Where German Tech Unicorn Founders Should Go Public

Christian Dahlen
Christian DahlenMember um Band of Angels
Confidential
WUNDERVC
Where German Tech Unicorn
Founders Should Go Public
Christian Dahlen, September 2023
Confidential
WUNDERVC 2
Only few Startup Founders will be able to go Public
Venture
financed startup
exceeding the
‘Mendoza line of
SaaS growth’
IPO or
sale
IPO
Sale
Sale or
shutdown
Yes
No
Only < 0.1% of
all funded
startups
Confidential
WUNDERVC 3
IPO Brings with it Completely Different Expectations
• Ownership change brings with it a
loss of protection from the board
of investors
• Increased public scrutiny
• Expectation management toward
the public markets
• Expectation management
towards all stakeholders
• Governance structure will
completely change and depend
on where the shares are traded
Private
company
board
Public
company
board
IPO
Confidential
WUNDERVC 4
The Decision to IPO is Typically made 2-3 years Prior
1m
ARR
Company first
becomes
serious about
developing
corporate
governance
systems
Hires the
CFO who
eventually
takes
company
public
Hires
inside
general
counsel
Recruits first
independent
director to
the board
IPO
Put the
financial &
accounting
systems in
place
9
Years
4
Years
3
Years
2
Years
0
Years
Hire the
external
auditor
used at
IPO
Confidential
WUNDERVC 5
What Matters to Founders
1. Valuation
2. Board governance
3. Board composition
4. Board control (‘Dual class shares’)
Confidential
WUNDERVC 6
Where to to Public?
Venture
financed startup
exceeding the
‘Mendoza line of
SaaS growth’
IPO or
sale
IPO
US
Germany
Yes
?
Confidential
WUNDERVC 7
Key Differences Between Germany and the US
Germany US
1. Valuation Dominated by value
investors
Valuations often 2X
higher than European
comparable
2. Board governance Two tiered AG
stakeholder model*
One tiered shareholder
model
3. Board composition Supervisory board Board of Directors
4. Board control (“Dual
class shares”)
One share – one vote** Dual class shares
*SE allows for one tier model ** Subject to changes planned in Germany’s Future Financing Act 2023
Confidential
WUNDERVC 8
Almost all Tech Startups are Trading
on NASDAQ or NYSE
• Higher valuation can be used as acquisition currency, to avoid
being acquired and to reward shareholders and employees
• US IPO market generally offers higher IPO valuations than the
UK, Europe and German markets. The US market shows
particular strength in small and mid cap IPOs, while European
exchanges rather have micro caps
• Many tech IPOs require knowledgeable tech analysts and in
turn informed investors
• Deeper, bigger pool of growth investors on NASDAQ and
NYSE vs. value investors
‘America is the natural habitat of the growth investor while the
FTSE today still reflects the truism that the UK is a dividend
market, representing the old economy.’
FT, Aug 2022
1. Valuation
Confidential
WUNDERVC 9
EV/sales in the US Historically 10x
but only 5-6x in London
1. Valuation
Confidential
WUNDERVC 10
Governance Models: Worlds Apart
Germany United States
Board Structure Two-tiered One-tiered
Goals of Corporate
Governance
Stakeholder model Shareholder model
CEO/Chair Duality Prohibited Permitted
Independence via Board Structure Committee Structure
Appointment of
Independent Auditor
Supervisory Board Independent Audit
Committee
Mandatory disclosures Required by law Required by SOX
Required Disclosure In Annual Report Limited in 10K, details in
Proxy Statement
2. Governance
Confidential
WUNDERVC 11
Two-Tier Versus One-Tier Boards
2. Governance
Company in the US
Board of Directors
Executive
Directors
Non -Executive
Directors
Company in D
Management
Board
Supervisory
Board
Executive
Directors
Non -Executive
Directors
Two-Tier AG Board Structure One-Tier Board Structure
Confidential
WUNDERVC 12
The Role of the German Supervisory Board
is to Control
2. Governance
The Supervisory Board is often referred
to as a ‘Kontrollgremium’, emphasizing
its responsibility to control the
Management Board of the
corporation.
