Typically, an equity investor invests:
- when starting a business
- on the occasion of a planned increase in share capital
- shortly after the takeover of the business by the new owner
The legal form of your company and the contractual provisions you specify determine which rights, obligations and liability he assumes .
Start-ups that are founded as sole proprietorships can later be converted into GmbHs by taking on additional investors.
The abbreviation GmbH stands for the company with limited liability, which is one of the legal forms of corporations.
A special feature of this form of company is that the partners do not have to be personally liable with their private assets. The GmbH is a legal entity and acts itself as a businessman in business transactions.
If the GmbH of your start-up has been set up and there are already investors, you as the founder can now agree a participation agreement with them.
In order to acquire shares in a company, your investor must at this point become a shareholder in your GmbH or a co-owner (co-entrepreneur) in your partnership.
In these cases, the investor also acquires a right to share in the profits and to participate in management decisions.
However, an investment in shares (the so-called shares) is only possible if your start-up has been able to develop from a limited liability company into a public limited company (AG for short) by means of a successful market entry.
With this form of direct participation in the listed company, the investor acquires a claim to his share of the profits by purchasing shares and also a right to vote on the design of the business policy.
However, strict regulations are laid down in the Stock Corporation Act (AktG) for founding an AG. The following steps are absolutely necessary for this:
- Drafting of articles of association and notarial certification
- Acquisition of shares by the AG founders
- Provision of AG bodies and departments (supervisory board, board of directors, auditor)
- Incorporation report creation and successful verification of incorporation
- Deposit of deposits (cash or in kind)
- Entry in the commercial register (The founding of a stock corporation is only complete after entry in the commercial register.)
In addition, at least €50K, for example, must be deposited as the share capital of an AG. They form the essential basis on which the first shares of your start-up or scale-up can be issued: The so-called par value shares (minimum value: 1 €/$/£) or no-par value shares.
Trading the shares on the stock exchange is of course not absolutely necessary for your advanced start-up or scale-up and usually only takes place in a large corporation.
In any case, investors who participate in the equity of your company become so-called shareholders. If you translate this English term into German, the dictionary throws out the terms „Aktär“, „Aktien“ or „Aktieneigner“.
These are the people or organizations who own a fixed stake in your company and who are therefore also the owners of your start-up.
These owners are usually interested in monetary success, since they naturally hope for positive financial returns and profits for your (now joint) company.
The shareholders of your company also have a lot to say. Among other things, it is possible for them to come together at shareholders‘ meetings in order to influence the company management through elections in a self-determined manner.
When it comes to important and essential issues, the shareholders can have a say and thus exert a direct influence on your start-up and scale-up.
If your company also follows the so-called shareholder value approach, the (mostly financial) wishes and goals of the shareholders are in the foreground.
Your economic activity is therefore based on what the owners (shareholders) of your start-up and scale-up want.
If you transfer this approach to reality, then as the board of directors of your start-up you are primarily pursuing one goal: to increase the market value of your equity. After all, your shareholders want the long-term value of their shares in your company to grow.
A profitable company management should take note of the interests of other people and groups (stakeholders), but only has to take them into account if possible. Compared to the wishes of the shareholders, however, they do not play an essential role in this approach.
Your advantages of investing in equity
Especially at the beginning of your start-up development, investing in your company’s equity is a simple and promising financing option.
Many business angels are interested in the equity of your start-up and would therefore like to support you with an investment. Of course, you can also benefit from the know-how of business angels with business experience and simply hand over some decisions to professional hands.
However, it is important that you are aware of the value of your equity shares and still focus on keeping as much equity as possible in the hands of the founders.
Negotiate smartly with your investor and deal with your equity in a sustainable and future-oriented manner!
The disadvantages of investing in equity
„Many cooks spoil the broth.“: Especially in the initial phase of your start-up, it is important to set your own course and make yourself as independent as possible. After all, your idea is unique and only you know how you want to implement it profitably.
Business angels in particular want relatively too much equity for their investment in the seed phase of your start-up, which can be fatal to your start-up on the long-term development path.
If you have already sold too much equity at the beginning, you will not have much of it available later and may become uninteresting for larger investors.