Cheap startup financing with mezzanine capital

A recent example in the German startup scene shows that promising business models  in the growth phase, not only with capital , but also with debt can be financed or hybrid forms. The Hamburg-based company Kreditech has for its Big Data scoring process of credit check up to five million euros borrowed get from Kreos Capital.

In Kreditech according to press release, the business model has enabled the ability to be financed by debt. Regardless of the business plan of a startup, it makes sense to look at as the founder of some forms of hybrid capital.

Before the individual financial instruments are considered in more detail, one can ask the question why it is generally for founders of great importance to think about their financial structure. Typically are owner of a new company the following problem: Depending on the development and maturity of the company are not yet sufficient revenue available to cover the cost of a normal loan. Even with existing revenues, it may be difficult to operate the liabilities, as banks - due to the risk profile of startups - charge high interest rates.

Under these circumstances, one might come to the decision to look at capital as the only meaningful source of financing for startups. However, with absorption of external equity holders always loses shares and voting rights at its startup. Despite these problems, the company therefore remains mostly in the seed and growth phase, only the route via external equity from venture capital companies and / or business angels.

In order to defuse the conflict between the high direct cost of credit and the high indirect costs of raising equity capital through share loss, to so-called hybrid- or mezzanine offer financing instruments, so forms of corporate financing that is not 1: 1 correspond to the ideal types equity or debt , In particular, silent participations, participating loans, loans with conversion rights and subordinated loans, the four are in practice most frequently encountered forms.

An overview of the different stages of a startup and the appropriate forms of finance is as shown:

Below the shareholder loan and loans are considered in more detail by way of example with conversion rights, as these both different interest situations between founder and investor mitigate, as are widely used in the US start-up scene.

Participating loans

Participating loans grant the creditors Investor addition to a fixed basic interest rate additionally a profit-related interest contribution. Advantage for the entrepreneur are compared to bank credit relatively low and adapted to the company's success rates, as well as the fact that all the company's shares remain with her.

Applications can be found for participating loans usually always only when the young company has sales potential entering a high and in the foreseeable future.Only then can the financing bank can proceed realistically it, their "subsidized" interest rate increase by the profit-sharing.

The positive image, draw the shareholder loan in the start-up financing is clouded by the following restriction: If the startup for the future further equity financing rounds plan (with the participation of venture capital companies), the shareholder loan is not suitable. The potential investors of "hard" equity will not appreciate having to transfer parts of the profits to a lender. From their perspective, the proceeds find their most profitable use as a re-investment in the company in order to be able to grow faster.

Loans with conversion rights

In addition to profit entitlements (participating loan) certain special rights may be linked to loans that are based on future income claims and participation rights.Loans with conversion rights, or simply convertible loans, allow the creditor to convert the loan into an equity participation and to acquire shares. The capital thus is free to choose to exercise their conversion right during the term of the loan or to forfeit it. Unless a conversion takes place, the loan will bear interest annually and paid back at the end of the term.

The conversion right brings a loss of information and interest differences between founder and lenders with it. Since the creditor can observe the development of the company during the term, it is with the right to convert it were an owner / shareholders on demand.

There are a number of reasons why both the investor and the founder of an online company prefers to take out a loan rather than equity, and then convert the loan into equity at a later date. For the startup, the reasons are clear. If the young company believes its capital will be worth more later, then "diluted" it through a convertible loan and its subsequent conversion into equity less. Besides, the transaction costs of contracts, et cetera usually lower for issuance of debt compared to equity.

On the side of venture capitalists take advantage of the convertible loan are less obvious. Sometimes the interest in a startup is so great that the investor would like to take every opportunity to invest in the company. Here the investors like to invest in a convertible loan and makes the next round of financing specify the price of the equity.

With a possible addition, bankruptcy debt higher than equity in rank what the investors has a somewhat greater security. However, it should be noted that this additional security is not particularly valuable in young Internet companies. If a startup fails, usually minimal insolvency exists. 
Is a general advantage for both sides that convertible loans can be very well connected with future funding rounds. Therefore, the financing through convertible loans in various phases of startups is conceivable. 
For one, it is in the very early phase in the first friends and family generally invest in the company. When friends and family can be assumed to have no great interest in long negotiations over the price of the shares and leave this discussion rather incorporate subsequent rounds of financing with professional investors.

On the other convertible loans may also be useful in a very late stage of the online business. For example, with a planned in the near future exit , regardless of whether a sale or IPO . If financial resources are needed for the achievement of certain milestones before the exit yet, it can often be better Founder view to obtain a loan with generous conversion rights, as through a final venture capital round, which goes hand in hand with greater dilution of the shares.

In summary it can be said that both investors and entrepreneurs in the predominantly equity-financed start-up scene can benefit from unusual financial instruments. Hybrid forms of financing such as participating loan and convertible loans provide an inexpensive and interest reassignment ends entering the startup financing.

Currently, the search seems even more difficult for potential mezzanine lenders for financing growth German startups. Hope to make the following addresses: Participating loans you can take out the one with the Swiss bank Zürcher Kantonalbank. This has its own start-up financing department. that promising companies from the south of Germany could have here clearly benefits the geographical position suggests.

In addition to the Zürcher Kantonalbank can be found on the websites of the major German savings banks or their affiliates regularly information on participating loans.Also said at the beginning of the article Investor KreosCapital focused on the "debt-, or mezzanine financing for high-growth companies".

Convertible bonds, however, are (HTGF) used mainly by High-Tech Gründerfonds in Germany in his participation model. HTGF is in this model for 15 percent of the shares 500 000 EUR are available. 5,000 euros as share capital and 495,000 euros as a convertible loan. Known companies that were financed by the HTGF with a convertible loan, for example, are 6Wunderkinder , Windeln.de , Mister Spex  andStuffle.it .