• One half of the Supervisory Board members
are elected by the employees for most
companies with more than 2,000 employees
• One third of the Supervisory Board members
must be elected by employees for most
companies with 500 to 2,000 workers
The Supervisory Board appoints and can
remove members of the Management Board.
Supervisory Board cannot make any executive
decisions or give formal orders to the
Management Board
The Management Board independently
manages the company and is responsible for
the day-to-day business of the company
Confidential
WUNDERVC 13
Founder CEOs are Better Stewards
of Their Company
2. Governance
• Stewardship theory suggests that firms with CEO duality -
where the CEO serves as the chair of the board of directors-
allow the CEO to develop a clear, executable strategy
• Statistically significant correlation between dual leadership
and CEO tenure, and firm performance
• Specifically, there is a positive correlation between CEO
tenure and probability of firms going public or acquired in
firms with duality
• Considering the relatively small size of the board of directors
in venture funded startup firms, being in dual position for
longer tenure means better understanding of human capital
for efficient consolidation of power and unity of leadership
Confidential
WUNDERVC 14
In the US the CEO can Assemble Their own
Board of Directors
• Current industry relevance –> important for tech
companies
- Insight into recent and future trends
- C level insights into fast growing companies
• Regulatory requirements, i.e. qualifications for
committees: audit committee, nominating
committee, compensation committee
• Diversity: Nationality/background, gender, age
• Independent board members
• CEO day job: build strong
executive team
• CEO job leading up to the IPO:
Assemble strong board or directors
- gain/keep control
- solicit advice
- maximize value
3. Composition
CEO responsibilities Board member qualifications
Confidential
WUNDERVC 15
US BoD Composition - Examples
HQ
location
Listing Market
cap
Board composition
Zoom Silicon
Valley
NASDAQ $20.3B • 9 Board members (all US based)
- 1 CEO and Chair aged 52
- 2 active public tech company CEOs
- 2 VCs with board experience
- 2 public sector and policy exec
- 1 tech CFO and investor
- 1 angel and lead director
• 4 Board Committees
UiPath London ->
NY
NYSE $8.5B • 7 Board members (US dominated)
- 1 CEO and chair age: 50
- 3 active public tech company
CEOs/CFOs
- 3 VCs with board experience
• 3 Board Committees
3. Composition
Confidential
WUNDERVC 16
German Supervisory Board Composition - Examples
3. Composition
HQ
location
Listing Market
cap
Board composition
BioNTech SE Germany NASDAQ $29B • 6 Board members (D dominated)
- 5 with track record in healthcare,
pharmaceutical and biotechnology
- 1 with audit and accounting background
• 3 board committees
TeamViewer
SE
Germany Frankfurt €3.1B • 8 Board members (6 German)
- Key skills: Private equity, corporate finance,
consulting
- Backgrounds predominantly in traditional
industries
- Very limited SW experience and exposure to
SW companies through boards
• 2 board committees
Confidential
WUNDERVC 17
Control: Dual Class Shares For Founders
Publicly held corporations can issue different classes of common stock
The most common practice is to issue Class A shares and Class B shares. Each class comes with a
different set of rights for stockholders.
- Class B shares give stockholders multiple (3/10/35) votes for each share they own
- Class A shares give stockholders 1 vote for each share they own.
