The success of startups depends not only on the business idea and its implementation. It is usually just as decisive who I involve in my company, when and for what purpose, and above all how. An investment is not only a question of money; it is also about co-determination and thus about the foundation on which a company is built.
How should a founder manage the participating investors in an investment round?
Keeping the shares for yourself and not giving any away – that may be a dream for many German founders and corresponds to the model of quite some German model entrepreneurs like the Aldis, Müllers, Würths and Co. Legally, it would also be the easiest solution. However, what might be the rule for German SMEs is not a realistic option for many founders today. Money and resources are scarce or even non-existent, venture capital is often not available for young entrepreneurs despite cheap money circulating.
But how can you as a particularly ambitious startup can get started, if you need venture capital and highly qualified employees? In these cases, an equity investment is often the only available currency with which to raise this support from venture capitalists and employees.
Equity as (virtual) currency?
At first glance, it sounds more than tempting to pay with virtual shares. It feels like it costs nothing to give up a few percentage points. As a founder, you don't notice missing money in your wallet, you don't incur any debts and an exit and its revenues, from which you will be required to hand over some to your investors, are still very abstract and far away. When virtual shares are issued (VSOP), as is common in Germany due to the miserable taxation situation, those involved don't even talk you into it.
Auch die Zustimmung vieler in der Startup-Szene wird einem gewiss sein, wenn man mit Beteiligung „bezahlt“, weil es dort zum guten Ton gehört, möglichst viel Risikokapital gegen Beteiligung aufzunehmen und ein Beteiligungsprogramm von 10–20% für Mitarbeiter und Berater/Beiräte zu haben.
Many in the startup scene are also sure to applaud if you "pay" with equity: it is good manners there to raise as much venture capital as possible in exchange for shares, and let 10 - 20% go to employees and advisors/advisory boards. So, is everything well after all? Unfortunately, trading with shares is not as easy as it might seem.
Do's and don'ts in investment management
Mistakes in the allocation of investors can be existential for the founder and the startup. Very often, founders regret the involvement of employees and advisors – or even their decision for certain investors, if the cooperation later unfortunately does not work out as originally expected.
Why is that?
Especially in the venture capital model, there is a special dependence of the company on all shareholders, not only for those with large shareholdings. Although company law has anchored the majority principle in the law for very good reasons in order to keep companies functional, this principle is largely overridden in the venture capital model.
Martin Sundermann, Osborne Clarke:
This means that even with smaller investments far below the legal thresholds of 50% or at least 25%, the investors usually expect a large number of approval rights for almost all relevant decisions, including operational ones. If founders and investors disagree upon, these measures cannot be implemented, even when there is pressure to act.
Osborne Clarke
Osborne Clarke's venture capital team advises startups and investors at all stages from company formation to exit.
This applies in particular to further financing rounds. If not all existing shareholders participate in the financing round and the usual special rights of additional investors (protection against dilution, co-determination rights, liquidation preferences) cannot be legally agreed, the financing threatens to fail.
The necessary cap table clean-up
In view of this well-known problem, many VC investors now expect a correspondingly lean cap table in order not to have to bear such a risk from the investment structure in addition to the entrepreneurial risk. It is made a precondition of further financing that micro-shareholders and former employees in particular are either eliminated as shareholders in advance or at least pooled in such a way that they no longer have any participation rights. This so-called cap table adjustment poses immense problems for the founders, because it only succeeds if those affected by the loss of rights participate "voluntarily". It is not surprising that those affected see little reason to do so. Such processes are correspondingly difficult.
How do you solve the conflict that you have to give up shares in order to be able to start your business, but at the same time you should avoid running into the problems mentioned above? There is no one-size-fits-all answer, it depends on the situation. In any case, think twice before offering participation.