Forms of financing for start-ups: what models are available and what is legally important

Building on the classic venture capital rounds, the question arises for many founders: Which form of financing is the right one for the respective phase?

In addition to traditional equity investments, various models have become established in practice, each of which has its own special legal features.

Equity financing

The classic form of start-up financing is the participation of investors in the company.

Direct participation

Investors acquire shares and become shareholders.

Typical features:

• Long-term capital commitment
• Investors have a say
• Adjustment of the shareholder structure

This form is particularly common in later financing rounds (e.g. Series A).

Convertible loan

The convertible loan is a frequently used instrument, especially in the early phases.

Functionality

A loan is granted and converted into equity at a later date - usually during the next financing round.

Typical advantages:

• Fast realisation
• Less negotiation effort
• Shift in company valuation

From a legal perspective, the Conversion conditions and valuation mechanisms decisive.

Other forms of financing

In addition to equity and convertible loans, there are other models.

SAFE-like models

These simplified investment instruments originated in the USA and are also used to some extent in the German market.

They allow participation without immediate valuation, but must be adapted to German law.

Debt capital and alternative models

Depending on the business model, other options may also be considered:

• classic loans
• Subsidies
• Strategic partnerships

These models can be particularly useful in early phases or as a supplement to equity financing.

Legal consideration for founders

The choice of financing form should be assessed not only from an economic but also from a legal perspective.

Important questions are:

• How is the Shareholder structure?
• Which Rights obtained by investors?
• What impact does the model have on Future financing rounds?
• How complex is the Contractual implementation?

Careful structuring helps to avoid conflicts later on.

By the way:

Find out what founders should know legally about financing rounds in this blog post:

Venture Capital Basics: Financing rounds from pre-seed to Series A

Conclusion

Start-ups today have a variety of forms of financing at their disposal. Each brings its own opportunities and legal requirements.

The right choice depends largely on the company's phase, growth targets and strategic orientation.

If you have any questions on this or other topics, please contact us - we will be happy to advise you

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