Venture Capital Masterclass #vcmasterclass

0GERMAN STARTUPS GROUP I November 2016
Nikolas Samios | #VCMASTERCLASS | @BerlinVC
GERMAN STARTUPS I GROUP
I. Venture Capital Master Class
Nikolas Samios - @BerlinVC
15. November 2016

#INTRO
All sounds, loops & grooves made with Music Maker JAM14:45

14:45 #INTRO
15:00 #SESSION1
Fundamentals of the deal
Philosophy of the deal: hear from the experts
Deep dive 1: The bear’s skin
16:00 #BREAK
16:15 #SESSION2
Deep dive 2: Staying agile
Exit panel
17:30 #Q&A
18:00 #ENCORE @ #funkykitchen
Agenda for today
#INTRO

 We are streaming live & you might be recorded
 Disclaimer: no tax & legal advice! Always ask
your lawyer and/or tax advisor!
 Questions: at the end of any chapter and Q&A at
the very end (@THF: wait for the mic!, online:
use comment box below the video)
 WLAN: see your hand-outs
 Drinks: help yourself!
 Let‘s go...
Housekeeping
#INTRO

Who are you?
#INTRO

Some data on today‘s audience
#INTRO
VC
25%
Business
Angel
8%
Founder
3%
Intend to
found
17%
Consultant
14%
Service
provider
14%
Startup
employee
11%
Corporate
VC…
Other
5%
Audience
None
7%
Friends &
Family
16%
Angel
13%
Seed
19%
Series A
24%
Series B
10%
Series C
5%
Series D & up
6%
Experience level

Who’s GSG
again?
#INTRO

Key facts German Startups Group
Providing access to the asset class ‘Startups made in Germany’
• Venture capital provider for innovative startups
• Launched with business operations in Berlin in April 2012
• Second most active VC investor in Germany since 20121,
second most active FinTech investor in Germany2 and third
most active EU based VC investor in Q1 20163
• Portfolio consists of 25 minority stake holdings in
operationally active companies that are of particular
significance to GSG4
• Majority shareholding in Exozet Group since June 2015
• Two successful exits already
• Profitable since its first full year of business (IFRS) –
net profit of 0.49 EUR per share in 2015
• Gross performance of 25.3% per year on average invested
capital since the beginning of investment activity5
• Balance sheet total as of 31.12.2015 - EUR 35.9 Mio. Total
portfolio value GSG (non-cons.) EUR 20.4 Mio.6
Key facts Portfolio extract
1 Source: CB Insights, Germany VC Overview 2015 2 Source: Barkow Consulting FinTech Money Map, July 2015 3 Source: Dow Jones Venture Capital Report Q1 2016 4 25 of the 47 minority
stake holdings comprise 89% of the value of all 47 active minority stake holdings per 30th September 2016; the ten core holdings make up 59% of the value of all active minority stake holdings
5 Gross annual return on the average invested capital according to the Company’s calculation method 6 incl. RNTS shares received upon trade-sale of the Fyber stake and convertible notes
EarlyStageGrowthStage

237
304
431
687
1,031
1,457
1,850
2,222
2,562
2,890
2008
2009
2010
2011
2012
2013
2014E
2015F
2016F
2017F
0
1
2
3
4
5
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
0
1
2
3
4
5
6
7
0
20
40
60
80
100
120
140
160
180
1997
2000
2003
2006
2009
2010
2011
2012
2013
2014
New market opportunities & innovation – key drivers
Ubiquitous internet availability drives new business models
Mobile internet Average time spent onlineInternet speed
Worldwide smartphones (in millions)1 Average time spent in the
online universe in Germany (Mon-Sun)3
Average global internet
connection speed (in Mbps)2
DaysMin per dayMbps
3 Source: ard-zdf-onlinestudie.de, 20142 Source: Statista, Global internet usage – Statista-Dossier,
July 2014
1 Source: Statista, Smartphones – Statista-Dossier, 2015
#INTRO

The internet disrupts the economy
Emergence of new global players enabled through the internet
1 Source: nasdaq.com as of 14 Nov 2016 ($1=0.926 EUR), 2 finanzen.net as of 14 Nov 2016
Market cap1:
Top 30 Silicon-Valley-
companies
EUR 3,532 bn
30 german bluechips
Market cap2:
Dax-30-
companies
EUR 1,070 bn
Market cap1:
Top 3 alone
EUR 1,473 bn
#INTRO