Pros (for founders)
Gives founders, executives, and any other key
stakeholders enough super voting shares to help
retain control over the company
Concentrating voting rights among a particular
class of shareholders makes a takeover attempt
more difficult
Cons (for common shareholders)
Class A shareholders may feel that insiders have
too much control over the company and won’t
act in the best interests of ordinary
shareholders, causing the company and its
stock to underperform
The Class A shareholders can try to force a vote
of all shareholders to get rid of the two different
stock classes and their unequal voting rights
4. Control
Confidential
WUNDERVC 18
Almost Half of Tech IPOs Have Used Dual Class Shares
4. Control
Examples
• Zoom: 1 B share = 10 A shares
• UiPath: 1 B share = 35 A shares
• Meta: 1 B share = 10 A shares
• Google: 1 B share = 10 A shares
6%
14% 15%
11%
6%
37%
24%
43%
36% 35%
43%
47%
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
Dual Class Tech IPOs, %
Confidential
WUNDERVC
Many rocket ship tech founders in Germany have a choice whether to go
public in Germany or in the US
The choices come with trade offs regarding incorporation and board
governance
Tech founders wanting to play in the big leagues should list in the US
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Where German Tech Unicorn Founders Should Go Public

  • 1. Confidential WUNDERVC Where German Tech Unicorn Founders Should Go Public Christian Dahlen, September 2023
  • 2. Confidential WUNDERVC 2 Only few Startup Founders will be able to go Public Venture financed startup exceeding the ‘Mendoza line of SaaS growth’ IPO or sale IPO Sale Sale or shutdown Yes No Only < 0.1% of all funded startups
  • 3. Confidential WUNDERVC 3 IPO Brings with it Completely Different Expectations • Ownership change brings with it a loss of protection from the board of investors • Increased public scrutiny • Expectation management toward the public markets • Expectation management towards all stakeholders • Governance structure will completely change and depend on where the shares are traded Private company board Public company board IPO
  • 4. Confidential WUNDERVC 4 The Decision to IPO is Typically made 2-3 years Prior 1m ARR Company first becomes serious about developing corporate governance systems Hires the CFO who eventually takes company public Hires inside general counsel Recruits first independent director to the board IPO Put the financial & accounting systems in place 9 Years 4 Years 3 Years 2 Years 0 Years Hire the external auditor used at IPO
  • 5. Confidential WUNDERVC 5 What Matters to Founders 1. Valuation 2. Board governance 3. Board composition 4. Board control (‘Dual class shares’)
  • 6. Confidential WUNDERVC 6 Where to to Public? Venture financed startup exceeding the ‘Mendoza line of SaaS growth’ IPO or sale IPO US Germany Yes ?
  • 7. Confidential WUNDERVC 7 Key Differences Between Germany and the US Germany US 1. Valuation Dominated by value investors Valuations often 2X higher than European comparable 2. Board governance Two tiered AG stakeholder model* One tiered shareholder model 3. Board composition Supervisory board Board of Directors 4. Board control (“Dual class shares”) One share – one vote** Dual class shares *SE allows for one tier model ** Subject to changes planned in Germany’s Future Financing Act 2023
  • 8. Confidential WUNDERVC 8 Almost all Tech Startups are Trading on NASDAQ or NYSE • Higher valuation can be used as acquisition currency, to avoid being acquired and to reward shareholders and employees • US IPO market generally offers higher IPO valuations than the UK, Europe and German markets. The US market shows particular strength in small and mid cap IPOs, while European exchanges rather have micro caps • Many tech IPOs require knowledgeable tech analysts and in turn informed investors • Deeper, bigger pool of growth investors on NASDAQ and NYSE vs. value investors ‘America is the natural habitat of the growth investor while the FTSE today still reflects the truism that the UK is a dividend market, representing the old economy.’ FT, Aug 2022 1. Valuation
  • 9. Confidential WUNDERVC 9 EV/sales in the US Historically 10x but only 5-6x in London 1. Valuation
  • 10. Confidential WUNDERVC 10 Governance Models: Worlds Apart Germany United States Board Structure Two-tiered One-tiered Goals of Corporate Governance Stakeholder model Shareholder model CEO/Chair Duality Prohibited Permitted Independence via Board Structure Committee Structure Appointment of Independent Auditor Supervisory Board Independent Audit Committee Mandatory disclosures Required by law Required by SOX Required Disclosure In Annual Report Limited in 10K, details in Proxy Statement 2. Governance
  • 11. Confidential WUNDERVC 11 Two-Tier Versus One-Tier Boards 2. Governance Company in the US Board of Directors Executive Directors Non -Executive Directors Company in D Management Board Supervisory Board Executive Directors Non -Executive Directors Two-Tier AG Board Structure One-Tier Board Structure
