Financing of Startups
Business angel, venture capital, financing rounds, bank loans and support programs
The financing of the company is one of the decisive steps on the way from the business idea to the first financing rounds and the successful exit or stay-in of the founders. In each phase, founders must identify the appropriate form of financing for themselves and have access to it. The focus is on economic as well as legal and tax issues.
Our lawyers, corporate lawyers and tax consultants accompany founders, start-ups and investors in all stages of financing and help to ensure that the realization of promising business models does not fail because of money.
For a non-binding inquiry, please contact one of our contacts directly by phone or e-mail or use the contact form at the bottom of this page.
Important principles for financing start-ups
The many years of experience of our consultants in supporting start-ups allow us to formulate three central recommendations for the financing of start-ups:
- Take care in time: Founders must take care of the financing of their project as soon as possible. For example, certain subsidies are often only available before the start of business activities.
- Multi-track planning: Start-ups should always look for different financing options and not shy away from the associated expense. Only those who have the (choice) can decide on the right financing and get the right conditions.
- Long-term thinking: The design of the financing has far-reaching consequences for the company's perspective. Whoever involves investors in the company will not get rid of "the spirits he called" so easily in case of doubt.
Outside capital through bank credit
Even though many start-ups shy away from financing through bank loans and access to them is often difficult, classic financing through borrowed capital from credit institutions should always be considered as an option. At least at first glance, many offers for debt financing may seem more expensive than alternative forms of financing, but debt financing prevents the financier from having a far-reaching say in the decision making process.
The commitment of a bank (private bank, savings bank or investment bank) is always limited in time and the amount of the financing costs is usually fixed from the beginning. The company value created by the further development of the business idea remains with the founders. On the other hand, many start-ups do not have access to a bank loan because the credit institution does not understand or cannot assess the business model or because a loan is out of the question for regulatory reasons.
Unless it is a state investment bank, the bank will demand extensive securities for the granting of the loan, for which the founders must be personally liable with their assets. The agreements on these securities (e.g. guarantees, land charges, pledges, etc.) are a focus of the legal examination of a bank loan by our lawyers.
Support programs, promotional loans
The state knows the importance of entrepreneurship for the national economy and supports start-ups with attractive programs. In addition to the promotion of start-ups from unemployment and consulting services (e.g. by lawyers or tax advisors), the state also supports the financing of start-ups in particular. Low-interest public promotional loans are available from various sources. Of great importance are the so-called KfW loans, in which the KfW assumes part of the default risk from the financing bank.
The federal states also have investment banks that maintain promotional programs to strengthen the regional economy. Publicly subsidized loans generally have a long term and are redemption-free in the initial phase. The interest rates are significantly lower than those of the regular capital market. In addition to subsidized loans, there is also subsidized equity, for example ERP capital for start-ups (loan with equity character) or the ERP start-up fund (equity capital for technology start-ups). Under certain conditions, non-repayable subsidies are also granted.
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Seed Capital, Venture Capital
Venture capital or risk capital is a form of financing in which an investor provides the start-up with equity capital or mezzanine forms of financing, such as silent partnerships or profit participation capital. In the early phase of a start-up, the investor's capital for the further development of the business idea is also called seed capital. Since the investor can only realize a profit if the start-up is successful, he often supports the start-up not only with financial participation but also on the business level (strategic orientation, marketing, personnel, etc. - so-called business angels, who see themselves as midwives in the early phases of a start-up). Founders should therefore also make sure that the investor has relevant industry experience.
The investor, often a company specialized in certain business areas or industries, usually participates directly in the start-up, i.e. becomes a direct shareholder. The corporate law relationships are usually complex because the investor is usually only a minority shareholder, but wants to claim extensive rights for himself. The core of venture capital financing is therefore the articles of association and the associated shareholders' and investment agreement.
The professional investor will often submit his own draft contracts to the founder. Founders who also want to protect their own interests should urgently commission a specialized lawyer or attorney for corporate law to review and amend these complex contracts. This applies from the first to the "last" financing round before the exit.