0
100
200
300
400
500
20132011 2012
Private vs. public market return multiples –
a shift towards private value creation1 Company valuation windeln.de2-7
2010 2014 IPO
5/2015
In EUR m
Estimated total funding to date
Pre-IPO
c. +290m
Post-IPO
c. -200m
ILLUSTRATIVE
Sources: 1 European Investment Fund Sources: 2 windeln.de Prospectus 3 www.excitingcommerce.de/2014/04/04/windelnde-
bewertung-2013/ 4 www.excitingcommerce.de/2014/05/11/windeln-de-wachst-auf-100-
mio-e-und-holt-weitere-15-mio-e/ 5 www.gruenderszene.de/news/windeln-de-
finanzierung-acton-dn-mci-360 6 www.deutsche-startups.de/2015/01/19/windeln-45-
millionen-euro/ 7 www.crunchbase.com/organization/windeln-de#/entity
1 2 3 4 5 6 7 8 9 10
1980 19861986 1997 2004 2004 2011 2012 2012 2013
1200x
1000x
800x
600x
400x
200x
0x
Post-IPO value creation in public market
Pre-IPO value creation in while still privately owned
by founders and VCs
2016
German Startups Group‘s investment proposition
Trend towards more shareholder value created pre-IPO
#INTRO

Venture capital in Germany is teeny-tiny
German wealth
Invested in VC
#INTRO

Percentage of venture Ccpital out of overall German wealth
#INTRO

Global market overview
The German and Berlin VC markets offer huge potential
1 Source: EVCA, 2014 Private Equity Activity; OECD, Entrepreneurship at a glance, 2015;
2 VC-Magazin, “Die Step by Step-Finanzierung ist für deutsche Start-ups nach wie vor
sinnvoll“, 26 April 2012;
0.00% 0.50% 1.00% 1.50% 2.00% 2.50%
LONDON
STOCKHOLM
BERLIN
DUBLIN
HELSINKI
KOPENH-MALMÖ
TORONTO
LIVERPOOL
SEATTLE
MUMBAI
BOSTON
BANGALORE
SAN FRANCISCO
SAN JOSE
Venture capital investment as a share of economic
output3
3 Source: Martin Prosperity Institute, Rise of the Global Startup City;
Venture Capital Investment as a Share of Metro Economic Output
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
13.3x
VC-investments in relation to GDP in 20141
While in the US, companies easily raise hundreds of
millions of venture capital at significant valuation levels,
German startups struggle to raise enough money to
finance their business plan2
#INTRO

… supported by close portfolio monitoring
Investment criteria Portfolio monitoring
520
183
107
39 11 9 8 8
Pre-selection
criteria
First meetup
with founders
Detailed
screening
Term sheet
‘Deal flow’
(Pitches)
Due Diligence
Closing
preparation
Investment
Deal flow 20151
• Disruptive innovation
• High scalability
• Track record of founders / serial
entrepreneurs
• Fair value calculation, company performance and cluster
analysis
• Creation of quarterly status reports for each portfolio
company
1 All individual companies are counted once, i.e. volumes do not include follow-on investments in existing portfolio companies. In case of use of one or more special purpose vehicles for
an individual portfolio company, the company is only counted once
German Startups Group‘s selection process
A typical year‘s dealflow pipeline
#INTRO

Portfolio overview
25 minority holdings are of particular significance to German Startups Group
#INTRO

Who am I?
#INTRO

 Born 1977 in Munich, one wife, one kid, no dogs
 European mixture: Latvian, Greece and German ancestors
 Founded first company at school, financed early company with
 corporate VC money
 Supported a lot of founders in fundraising, turn-around, M&A and
exits for more than 15 years now
 Changed to the other side of the table starting to manage
portfolios of larger business angels around 10 years ago
 Personally lead, structured or at least participated in
>200 VC deals
 Currently writing a book on VC terms (to be released mid 2017)
 Strong supporter of and believer in the social relevance of
Entrepreneurship
Who am I?
#INTRO