  • 12. Confidential WUNDERVC 12 The Role of the German Supervisory Board is to Control 2. Governance The Supervisory Board is often referred to as a ‘Kontrollgremium’, emphasizing its responsibility to control the Management Board of the corporation. • One half of the Supervisory Board members are elected by the employees for most companies with more than 2,000 employees • One third of the Supervisory Board members must be elected by employees for most companies with 500 to 2,000 workers The Supervisory Board appoints and can remove members of the Management Board. Supervisory Board cannot make any executive decisions or give formal orders to the Management Board The Management Board independently manages the company and is responsible for the day-to-day business of the company
  • 13. Confidential WUNDERVC 13 Founder CEOs are Better Stewards of Their Company 2. Governance • Stewardship theory suggests that firms with CEO duality - where the CEO serves as the chair of the board of directors- allow the CEO to develop a clear, executable strategy • Statistically significant correlation between dual leadership and CEO tenure, and firm performance • Specifically, there is a positive correlation between CEO tenure and probability of firms going public or acquired in firms with duality • Considering the relatively small size of the board of directors in venture funded startup firms, being in dual position for longer tenure means better understanding of human capital for efficient consolidation of power and unity of leadership
  • 14. Confidential WUNDERVC 14 In the US the CEO can Assemble Their own Board of Directors • Current industry relevance –> important for tech companies - Insight into recent and future trends - C level insights into fast growing companies • Regulatory requirements, i.e. qualifications for committees: audit committee, nominating committee, compensation committee • Diversity: Nationality/background, gender, age • Independent board members • CEO day job: build strong executive team • CEO job leading up to the IPO: Assemble strong board or directors - gain/keep control - solicit advice - maximize value 3. Composition CEO responsibilities Board member qualifications
  • 15. Confidential WUNDERVC 15 US BoD Composition - Examples HQ location Listing Market cap Board composition Zoom Silicon Valley NASDAQ $20.3B • 9 Board members (all US based) - 1 CEO and Chair aged 52 - 2 active public tech company CEOs - 2 VCs with board experience - 2 public sector and policy exec - 1 tech CFO and investor - 1 angel and lead director • 4 Board Committees UiPath London -> NY NYSE $8.5B • 7 Board members (US dominated) - 1 CEO and chair age: 50 - 3 active public tech company CEOs/CFOs - 3 VCs with board experience • 3 Board Committees 3. Composition
  • 16. Confidential WUNDERVC 16 German Supervisory Board Composition - Examples 3. Composition HQ location Listing Market cap Board composition BioNTech SE Germany NASDAQ $29B • 6 Board members (D dominated) - 5 with track record in healthcare, pharmaceutical and biotechnology - 1 with audit and accounting background • 3 board committees TeamViewer SE Germany Frankfurt €3.1B • 8 Board members (6 German) - Key skills: Private equity, corporate finance, consulting - Backgrounds predominantly in traditional industries - Very limited SW experience and exposure to SW companies through boards • 2 board committees
  • 17. Confidential WUNDERVC 17 Control: Dual Class Shares For Founders Publicly held corporations can issue different classes of common stock The most common practice is to issue Class A shares and Class B shares. Each class comes with a different set of rights for stockholders. - Class B shares give stockholders multiple (3/10/35) votes for each share they own - Class A shares give stockholders 1 vote for each share they own. Pros (for founders) Gives founders, executives, and any other key stakeholders enough super voting shares to help retain control over the company Concentrating voting rights among a particular class of shareholders makes a takeover attempt more difficult Cons (for common shareholders) Class A shareholders may feel that insiders have too much control over the company and won’t act in the best interests of ordinary shareholders, causing the company and its stock to underperform The Class A shareholders can try to force a vote of all shareholders to get rid of the two different stock classes and their unequal voting rights 4. Control
  • 18. Confidential WUNDERVC 18 Almost Half of Tech IPOs Have Used Dual Class Shares 4. Control Examples • Zoom: 1 B share = 10 A shares • UiPath: 1 B share = 35 A shares • Meta: 1 B share = 10 A shares • Google: 1 B share = 10 A shares 6% 14% 15% 11% 6% 37% 24% 43% 36% 35% 43% 47% 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 Dual Class Tech IPOs, %
  • 19. Confidential WUNDERVC Many rocket ship tech founders in Germany have a choice whether to go public in Germany or in the US The choices come with trade offs regarding incorporation and board governance Tech founders wanting to play in the big leagues should list in the US