Participation in a company
If you plan to raise money for your company there are several options that all have their benefits and trade-offs. For scale-up companies equity funding often is a suitable way. With a leading law firm we have developed a legal documentation for an asset that is economically comparable to an equity investment into your company. Investors provide you with funding in exchange for a certain share of your company's value. We call this asset Digital Company Share.
The return for an investor is not fixed at the time of the sale. The return depends on the value of the company. A unit of a Digital Company Share has the economic value of one Euro of the company's registered share capital. For the owner of a Digital Company Share this means that they receive a payout every time the shareholders of the company receive a payout. This happens, for example,
- if the shareholders sell part of their share capital to a new investor,
- if the company carries out an IPO and the previous shareholders receive shares or
- if the company distributes dividends to its shareholders.
If one of these situations occurs, the company is contractually obliged to distribute payouts not only to its shareholders, but also to the owners of the Digital Company Shares.
Let's first set the scene: You and a business partner are the founders of a company called "Awesome Tech GmbH" with a share capital of EUR 30,000. You both own EUR 15,000 of the share capital. You are convinced that you company is worth EUR 2,250,000. With the commercial register at hand we can compute the cap table:
Let's say you now sell 15,000 units of the Digital Company Shares after you start the business where one unit bears an economic value of EUR 1 of your share capital. In return for issuing the Digital Company Shares you will receive EUR 750,000 to hire new employees and buy them enough coffee. This corresponds to a price of EUR 50 per unit of the Digital Company Shares. This is a post-money valuation of EUR 2,250,000.
After the issue, the cap-table still shows a share capital of EUR 30,000 in the commercial register. This cap-table reflects the proportion of voting rights among the shareholders. However, the now existing cap-table of the Digital Company Shares has an additional number of EUR 15,000. Both cap-tables together reflect the economic participation in case of a payout. This corresponds to a total of EUR 45,000:
So if three years later a private equity firm buys your company for a total of EUR 12,000,000 it is obliged to pay you both EUR 4,000,000 each, and the owners of the Digital Company Shares also receive EUR 4,000,000 in total. Here the actual payout is calculated with the cap-table in the commercial register and the cap-table of the digital company investments. With their initial payment of EUR 750,000 the investors get a return of more than 500 %. In venture capital terms this is expressed as a multiple of more than 5.
The digital part of the cap table ("Investors") can be viewed directly on the Ethereum Blockchain. Just like the commercial register, manipulation is very unlikely and the entry can be viewed transparently by everyone. For example our Cap-Table of the Digital Company Share looks like this: Cashlink Virtual Cap Table