#SESSION1

VC business in
60 seconds
#SESSION1

Nikolas Samios | #VCMASTERCLASS | @BerlinVC #SESSION1

Fundamentals
of the deal
– or –
How to set up a
good one?
#SESSION1

I. Valuation
#SESSION1

Seed Stage Early Stage Growth Stage
Status - Proof of Concept (PoC)
Minimum viable
product
(no revenues)
Product and market
PoC
(some revenues)
PoC in terms of
profitability and
scalability
(substantial revenues)
Typical valuation (Germany) EUR 1-4 m EUR 4-15 m EUR 10 m+
Assumed return potential >10x >5x >2.5x
Assumed default rate >50% c. 30% c. 25%
Assumed time to exit c. 6-8 years c. 4-6 years c. 2-4 years
Typical VC expectation for risk-adjusted returns
Or: the art & science of finding a fair valuation
#SESSION1

 liquidation preferences [usually 1 x non-part.]
 milestones / tranches [usually no]
 ratchets / warrants / other dilutive instruments [usually
no, only part of guarantees]
 anti-dilution [yes, next round, broad weighted]
 ESOP / VSOP [must, early, significant]
But there is more to consider valuation-wise...
#SESSION1

II. Founder ocus
#SESSION1

 consequent non-compete and focus
 no such thing as a
Parallel Entrepreneur
 serious founder vesting
 founder lock-up (“Vinkulierung”)
Any shareholder wants to see from
the operative founders...
#SESSION1

III. No surprises
#SESSION1

 be honest early-on
 have your shit together in DD
 accept fair guarantees
 flawless signalling during negotiation
 avoid bridge rounds whenever possible
 inform yourselves about your VC!
Founders, avoid bad surprises...
#SESSION1

IV. Information
#SESSION1

 proactive communication before
smoke is rising
 reporting covering the relevant KPIs
beyond P&L
 cashflow is more important than your mother
 proper accounts, in-time
All shareholders need data to operate...
#SESSION1

IV. Control
#SESSION1

 (only) Managing Directors in the driver seat
 reasonable thresholds for board / shareholder
authorisations
 proper board structure once cap-tables grow
 better: also include outside board members
 (not much else)
Control...
#SESSION1

V. Logistics
#SESSION1

 post funding-round is pre funding-round
 limited no. of parties in the cap-table
 proper pooling for early / smaller investors
 agile mechanisms for decision making
 no blocking / veto position for anyone
Keeping the company capable of acting...
#SESSION1

VI. Exit
#SESSION1

 general lock-up (“Vinkulierung”)
 unilateral pre-emption rights
 unilateral drag-along (with or without floor)
 unilateral tag-along
 privileged transfers (with fall-back)
 IPO & trade sale process
Reasonable terms on selling shares
#SESSION1

 unless there are no strong arguments for a deviation stick with
plain vanilla terms as long as possible
 Only “bad” VCs try to optimise themselves via contractual terms
and small print
 Abnormal terms will work against all parties in later rounds
 not maxing short term valuations but rather keeping a steady
trajectory
 setting up professional structures in legal, accounting / finance,
reporting, pooling early-on
The appeal for “Plain Vanilla”
#SESSION1

Philosophy of
the deal
#SESSION1
15:20

Philosophy of the deal – hear from the experts
#SESSION1
Excerpts from around 15
hours of interviews for my
new book on venture deals
(to be released early / mid
2017) with some of the most
relevant German serial-
entrepreneurs and investors
on the state of the art and
philosophy of the venture
capital deal…

Pawel Chudzinski
Co-Founder & Managing Partner Point Nine Capital
#SESSION1
Fundamentally, we do not believe that you can earn
a lot of money in venture capital early-stage tech
investing by optimizing contracts.

Christian Claussen
General Partner Ventech
#SESSION1
It is always a kind of business card how you behave
during negotiation.
The founder will have to handle business partners
and also strategic partners up to the exit any day in
his business.
Being a business man, CEO or in a high executive
position will always require negotiation skills.
To distribute a cow’s skin in a reasonable way so
that at the end, everybody is reasonably happy with
the deal and you got a little bit more yourself.

Rayk Reitenbach
Senior Investment Manager IBB
#SESSION1
I mean, it’s like entering a marriage – even though a
temporary one – and here the absolute prerequisite
is trust.
It would be catastrophic if you make a deal and
straight away someone feels cheated.

Christian Claussen
#SESSION1
But you’re learning a lot about your companion,
investor or your founder or team of founders during
this process.
I can only say that I constantly notice: the more
experienced the people on both sides of the table
are, the quicker they will come to an agreement,
the more they will talk about core topics, the less
they will waste time on minor issues.

