Business valuation german startup
Discounted cash flow, multiplier method, IDW S1, benchmarking for founders and investors in Germany
By their very nature, startups have no company history, which makes the valuation of startups immensely difficult in german practice. Thus, founders in Germany often look into smiling or stunned faces when they try to explain to investors how many shares they would give away for how many euros.
However, the valuation of start-ups in Germany does not only play an important role in financing / financing rounds of the start-up. Company valuations are also of particular relevance in completely different contexts in german practice, e.g. in the event of the premature departure of shareholders, shareholder disputes or exits.
Our know-how on company valuation for german startups & growth companies
Our team of lawyers, certified specialists for german commercial and corporate law and tax advisors, in cooperation with auditors, continuously advises investors and founders on the financing of startups as well as in connection with the exit of shareholders from startups, often in the context of shareholder disputes in german practice.
Therefore, our experts are familiar with the crucial aspects related to the valuation of german startups. In particular, our advice covers the following topics:
- Advising founders and investors in connection with financing rounds
- Advising founders and investors on participation / investment agreement issues
- Advice to founders and investors on the negotiation and drafting of convertible loan agreements
- Valuation of companies, expert opinion on the valuation
- Advice to founders and company on the (non) contentious withdrawal of a shareholder
- Advice as well as representation in and out of court in bad-leaver cases
For a non-binding inquiry, please contact one of our contact persons directly by phone or e-mail or use the contact form at the bottom of this page.
Company valuation in the context of financing under german law
In a financing round, an investor provides equity capital to a company, in german practice usually a limited liability company, and in return receives shares in this company. The shares are usually issued as part of a capital increase (increase in share capital, amendment of the articles of association).
The amount of the company participation sought by the investor depends decisively on the valuation of the company in addition to the amount of his investment. In essence, this is an economic indicator that investors and (existing) shareholders must agree on as part of the negotiations on the financing, regardless of whether it is seed, Series A, B, C or D. The valuation of the company is based on the value of the investment.
Evaluation from our expert!
In our team, tax advisor Martin Stürmer takes care of the company valuation for the determination of the purchase price. As a specialized expert, he works together with our lawyers in german corporate law. You can also engage him independently of a legal mandate.
Ask for a quote for a business valuation or a cost-effective indicative business valuation:
Meaning of Pre-Money, Post-Money in Germany
When specifying the amount of the company valuation, a distinction is made in detail between the pre-money and post-money valuation of a german company. The pre-money valuation of a company refers to the company value before additional capital has flowed into the company due to financing.
In contrast, the post-money valuation of a company takes into account the capital that has been contributed to the company as part of the financing. From the point of view of an investor, the specification of a company valuation as a pre-money valuation is therefore more advantageous, as he then receives a larger share in the company for his investment.
Valuation approach & valuation method in german practice
To determine the amount of the company valuation of a startup, different valuation approaches and methods are used in german practice.
One approach is to perform a valuation based on the current economic key figures of the company, such as its sales in particular (discounted cash flow valuation). So-called multiples (multiples valuation) are also frequently used for valuation in Germany. These are based on the respective industry and size of a company and are based on the economic data of comparable companies.
A classic valuation method in german practice is also the IDW S1 standard, which is also used for start-ups and growth companies in individual cases, despite its earnings-based approach (capitalized earnings value method). It goes without saying that special requirements must be met here in terms of valuation assumptions, in particular planning calculations, market forecasts and risk assessments.
Investors in particular often base a company valuation on the expected return at the time of exit (so-called venture capital valuation). In this case, the thinking is "from the end". German practice shows that the firmly defined return expectations of financial investors often stand in the way of a quick exit by the founders and early-stage investors and thus pre-program disputes.
Pre-seed, seed and early-stage phases in german practice
Regardless of the choice of the specific valuation method, the determination of a company valuation of startups in Germany is often associated with a high degree of uncertainty, since either there are no comparable companies due to the uniqueness of a startup's product, or the startups can only present a prototype at the time of financing and a market entry has not yet taken place.
Special rights to compensate for uncertainties under german law?
In addition, the company valuation on which a financing is based must always be seen against the background of the other conditions of the respective financing round, in particular with regard to agreed special rights of the investors in Germany.
If, for example, liquidation preferences are granted in favor of an investor, the latter will, in case of doubt, be more willing to agree to a higher company valuation as the basis for the financing round. This also applies to the granting of other special rights in favor of an investor, such as the right to appoint members of the management or a supervisory body (supervisory board, advisory board).
Convertible loan agreements in Germany as a solution to the Gordian knot?
In order to circumvent the difficulties of a company valuation outlined above, at least in the short term, convertible loan agreements are particularly popular in german practice.
They allow the short-term bridging of capital bottlenecks of a german company and have the great advantage that the question of an exact company valuation can be postponed to the time of the conversion, i.e. to the time of the next financing round. At the time of the conclusion of the convertible loan agreement, an often time-consuming and cost-intensive company valuation can thus be avoided.
In order to adequately reflect the economic risk assumed by the convertible lenders, a percentage discount is regularly granted in their favor on the company valuation in the context of the next financing round. Frequently in german practice, the company valuation is also capped in favor of the lenders.
Fundamentals of valuation, "self-assessment" in Germany
The valuation of a company in Germany should be left to professionals. However, the following aspects play a role in any case, regardless of the method used for the valuation. They should be researched or prepared in advance.
- Financial planning with at least three years of planning time
- Product development planning with a planning period of at least three years
- increasingly important also personnel development plan
- Market definition, market delimitation taking into account product, customers and, if applicable, suppliers
Company valuation in the event of the departure of a shareholder under german law
Outside the area of corporate financing, the company valuation of a german startup can be of particular importance in connection with the withdrawal of a shareholder, e.g. in the context of a shareholder dispute.
If a shareholder leaves the german company by selling his shares to another shareholder or a third party, an appropriate price for the shares of the departing shareholder is determined during the purchase price negotiations between the buyer and the seller. Such a path is often chosen in german practice as a way out of a shareholder dispute between the founders of a startup.
If the buyer and the seller cannot agree on a concurrent company valuation during the purchase price negotiations, it may be advisable to make the amount of the purchase price dependent, at least in part, on the future performance of the german company.
In addition to an immediate payment, the remaining shareholders then undertake vis-à-vis the departing shareholder to allow the latter to participate in part in their increased sales proceeds in the event of an exit. From the point of view of the exiting shareholder, this can prevent him from selling at a price that is too low, as the question of share valuation is at least partially shifted to the time of the exit. From the point of view of the shareholders remaining in the german company, it is ensured that a higher payment is only due after an exit has taken place and they therefore have sufficient cash anyway. It is essential that such agreements are accompanied by tax advice in german practice.
If a shareholder leaves the german company by withdrawing his shares, the amount of his compensation must be determined purely objectively on the basis of a company valuation. Ultimately, this also applies in cases where an employee leaves an employee participation program due to the termination of his or her employment.
Bad Leaver, Good Leaver under german law
According to the established case law of the German Federal Court of Justice, the compensation of a departing shareholder must generally be based on the true value of his shareholding. However, it is also recognized that the amount of the compensation can be partially limited in the articles of association, particularly in bad leaver cases, in order to sanction the misconduct of a shareholder and to preserve the liquidity of the company.
However, a complete exclusion or a disproportionate limitation of the severance payment is also inadmissible in bad leaver cases and may lead to the invalidity of the severance payment clause. A detailed examination must be carried out here, taking into account all aspects of the individual case in german practice.