Mezzanine financing includes financing instruments that combine characteristics of debt and equity. The commercial balance sheet and tax classification depends on the specific legal structure in each individual case, through which different effects can be achieved, especially with regard to taxes and strengthening of equity. Mezzanine capital includes in particular
- typical and atypical silent partnerships,
- subordinated loans,
- parity loans,
- profit participation rights and
These enable tailor-made financing solutions, also for start-ups, and ensure a balanced financing structure. Further information on mezzanine capital can be found here: Mezzanine financing
The Business Angel also supports the founder with both capital and expertise, especially in the initial phase of a start-up. The Business Angel's support usually starts earlier than the commitment of a venture capital company. Ideally, business angels have founding experience, knowledge of the industry and important contacts for the development of the start-up. Due to the high risks of very early involvement and support, business angels usually require a high economic participation in the possible success of the company. Legally, the commitment of the mentor providing funds corresponds to that of the other venture capital investor. The corporate law structuring options range from the granting of a partnership position to partnerships or corporations to dormant partner's interests and profit-sharing loans.
Crowdfunding, crowd investing, crowdlending
Crowdfunding (or "swarm financing") is a still young financing option for start-ups. On Internet platforms such as seedmatch.de, startnext.de or kickstarter.de, a large number of financial backers can be attracted to a project or business idea. Crowdfunding is an interesting financing option both for business start-ups geared towards economic success and, for example, for social or creative projects (then in the form of donation-based crowdfunding).
The most important forms of crowdfunding for start-ups are credit-based crowdfunding (crowdlending), in which the donor gets his investment back with interest, and crowd investing. With crowd investing, the investor participates in the future profits of the start-up company. From a legal point of view, crowdfunding is subject to a possible permit requirement (according to § 32 para. 1 German Banking Act). This is checked by the Federal Financial Supervisory Authority (BaFin). In addition, an obligation to obtain a permit under § 34c of the German Trade Regulation Act is also conceivable. The examination always takes place for the concrete individual case on the basis of the contractual arrangement. In the event of a violation of the above-mentioned regulations, official measures may be taken against both the operators and the users of the Internet platforms, up to and including the discontinuation and settlement of transactions.
ICO as new financing alternative
In recent times, so-called Initial Coin Offerings (ICOs) have also attracted attention in Germany as an alternative form of financing for start-ups. They are also known as Initial Token Offerings or Token Sales. By purchasing coins or tokens, investors are given the opportunity to use the services or products offered by the company. In some cases, coins or tokens also convey voting rights or a share in the economic success of a company, comparable to a share. ICSs represent an interesting form of financing, since the capital can be raised publicly, even in small amounts, and worldwide, i.e. it has the character of swarm financing.
On the other hand, there are difficult questions regarding capital market law, supervisory law and prospectus law that need to be answered. The image of ICOs has also been tarnished by past cases of fraud. Our specialized attorneys and tax advisors will advise and assist you for a successful ICO, if this is a consideration for your start-up.
Future model of responsible ownership
Under the keyword "Purpose Economy", alternative forms of companies are increasingly being discussed in Germany as well, where the priority of profit maximization under the influence of investors is being questioned. In the case of the so-called GmbH-VE (GmbH in Verantwortungseigentum, english: GmbH in responsibe ownership), voting rights and profit claims are to be separated and the company's orientation towards the purposes set out in the articles of association is to be achieved. A draft by legal scholars has already been submitted to the legislator.
At present, a legal structure in this form can only be achieved in a very complicated way, with the help of foundation law or through corporate law models such as the veto share model. Here you will find more information on responsible ownership.
Bank loan, support program, business angel, venture capital, crowdfunding and recently also ICOs. - the possibilities for start-ups are manifold. Founders must first clarify the question of which financing options are available. The selection is then made, particularly on the basis of the financing costs. It should be noted that the actual price of what appears at first glance to be a favorable financing option is often bought by investors' rights to a say and profit-sharing rights. Here, the legal and fiscal examination of the contractual arrangement by a specialized lawyer and tax consultant plays a central role in assessing the long-term consequences for the establishment of the company.