Nikita Fahrenholz
Serial-Entrepreneur (Delivery Hero, Book A Tiger)
#SESSION1
The keyword is trust. I want my investors to trust
me just like I want to trust them. And they only
trust me if they know I will be blunt with them.
Unfortunately, that is something that doesn’t
happen often. And being blunt also means saying
things like: “Hey, things are shitty, and we’re
trying to solve it.”
And these things will happen. It should always be
you who is addressing what’s wrong and not the
investors.

Rayk Reitenbach
Senior Investment Manager IBB
#SESSION1
Well, I could say that we’re creating a very detailed
finance model that presents the valuation in the
end, but that’s just not the case.
We have benchmark dimensions that we’re used to
meet and it depends on how attractive the deal
seems to us.
Mainly, it’s about the team and the potential of the
exit the company can achieve in the end.

Christian Vollmann
Serial Entrepreneur, Super Angel
#SESSION1
That’s a mistake that happens often: In the end, the
investor with the highest valuation is chosen. And a term
sheet is so much more than just the valuation.
On the one hand, we have all the other terms: The
highest valuation, but a 2.5x liquidation preference is not
quite the best term sheet.
And in addition, there are the soft factors that aren’t
listed on the term sheet, like: “Is the investor on my
side, is he my biggest fan, will he open his network to
me, does he have a big network and how is his standing?”
All of that is very important.

Reiner Maerkle
General Partner – Holtzbrinck Ventures
#SESSION1
I’m sure there have been one or two founders that
brag about their valuation. You can see it in Berlin
as well these days, that a lot of companies have
impressive valuations in very early stages.
If everything keeps soaring, this can work, but you
will have a much harder time raising the next round
if you’re already on a high level. And that’s
something you should never forget.

Michael Brehm
#SESSION1
[speaking of high starting valuation] And if success
doesn’t come straight away, then you obviously have a
problem as well, because then you have to make a
follow-on round on a lower valuation and you’re not
necessarily doing yourself any favor.
The valuation is always one thing, but you have to see
the whole context and different other conditions.
Just like with a company sale (…) - the sale doesn’t
necessarily go to the highest bidder, there are two dozen
other determining factors like:
Payout conditions, obligations to stay in the company as
manager, earn-out agreements, all sorts of things that
have impact, so you say: the entire package has to be
considered.

Vesting isn’t just protecting the investor. It also
protects the company, kind of, against the
founders.
Against a founder losing interest in the company for
whatever reason or suddenly having a better
opportunity.
Christian Vollmann

Christian Claussen
#SESSION1
There are still founders that believe investors are
generally interested in getting rid of a founder due
to wrongly believing they could then acquire his
shares through the vesting mechanisms.
That is complete bullshit, you have to erase that
from your brain. No investor is interested in a
change of management.
The best venture in the world is the one where the
three guys that founded it all stay on board until
the massive IPO, with no loss of momentum and
where everything runs smoothly. That is the goal.

Christian Claussen
#SESSION1
Entrepreneurship isn’t a kid’s birthday party. It’s
always viewed like that in a way, but there are
very, very hard moments with a surprisingly high
pressure of responsibility that suddenly emerges
when I have to reduce my company from 100 to 50
employees.
Stuff like that happens. Not because the investor is
evil, but because things didn’t work out as planned.
(…)
This leads to enormous pressure and sometimes
founder teams will collapse under this pressure.

I would like to see two things: First, that more founders
give virtual shares to their employees, and - what’s
almost more important - that employees start asking for
it and insist on it.
And seeing it as part of the salary negotiations, but also
understanding that he or she can’t receive both a high
salary AND employee shares, but that it’s a kind of slider.
And another thing that is missing: There are surprisingly
few people that say: “Oh well, if I have to relinquish a
part of my salary! No, then I don’t want this.”
And that is pretty sad because it is really the case that it
would be worth much more than the salary component if
the company achieves success.
Christian Vollmann

Pawel Chudzinski
Co-Founder & Managing Partner Point Nine Capital
#SESSION1
I believe the two topics that investors always view
differently are approval bodies and liquidation
preferences: You really need to keep it simple.
Because if you don’t, then a) everything gets more
complicated, and b) it will come back and bite you when
you enter the next round. And what you have now in the
contracts is the basis for the next round, to make this
even more extreme.
And I believe it would be good if more investors would
view things in this way, to keep things as lean as possible
for as long as possible. Then everybody’s happy and most
importantly, it will increase the chances of the company.

