How do you calculate equity funding?
The basis for any financing is the mentioned financing requirement, which has to be covered. Once this amount has been determined, it must be clarified how the company is currently valued. The company valuation is then the basis for the amount of shares in the company transferred in return for the contributions made. The company valuation can, for example, be calculated using a sales multiple that is customary in the industry. In addition, a pre- and a post-money valuation must be calculated, i.e. valuations that will be available before and after the expected investment.
What is silent participation?
Depending on the type of financing that is provided, different rights and obligations are associated with this. Let’s think about a loan from your house bank. It grants itself defined rights around the credit agreement, which are typically rights to information and information , and possibly also securities such as liens. Other investors, on the other hand, would like to have an active say in the company’s operational activities. For example, you provide equity, take over a percentage of the company and contribute proactively. Even ordinary shareholders have the opportunity to actively shape the company in the course of the general meeting.
But then there is also the option of silent participation . As the name suggests, the investors in this case have no interest in being involved in the day-to-day business of the company. Nevertheless, it can be agreed that the silent partners will be granted certain control rights. In principle, however, capital is simply made available here and in return there is a right to participate in the company’s profit distributions .
Examples of equity financing
According to WHICHEVERHEALTH.COM, the easiest way to understand the full range of possibilities that arise from equity financing is to look at practical case studies.
In our first example, let’s think of a young start-up, which makes muesli bars and wants to sell them to retail chains. The capital requirement is great, because in order to supply the retail trade, corresponding quantities have to be produced. Manufacturers who are eligible for production do not offer production in small quantities and are also skeptical when new companies dare to enter the market. Some manufacturers therefore require prepayment, which the start-up cannot finance, as the retail chains, in turn, will only pay very late. The time gap is simply too big here. However, there is a producer who is ready to support the company. He wants to get actively involved, provide advice and organize the entire production for the company. GmbH of the producer at the muesli start-up and, in addition to many years of experience, also brings 200,000 euros of equity into the company to finance growth . In return, the manufacturer’s GmbH now receives 25 percent of the shares in the company . Details on the right to have a say and in general the rights and obligations of all shareholders are regulated in the partnership agreement.
Example: Established company
In our second example, the situation is completely different. Let’s think of an established hotel that has been around for many decades. Bank loans were taken out years ago, but now the building needs to be renovated again, although the existing loans have not yet been repaid. The banks react skeptically to this plan, as liens have already been entered in the land register through the existing loans – there is no new collateral. Therefore, the decision is made that a so-called debt-equity swap occurs. This means that the bank waives the repayment of the outstanding loan and instead shares in the company receives. The exact design can again be made through shareholder agreements and supplementary agreements. In the long term, the bank will have no interest in permanently working on day-to-day operations. However, it can be defined that for a certain transition phase the financing bank will provide a restructuring professional who will restructure the company and help to put it on a safe footing. These two examples already illustrate how financing requirements and investments can arise for completely different reasons. The range is almost endless and the design options for structuring investments are just as large. In the following, we will now take a look at which aspects must be given special attention depending on the legal form.
Consideration of different legal forms
Despite the broad design options, which are contractually quite flexible, there are some key points that must be taken into account depending on the respective legal form .
Equity financing at the KG
The limited partnership (KG) offers the option of being a general partner or limited partner . So if you only want to bring capital into a company but do not want to participate in the operational activities, the KG can create an ideal construct. There is also the option of a GmbH & Co. KG to enable the investment to take place through a corporation .
Equity financing at the GmbH
The limited liability company (GmbH) offers the opportunity to acquire the position of a partner through the capital contribution . How this role is interpreted is again a matter of agreement – from the managing partner to the financial investor who acts passively and perhaps only wants to check key figures and balance sheet data on a quarterly basis, the full spectrum is conceivable here.