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Convertibles Notes: hassle-free startup fundraising in Germany by Legalstrasse

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We're thrilled to release a legal template for convertible notes, accessible for free to all startups in Germany! The template is straightforward, founder-friendly, and is now available on Legalstrasse (https://www.legalstrasse.com/).

Check out what it is, how it works and how to use it in this presentation by Daniel Streiff, Founder of Streiff Law.

Fundraising can be a long and painful legal process. But it doesn't have to be.

For the past years, many startups have turned to convertible notes to finance their 1st round or bridge. Convertibles are a form of loan that automatically converts to equity at the next VC round, making the paperwork fast and effortless. It's also a lot cheaper than hiring an army of lawyers to do a small equity round. But here's the catch: you need a well-crafted doc to make it happen. We got you covered: https://www.legalstrasse.com/

Veröffentlicht in: Kleinunternehmen & Unternehmertum
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Convertibles Notes: hassle-free startup fundraising in Germany by Legalstrasse

  1. 1. Enhancing by Streiff Law & The Family
  2. 2. Part I - Founding Part II - Growing Part III - Funding your GmbH / UG daniel@streifflaw.de
  3. 3. Part III - Funding your GmbH / UG 1. Why LegalStrasse & How it works 2. The funding dilemma 3. The solution: Convertible Note 4. Pros, Cons and Don’ts daniel@streifflaw.de
  4. 4. 9 out of 10 Startups fail Many for lack of a legal infrastructure and legal knowledge daniel@streifflaw.de
  5. 5. daniel@streifflaw.de a new hope Empowering founders through legal infrastructure & knowledge
  6. 6. daniel@streifflaw.de Why LegalStrasse #1: Avoid the pitfalls
  7. 7. daniel@streifflaw.de Why LegalStrasse #2: It’s free!
  8. 8. daniel@streifflaw.de Why LegalStrasse #3: More bootstrapping
  9. 9. daniel@streifflaw.de Why LegalStrasse #4: Join forces
  10. 10. 1. Go to LegalStrasse.com 2. Select & download docs 3. Edit marked passages with help of comments 4. For funding use the Convertible Note template How it works
  11. 11. Part III - Funding your GmbH / UG 1. Why LegalStrasse & How it works 2. The funding dilemma 3. The solution: Convertible Note 4. Pros, Cons and Don’ts daniel@streifflaw.de
  12. 12. Why found a GmbH or a UG? ● Founders join to work together GmbH = Gesellschaft mit beschränkter Haftung UG = Unternehmergesellschaft (haftungsbeschränkt) Shareholders GmbH/UG ● Legal entity independent of its shareholders ● Limited liability Managing Directors
  13. 13. The GmbH/UG in need for €/$ daniel@streifflaw.de Shareholders GmbH/UG MDs Employees Provider/ Contractor Freelancer
  14. 14. Early stage funding dilemma Who & What Type Why Why not Bootstrapping equity You hussle & believe in you Will only take you that far daniel@streifflaw.de Family, friends & fools equity/ debt They (foolishly) believe in you As a loan? A donation? For shares? Under which terms? Bank loans debt € via interest No security, no money! Personal securities = unlimited liability Risk capital equity € via shares Shares at what valuation?
  15. 15. How to evaluate a company? daniel@streifflaw.de Method Discounted cash flow Market capitalization Profit/Earnings Multiplier Excess earnings Asset/ book value Liquidation value Comparable businesses But negative cash flow (yet!) Want to establish it here Little earnings w/o profit Earnings again? only IP. Value? I feel like going in circles unique (USPs!) Let’s find a simpler solution!
  16. 16. Part III - Funding your GmbH / UG 1. Why LegalStrasse & How it works 2. The funding dilemma 3. The solution: Convertible Note 4. Pros, Cons and Don’ts daniel@streifflaw.de
  17. 17. Loan & behold: our template! ● Bilingual ● Balanced rights for company & lender ● Just adapt/fill out the highlighted fields ● Don’t forget to sign (to be safe in front of a notary)
