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TOP 10 Dos and Don'ts at foundation and early-stage financing

TOP 10 Dos and Don'ts on foundation and early-stage financing - A cooperation with:

His "TOP 10 Dos and Don'ts at foundation and early stage financing" has summarized venture capital lawyer Sebastian Frech from our cooperation partner Norton Rose Fulbright.

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1. Direct or indirect participation

The founders must decide whether they wish to participate directly (one-tier structure or one-tier structure) or indirectly via an investment company held by the founder (two-tier structure or two-tier structure) in their start-up. There is no "right" or "wrong" here, but founders should be aware of the advantages and disadvantages of the respective structure. The two-stage structure is particularly advantageous for tax purposes in the case of profit distributions and exits. This is offset by slightly higher one-off start-up costs and the minor ongoing administration costs of the intermediary company. The direct involvement of the founders - i.e. a single-stage structure - is therefore supported by its low complexity and a certain cost advantage.

As a result, the founders should think about tax structuring options at an early stage, since a later (re)structuring is usually likely to be much more complex and individual options are no longer required overall.

2. Vesting

If more than one founder participates in a start-up, the contractual agreement on an effective vesting clause in the founders' own interest is urgently required.

Vesting regulations serve to keep the founders on board during the start-up phase of the company; if a founder leaves the company as an employee, he also loses all or part of his company shares. Meaningful vesting rules are not only in the interest of investors; they should rather be agreed in the own interest of the founders and the financial viability of the start-up itself. For example, if one of three equal founders leaves the start-up as an employee and retains his shares, it will be difficult or even impossible for the start-up and the remaining two founders to find VC donors.

Clear market standards have developed in the concrete form of the vesting clauses (total duration, time barriers (cliff), compensation regulations, etc.) within which the founders should operate. Finally, in order for the clauses to be effective, it must be noted that they regularly require notarial certification.

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3. IP Rights

Intellectual property rights or IP rights form the major part of the company value for most start-ups.

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