I can really just warn you of these things: Giving
discounts to some business angels based on certain
promises.
In my eyes it’s dubious if a business angel invests
and then writes invoices for services that he or she
performs. I think, this is extremely dubious.
Christian Vollmann

I actually believe that founders focus too much on this
topic at times. I have the feeling that fundraising is
becoming the focal point of the company culture, which
should not be the case at all.
After all, we are founders to build companies, and even
if I like fundraising and it’s my duty as CEO to provide
cash flow, I would rather work on making the company
successful, make the product good.
So basically, a product-centric building of companies vs.
this series A / series B fuss. I sometimes have the feeling
that founders in Germany focus too much on that. Maybe
justifiably so, as the market doesn’t allow for anything
else.
Nikita Fahrenholz
Serial-Entrepreneur (Delivery Hero, Book A Tiger)

Tobias Johann
Serial-Entrepreneur, Company Builder
#SESSION1
Historically, we just had a lot less venture capital
per start-up than in the US or in England. This is
slowly changing though.
But because it started out this way, German VCs
were lazy, sluggish and not always good.
They had extremely low competition on the capital
side, which is why low-quality VCs were able to
stay in business longer than they should have. With
less entrepreneurial background, more something
like a banking background or worse.

And nowadays you can feel – especially in the last
five, six years – that the new VCs have arrived.
They are much more economically-minded, much
more shaped after the Anglo-Saxon role model than
the ones before.
They are pushing one or two unprofessional older
VCs out of the German market, and so the VCs are
becoming better and better and better.
Tobias Johann
Serial-Entrepreneur, Company Builder

I have grown to immensely appreciate Germany –
both as a place to found companies and also as a
location to do investments - after all the
experience abroad.
Michael Brehm

Oliver Holle
CEO Speedinvest, Serial Entrepreneur
#SESSION1
Niko: Last double-question: If you could give a
closing appeal to founders, what would that be,
what should they maybe pay more attention to in
the future?
Oliver: Especially in a seed-round, it is endlessly
more important to have the right investor on
board, someone that can really help you over the
next 2-3 rounds, compared to the valuation.

It is completely irrelevant, you only have to
calculate it through, you only have to simulate it,
and you will recognize that seed valuations don’t
have any significance for the personal life scenario
of the founder, and that a real investor that can
really help you is much more important.
You just have to get rid of this type of greed, and
this is obviously also directed at co-founders: Not
being generous enough at the beginning is a huge
mistake that is being made much too often.
Oliver Holle

Niko: And your closing appeal to investors?
Oliver: Think about whether you really want to do
this. I think there are lots of investors that really
have no business there.
If you don’t like working with founders and you are
basically a cynical person, then you should just
leave it be.
Oliver Holle

Deep dive 1:
The bear’s skin
15:30
#SESSION1

or: hey it’s pay day – so what do we get?
 How to trigger the sale
 Typical exit logistics
 Distribution of exit proceeds
 Liquidation preferences
 ESOP & VSOP
 Warrants and other dilutive instruments
Deep dive 1: The bear’s skin
#SESSION1

Most contracts provide several ways to trigger exits, most typical
ones:
 one / many shareholder(s) intend(s) to sell, others execute tag-
along rights
 one / many shareholder(s) intend(s) to sell and execute(s) drag-
along rights
 explicit exit process clause defining how and when an M&A advisor
will be selected to sell the company
 IPO clause
In most cases, the exit process is triggered by the founders and / or
the board as a joint exercise more or less regardless what was
negotiated in the SHA
Triggering the sale
#SESSION1

Triggering the sale / typical SHA exit clause
#SESSION1

#SESSION1

 roughly half of exits are managed with the help of an M&A advisor
 roughly 2/3 of exits happen to buyers with whom the company already had
operational contacts before
 approaching potential buyers, term sheet negotiation, due diligence
happens similar as in a funding round
 the exit agreement will usually include a distribution agreement sorting
out the waterfall and might contain escrow and earn-out elements
 still active founders have a strong position as buyers will most likely
require both comprehensive business and title guarantees and require
them to remain in their jobs for 2-3 more years
 this asymmetry can easily lead to tensions between investors and still
active founders that get a potentially better deal via an earn-out
Typical exit logistics
#SESSION1