  18. 18. The solution: The Convertible Loan daniel@streifflaw.de ● Lender gives a loan with interest that he may claim back after 1-2 years ● If there is a financing round until then, lender converts his repayment & interest claims into shares of the company ● Lender piggybacks the finance round valuation, but receives a discount (15-30%) from it to compensate the lender for his early stage risk = Loan (debt) that converts into shares (equity)
  19. 19. How to fill out the template? (highlighted fields) What Details Company & Lender data Dah.. and the shareholder data Loan amount In € or set currency conversion rate & date Interest rate Keep it low for tax reasons Due date At least 1 year after payout (e.g. 18 months) Discount 15-30%; depends on risk, stage etc. Financing Round How big should the next min. investment be?
  20. 20. A (convertible) loan over time daniel@streifflaw.de Company foundation: share capital Convertible loan: contract & payment End of loan: repayment plus interest GmbH/UG Lender
  21. 21. A convertible loan over time daniel@streifflaw.de Company foundation: share capital Convertible loan: contract & payment End of loan: repayment + interest Financing round, Capital increase & conversion GmbH/UG LenderInvestor
  22. 22. Investment & capital increase daniel@streifflaw.de GmbHInvestor 400k € 25k shares 800k € pre-money value 37.5k shares 1.2 m € post-money value 12.5k shares Why cap increase? ● Selling shares only benefits sellers & Finanzamt ● GmbH can spend capital reserves Formula: old shares * investment / valuation = new shares Example: 25k * 400k / 800k = 12.5k
  23. 23. Conversion example daniel@streifflaw.de GmbHInvestor ● 400k investment ● 800k Pre-money-valuation → 12,500 new shares 25,000 shares Lender ● 147k loan ● 1y at 1.5% interest ● Total amount 150k ● 25% discount = 600k → 6,250 new shares ~ 28.6% ~ 14.3% + 12,500 + 6,250 43,750 shares Founders ~ 57,1%
  24. 24. Conversion example with cap daniel@streifflaw.de GmbHInvestor ● 400k investment ● 800k Pre-money-valuation → 12,500 new shares 25,000 shares Lender ● 147k loan ● 1y at 1.5% interest ● Total amount 150k ● cap of 450k ● 25% discount = 600k → conversion at 450k → 8,333 new shares ~ 27.3% + 12,500 + 8,333 45,833 shares ~ 18.2% Founders ~ 54,5%
  25. 25. So cap or no cap? daniel@streifflaw.de ● Caps align company & lender interests for a high valuation ● Caps set a benchmark for finance round valuations, but relying on future valuation is the whole point! (risk = return) ● Compromise: a high cap sets a positive benchmark, doesn’t hurt & allows for a high floor as well ● If you say “cap”, I say “floor” → valuation corridor ● If you say “cap”, I say “no discount” (cumulatively) ● Capping the total of all convertibles reduces uncertainty
  26. 26. Part III - Funding your GmbH / UG 1. Why LegalStrasse & How it works 2. The funding dilemma 3. The solution: Convertible Note 4. Pros, Cons and Don’ts daniel@streifflaw.de
  27. 27. Pros of the convertible daniel@streifflaw.de ● Solving the valuation & finance dilemma fairly ● Fast, cheap and easy ○ no due diligence (or extensive guarantees) ○ standardized ○ little negotiation ○ at most relatively low notary costs only ● Allows gathering several investors as lenders ● Founders maintain control (agility & independence)
  28. 28. The dark side of the convertible daniel@streifflaw.de ● Valuation issue only postponed or preset by caps and floors ● Misaligned interests in financing round ○ b/w company & lender w/o cap ○ b/w investors & lender ● “Shadow” cap table & future majorities hard to predict ● Pressure to get € up to blackmail situations (hostile lenders) ● Too young for “entry drug” into finance campaigning
  29. 29. Some parting advice: when to avoid the convertible? daniel@streifflaw.de ● You don’t really need the money right now ● You want to deeply involve your strategic investor & can agree on a fair valuation (or find clever workarounds) ● The professional investor of your dreams (esp. a strategic partner) does not do convertibles Crucial: timing, money and how well you fit with the investor
  30. 30. daniel@streifflaw.de Enjoy & have fund!
  31. 31. Thanks to Gregor Cresnar from Flaticon.com for designing all icons! Thanks for listening! Comments & questions to daniel@streifflaw.de

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