain key personnel: they enable an incentive without the tax and corporate law problems related to the fair market value of shares materializing immediately at the start of the arrangement.

With options, taxation occurs when the option is exercised, not when it is granted or when the shares are sold. This means timing is important. If the company's value increases significantly before the option is exercised, the taxable benefit grows even though the shares may not be realizable. With the right timing, however, this is manageable.

The Co-Founder Situation

Among co-founders, the situation is different — and DIY mistakes are the most expensive.

When a company is founded, its fair market value is often nominal. A co-founder can subscribe for shares at the agreed subscription price in cash. No tax problem arises.

Retention is handled through vesting terms in the shareholders' agreement. Shares are earned over time. If a co-founder leaves before the vesting period ends, the company or other shareholders have the right to redeem the unvested portion. When the company acquires its own shares in leaver situations, a general meeting resolution and solvency are required.

In DIY implementation, three things are typically left undone or done inadequately:

Valuation is missing. How is the redemption price determined in good leaver and bad leaver situations?

The vesting schedule is vague. Cliff, total duration, special circumstances — these must be agreed upon precisely. In DIY shareholders' agreements, vesting is often mentioned but the details are missing.

Dedication terms are missing. Full-time commitment, non-compete, side activities. When these are not in the agreement, shareholders have no mechanism to address a situation where a co-founder puts their feet up on the desk.

PART 4 – How to Avoid DIY Problems

For convertible notes: choose the structure consciously. Define the subscription price and conversion mechanism in advance. Verify the protective mechanisms in the contracts. Preserve the tax advantage with the right structure.

For sweat equity: assess the recipient's position in relation to the company. Document values. Consider a stock option program and time it correctly.

For co-founder vesting: subscribe for shares at an early stage. Build vesting into the shareholders' agreement with concrete terms. Define good/bad leaver, the schedule, and dedication terms so precisely that no room for interpretation remains.

Closing Words

Contract law, corporate law, and tax law — three layers that must be considered. DIY problems arise when one or more layers are overlooked. The right structure protects all parties and saves time, money, and nerves later on. And best of all: almost all mistakes are fixable as long as they are addressed in time.