 as multiple liquidation preference levels, ESOP, warrants and other
dilutive instruments can create great complexity, it is advisable to
draft and execute a distribution agreement that translates previous
relative SHA terms into absolute numbers
 most buyers will require a certain amount of the transaction
volume to be held back on an escrow account until certain pending
risks have been settled
 in any transaction with a larger (fully-diluted) cap-table, it is good
practice to install a central escrow account (notary, lawyer) for
dispatching the exit proceeds (buyer to pay only to escrow agent,
agent to distribute further)
Distribution of exit proceeds / how?
#SESSION1

 active founders will always have a strong position regardless of SHA
terms
 remember that in any exit-contract guarantees need to be given by
everybody (scope varies between active / passive shareholders)
 if done wrong (e.g. without hard pooling): ANY individual party in
the SHA can boycott exit process or create significant headaches
 buyers might have internal timelines to meet e.g. before end of
their fiscal year or in-time for board meetings
 any delay or friction in the process can therefore lead to break-up
 full alignment of interest will not be possible in a lot of cases due
to earn-out deals that create asymmetric distribution
Exit process learnings
#SESSION1

 liquidation preferences „bend“ the pro-rata exit-proceed distribution in
preference of investors (last in / first out)
 Non-Participating („ohne Anrechnung“) is the softer form, should be norm
 Participating („mit Anrechnung“) still seen often, should be exception
 factors above 1 are usually only used in turn-around deals and should not
be used otherwise, will also always signal tension in the system
 liquidation preferences with interest are seen sometimes, but should be
avoided if possible to keep things simple
 US structures terminate liquidation preferences at a certain valuation
watermark and / or require investors to chose between liquidation
preferences proceeds and pro-rata via conversion from preferred to
common shares
Liquidation preferences / basics
#SESSION1

Liquidation preferences / contract example
#SESSION1

#SESSION1

Liquidation preferences / impact on distribution
#SESSION1

Liquidation preferences / statistics GSG sample
#SESSION1
No
22%
Yes
78%
Liquidation preferences
existing?
n = 50
Particpating
26%
Non-participating
72%
Both
2%
Particpating vs. Non-
participating
1x investment LP
97%
More than 1x LP
3%
1x investment LP vs. >1x LP
Yes
10%
No
90%
Interest on liquidation
preference?
1
2
3
4
Average number of LP levels

 keep it simple!
 any deviation from 1x non-participating liquidation
preference should only be done when there is a strong
reason and consequences are clear to everybody
 ”optimized” liquidation preferences will also turn
against (early-stage) investors in the next round
 multi-level liquidation stacks can lead to severe lack of
aligned interest between shareholders
 recently, more (US) experts discuss getting rid of
multiple preference levels, too
Liquidation preferences / main take-away
#SESSION1

 more and more required early-on by professional (seed) investors including
super angels
 Germany: bottleneck in structuring is tax law - almost impossible to
optimize, proceeds for employees will be taxed like salary
 main structuring goal: avoid a tax event when granting options, only
produce taxes at exit when cash is available for distribution
 as the company does not get exit proceeds, shareholders need to assign
parts of their exit proceeds via the company to the ESO / VSO program
 optional strike price will lead to more complex calculation but can be
used to incentivise “late-joiners” above a certain baseline
 interplay with liquidation preferences can create headaches if not defined
precisely upfront
Employee participation / basics
#SESSION1

VSOP / contract example / SHA
#SESSION1

VSOP / contract example / general terms
#SESSION1

VSOP / contract example / allocation
#SESSION1

VSOP / statistics from GSG sample
#SESSION1
ESOP/VSOP
71%
No
ESOP/VSOP
29%
Companies with ESOP/VSOP
Pro rata
80%
Asymetric
20%
Pro-rata vs. Asymetric contribution
5.8
0
25
50
75
100
Average ESOP/VSOP % of nominal
capital
21.5
0.0
25.0
50.0
75.0
100.0
Average allocation in %

 beware of tax pitfalls! Always talk to your tax advisors!
 the best ESOP is real co-founders in the cap-table
 ESOP is more and more expected early-on
 ESOP should be implemented in a professional and flexible way allowing
different vesting, cliffs, strike price
 also a good tool for board members and other forms of advisors
 rule of thumb: initial founders pay for completing the starting team
(= they pay for first ESOP), everything thereafter is borne by all
shareholders pro-rata
 best governance: Granting ESOP / VSOP out of an once agreed pool
happens by the MDs with board approval
VSOP / key take-aways
#SESSION1

