Zuletzt aktualisiert am 4. Januar 2021
Often early-stage startup founders need to raise funding. Leapfunder’s CEO, Tienko Rasker, prepared an overview of key FAQ the founders need to know before they start. Check it out and feel free to contact Leapfunder if you have further questions about raising funding for startups.
TAKE YOUR CHOICE: WHAT WAYS ARE THERE OF RAISING FUNDING FOR STARTUPS?
Depending on your circumstances you have to choose the right way of getting funds. The three most common ways are:
1. RAISING FUNDING FOR STARTUPS – LOANS
A loan is an advance of cash. The person that gives a loan wants that cash back with interest. The startup doesn’t have a reliable income, that means an orderly repayment is not so likely, so loans are rare when raising funding for startups.
Nonetheless, they sometimes happen. Is that a good thing for the startup? Eventually, you have to pay the loan back. Will you have that much cash available on the day the payment is due? If not, you run a risk of facing insolvency. Startups should handle loans with extra care.
2. RAISING FOR FUNDING STARTUPS – SHARES
Shares are the most familiar instrument when raising funding for startups. When you sell a share you are selling a % of your profits and votes, forever. So although selling shares is a good way to get funding, please remember: you will never get your shares back.
It’s always cooler to sell your product than it is to sell your shares. Eventually, you will run out of shares to sell, while you can always make more of your product.
3. RAISING FUNDING FOR STARTUPS – CONVERTIBLES
A convertible is a way of investing in shares without using a valuation. For this reason, it’s the most popular way of investing in pre-seed and seed-stage startups in California. In practice, it’s impossible to determine the correct valuation for startups in the pre-seed and seed phase.
So a convertible is a share transaction, in which the investor and the startup agree to a postponed valuation. The valuation is postponed until the next big cash investment in new shares. You gain a lot of time, so when the valuation eventually happens you have a lot more information.
WHEN RAISING FUNDING, WHAT IS THE DIFFERENCE BETWEEN PRE & POST MONEY VALUATION?
Here’s how to understand the difference: your company has a certain worth before a funding round (= pre-money valuation). Let’s say €2 million. When you take on an investment round, let’s say €100.000, then that amount will simply sit on your company’s bank account on day one.
That means the company is now instantly worth €2.1 million (= post-money). The difference between pre-money vs post-money valuation is precisely the amount of cash that is invested in the course of an investment round.
WHAT IS A SHAREHOLDERS’ AGREEMENT?
A shareholders’ agreement in the context of funding for startups is the broad agreement that regulates agreements between all shareholders of the company, including the founders.
Every company needs a shareholders’ agreement because there are a number of critical things, which are not organised by law nor in the articles of the association of a normal legal entity. The most important parts of the shareholders’ agreement are:
1. GOOD LEAVER/ BAD LEAVER
One of the most important things to regulate in a shareholder’s agreement is what happens when one of the founders leaves. It’s common for founders to leave a startup at some point, and since a departure can be emotional, that’s not a good time to talk about how much of their shares they should hand back.
Therefore, every startup should have a so-called Good Leaver/Bad Leaver clause. The Good/ Bad Leaver clause is also sometimes placed into a separate Founders’ Agreement because it only affects founders. But it is fine to put it into the shareholders’ agreement as a sub-section as well.
Please Note: if you don’t have a Good/ Bad Leaver clause in place get one this week. You never know when you and your co-founders will need to separate! It is often a surprise.
With too many shareholders decision making can become almost impossible. Generally, a startup should start to be worried when it has more than 3 small investors as shareholders. Within fundraising for startups an investor ‘pool’ is a separate legal entity that combines smaller shareholders into a single legal entity.
Within that legal entity, the small investors first have to agree with each other, and after this, they have to act as a block towards others. This kind of legal entity is often called a Special Purpose Vehicle (SPV).
Please Note: it’s important to agree in contract with your smaller investors that they will go into an SPV before they invest. Once they are in your cap table they have little reason to agree to a transfer into an SPV, and too many small shareholders can scare away later big investors.
3. DRAG AND TAG ALONG
The ‘Drag Along’ means that if a certain percentage, X%, of the shareholders wants to sell the company, they can force the remaining shareholders to sell as well. That means you don’t need a 100% agreement to be able to sell the company.
The ‘Tag Along’ means that if one of the shareholders gets a cash offer to exit the company, they have to share this cash offer with all the other shareholders. That way all the shareholders get to participate in the cash exit. That is just a general fairness regulation.
4. PREFERRED RIGHTS
Some of your shareholders will want additional rights. That’s especially common with VCs: they are investing a large amount of someone else’s money. It’s normal for VCs to want to be able to control quite a lot of the processes in the company.
They will likely want to control management appointments, sign off on the budget and sign off on large expenditures. They will also want to be able to block key asset sales, funding rounds, or fundamental strategy changes.
WHEN RAISING FUNDING FOR STARTUPS, DO YOU NEED A NOTARY FOR YOUR SEED ROUND?
It’s now widely accepted in Germany that you can do a convertible note funding round without a notary. For this to be possible, the convertible does need to be written properly. Any experienced startup lawyer can help you set it up. For company creation and for signing a shareholder’s agreement with a good/bad leaver you do need a notary in Germany.
This means that after creating the company and signing the shareholder’s agreement you can do several funding rounds with convertibles before visiting the notary again. Your next visit could be when the convertibles convert.
We hope this guide to raising funding was helpful. If you have more questions, join one of Leapfunder’s online training sessions!
>> Lese hierzu auch den Artikel: Startup-Gründer: 5 Dinge, die ich gerne gewusst hätte, bevor ich es wurde <<
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