 work like a call-option for a new share from a capital increase instead of a
traditional call-option where the underlying asset is an existing number of
shares already owned by some other shareholder
 mainly used in two scenarios:
 venture debt equity kicker
 hacking around a downround
 can have strike price
 economic effect will be dilution pro-rata
 similar effect: compensatory capital increases from anti-dilution
protection, ratchets, compensation from guarantees
Warrants and other dilutive instruments
#SESSION1

 warrants are special tools for special situations and should be avoided
unless there is a real necessity, also tricky to structure in an enforceable
way under German law as shareholders will need to collaborate for a later
capital increase
 other dilutive terms should be used with special care: usually nobody wins
if a company ends up fully owned by investors
 our take: anti-dilution protection is okay, but should be limited to the
next qualified round using a (broad base) weighted average, avoiding
extreme founder dilution
 guarantees should never be fully settled only with shares, a reasonable
cash part that “hurts” should be used, otherwise only a way of reducing
the valuation without real compensation for damages
Warrants et al. / take-aways
#SESSION1

#COFFEE
BREAK

#SESSION2

Deep dive 2:
Staying agile
16:30
#SESSION2

 founder vesting
 challenges from growing cap-tables
 how to manage governance aspects
 how to set-up shareholder pooling
 board structures
 further logistics
Deep dive 2: Staying agile
#SESSION2

 Founder vesting is one of the most emotional points when
negotiating a deal with a first-time-founder
 but FV is first of all protecting the company (read: also the co-
founders)
 FV should always be aimed at generating shares that can be used
to attract and bind new replacement talent
 if missing, co-founders will quite often be very demotivated as
they keep on generating value for somebody who already left
(> can lead to complete break-up of teams and companies)
 FV has become more and more a “must-have“ for many (seed and
early-stage) investors
Founder vesting / why?
#SESSION2

 (a relevant part of the) individual founder shares should fall-back to the
company in case of a leaver event during the vesting period (call-option)
 vesting periods are usually 3-5 years (optional with 1 year cliff) number of
(un)vested shares can be calculated monthly or yearly
 vesting events are usually clustered in „good leaver“ and „bad leaver“
events also leading to different compensations for the shares
 rule of thumb: “good leaver” was fired without cause (“wichtigem
Grund”), “bad leaver” left by himself or was fired for cause
 contracts (shareholder agreement) need to be so robust that the call-
option can be executed without the cooperation of the leaver
Founder vesting / how?
#SESSION2

Founder vesting / example contract
#SESSION2

#SESSION2

 Average % of founder shares vested:
85% (between 30% and 100%)
 Average vesting duration:
37,5 months (between 12 and 60)
Founder vesting / statistics from our sample
#SESSION2
Vesting
79%
No Vesting
21%
Companies with Vesting
Yes
53%
No
47%
Good / Bad Leaver terms?
Yes
24%
No
76%
Leaver Event occurred?

 not speaking about keeping managers busy reporting to 20+ shareholders…
 although corporate law has mechanisms in place to avoid a company get’s
out of control when single shareholder boycott (shareholder meetings with
majority votes) the situation in a typical VC funded company looks
different
 thanks to the additional shareholder agreement terms, and new investors
or buyers requiring guarantees from previous shareholders in most
financing or exit-situations, ALL existing shareholder will need to
cooperate and sign documents, in a worst case in front of a German notary
 also (new) investors are not willing to negotiate with many previous
investors and or many co-founders (especially not dead equity)
 last but not least: how many shareholders need to be asked by the MDs for
approvals of specific actions, budgets and so on?
Challenges from growing cap-zables
#SESSION2

 41,7% of Seed companies
with pooling
 71,4% of Early companies
with pooling
 41,18% of Growth
companies with pooling
Challenges from growing cap-tables
#SESSION2
Seed
9
Early
20
Growth
26
Average number of shareholders

 a single party should never have a veto / blocking right
 work with intelligent majorities instead
 MDs should act freely within the approved budget
 MDs should have sole representation („alleinvertretungsberechtigt“),
4-eye process still can be implemented in rules of procedure
(„Geschäftsordnung der Geschäftsführung“)
 boards are only useful in larger cap-tables and / or if outside board
members join in
 outside board-members need to be properly incentivised, best by ESOs
How to manage governance aspects
#SESSION2

 Voting pools
 PoAs
 Trust / („Treuhand“)
 GbRs
 GmbHs / UGs
 GmbH & Co. KGs
Shareholder pooling / how?
#SESSION2

 in a trust-structure, the trustor is delegating his shareholder role (almost
completely) to the trustee, who is the sole representative towards the
company and also registered in the company register
 best pragmatic solution: reasonable but not perfect
 usually tax transparent if done correct (ask your tax advisor!)
 but be careful: if the contracts take away all voting rights from the trustor
(„Treugeber“), tax transparency might lapse, creating double taxation
 as trust-contracts can always be cancelled by the trustor under German
law, some lawyers will insist on integrating the trustors as parties in the
shareholder agreement
 typical work-around: a cancellation will lead to a new trust structure with
another shareholder
Shareholder pooling / best practice / pragmatic
#SESSION2

Shareholder pooling / trust / example contract
#SESSION2

 hard pool using a corporate entity, usually a GmbH & Co. KG, maybe even
with add-on trust-relation or a GmbH / UG
 similar to a VC fund structure
 usually tax transparent (KG) or very little taxation on pool level (GmbH /
UG when §8b KStG can be applied – ask your tax advisor!)
 but might be an AIF that needs to be registered with BaFin
 if done right, using a pool-entity is the best solution, but a bit complex
and more expensive than trust, so it might only make sense with larger
investments
 only practical way to completely separate (sub) shareholders from the
company‘s cap-table
Shareholder pooling / best practice / full scope
#SESSION2

Shareholder pooling / best practice / full scope
#SESSION2
Startup
Pool-Entity
Pooled (indirect) shareholders
Pooled
participation
Direct shareholders

 growing cap-tables create the need to decouple the managing directors – at least in
day to day business - from direct contact to each and any shareholder by using a
(supervisory / advisory) board similar to a German stock based corporation
(„Aktiengesellschaft“)
 a good board can therefore streamline communication, offload management and
pool, validate and filter request from a growing base of shareholders
 where the German supervisory board (“Aufsichtsrat”) is very control-oriented, the
US corporate boards are more advice/support oriented
 as most German startups will be limited liability companies (“GmbHs”) the duties
and rights of the board can be drafted between these two poles rather freely
 the best boards also include at least some outside directors that do not represent
the interest of single shareholders but only support the whole company without
conflict
Board structures / why?
#SESSION2

 “real” boards in GmbH-Entities need to be created in the articles of association
(“Satzung” or “Gesellschaftsvertrag”), basically taking over some of the
shareholder rights (e.g. voting on the budget, approving actions of the MDs etc.)
 usually the shareholder agreement will govern how a board is elected –
shareholders will be bound to vote e.g. for one board member according to the
proposal of the pool of series-A investors, another one might be suggested by the
MDs and so on
 boards should have their own rules of procedure, governing how decisions are made
and which quotas are necessary
 outside board members should be incentivied via ESOP / VSOP
 oberserver seats are usually added for additional shareholders or if (German) VC
funds are afraid of trade income tax (“Gewerbesteuer”)
Board structures / how?
#SESSION2

Board structures / statistics from our Sample
#SESSION2
Yes
64%
No
36%
Supervisory / advisory board
present?
3
34%
4 - 5
47%
6 - 7
16%
8 - 9
3%
Number of Board Members
Yes
25%
No
75%
Outside Board Members?

Must:
 only one SHA at a time
 one-way accession mechanism to SHA
 central corporate lawyer and notary
 central, constant (shareholder) data room
Maybe:
 central PoAs
 using authorised capital
 using stock based corporations (“Aktiengesellschaften”)
 using UK / US based (holding) entities (maybe-maybe)
Further logistics that can make your life easier
#SESSION2

How to exit:
Experts panel
17:00
#SESSION2

Anja Arnold
Managing Director
How to exit: The experts panel
#SESSION2
Christoph Gerlinger
CEO & Founder
Andreas Krause
General Counsel
Managing Director

Q&A
17:30

All sounds, loops & grooves made with Music Maker JAM
#THEEND
 presentation on slideshare later this week
 thanks to Exozet & the GSG team!
 come with us for a small encore @funkykitchen
 follow us on Facebook, Twitter, Instragram
 thanks for watching!
 feel free to contact me at:
Mail: nikolas@german-startups.com
Twitter: @BerlinVC
It‘s a wrap!

Venture Capital Masterclass #vcmasterclass

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