We're thrilled to release a legal template for convertible notes, accessible for free to all startups in Germany! The template is straightforward, founder-friendly, and is now available on Legalstrasse (https://www.legalstrasse.com/). Check out what it is, how it works and how to use it in this presentation by Daniel Streiff, Founder of Streiff Law. Fundraising can be a long and painful legal process. But it doesn't have to be. For the past years, many startups have turned to convertible notes to finance their 1st round or bridge. Convertibles are a form of loan that automatically converts to equity at the next VC round, making the paperwork fast and effortless. It's also a lot cheaper than hiring an army of lawyers to do a small equity round. But here's the catch: you need a well-crafted doc to make it happen. We got you covered: https://www.legalstrasse.com/

1. Enhancing
by
Streiff Law
&
The Family

2. Part I - Founding
Part II - Growing
Part III - Funding
your GmbH / UG
daniel@streifflaw.de

3. Part III - Funding
your GmbH / UG
1. Why LegalStrasse & How it works
2. The funding dilemma
3. The solution: Convertible Note
4. Pros, Cons and Don’ts
daniel@streifflaw.de

4. 9 out of 10
Startups fail
Many for lack of a legal infrastructure
and legal knowledge
daniel@streifflaw.de

5. daniel@streifflaw.de
a new hope
Empowering founders
through legal
infrastructure & knowledge

6. daniel@streifflaw.de
Why
LegalStrasse
#1: Avoid the pitfalls

7. daniel@streifflaw.de
Why
LegalStrasse
#2: It’s free!

8. daniel@streifflaw.de
Why
LegalStrasse
#3: More bootstrapping

9. daniel@streifflaw.de
Why
LegalStrasse
#4: Join forces

10. 1. Go to LegalStrasse.com
2. Select & download docs
3. Edit marked passages with
help of comments
4. For funding use the
Convertible Note template
How it works

11. Part III - Funding
your GmbH / UG
1. Why LegalStrasse & How it works
2. The funding dilemma
3. The solution: Convertible Note
4. Pros, Cons and Don’ts
daniel@streifflaw.de

12. Why found a GmbH or a UG?
● Founders join to work together
GmbH = Gesellschaft mit beschränkter Haftung
UG = Unternehmergesellschaft (haftungsbeschränkt)
Shareholders
GmbH/UG
● Legal entity independent of its
shareholders
● Limited liability
Managing Directors

13. The GmbH/UG in need for €/$
daniel@streifflaw.de
Shareholders
GmbH/UG
MDs
Employees
Provider/
Contractor
Freelancer

14. Early stage funding dilemma
Who & What Type Why Why not
Bootstrapping equity
You hussle &
believe in you
Will only take you that far
daniel@streifflaw.de
Family, friends
& fools
equity/
debt
They (foolishly)
believe in you
As a loan? A donation? For
shares? Under which terms?
Bank loans debt € via interest
No security, no money! Personal
securities = unlimited liability
Risk capital equity € via shares Shares at what valuation?

15. How to evaluate a company?
daniel@streifflaw.de
Method
Discounted cash flow
Market capitalization
Profit/Earnings Multiplier
Excess earnings
Asset/ book value
Liquidation value
Comparable businesses
But
negative cash flow (yet!)
Want to establish it here
Little earnings w/o profit
Earnings again?
only IP. Value?
I feel like going in circles
unique (USPs!)
Let’s find a simpler solution!

16. Part III - Funding
your GmbH / UG
1. Why LegalStrasse & How it works
2. The funding dilemma
3. The solution: Convertible Note
4. Pros, Cons and Don’ts
daniel@streifflaw.de

17. Loan & behold: our template!
● Bilingual
● Balanced rights for
company & lender
● Just adapt/fill out
the highlighted fields
● Don’t forget to sign
(to be safe in front of a notary)

18. The solution:
The Convertible Loan
daniel@streifflaw.de
● Lender gives a loan with interest that he may claim back
after 1-2 years
● If there is a financing round until then, lender converts his
repayment & interest claims into shares of the company
● Lender piggybacks the finance round valuation, but
receives a discount (15-30%) from it to compensate the
lender for his early stage risk
= Loan (debt) that converts into shares (equity)

19. How to fill out the template?
(highlighted fields)
What Details
Company & Lender data Dah.. and the shareholder data
Loan amount In € or set currency conversion rate & date
Interest rate Keep it low for tax reasons
Due date At least 1 year after payout (e.g. 18 months)
Discount 15-30%; depends on risk, stage etc.
Financing Round How big should the next min. investment be?

20. A (convertible) loan over time
daniel@streifflaw.de
Company
foundation:
share capital
Convertible loan:
contract & payment
End of loan:
repayment plus
interest
GmbH/UG Lender

21. A convertible loan over time
daniel@streifflaw.de
Company foundation:
share capital
Convertible loan:
contract & payment
End of loan:
repayment + interest
Financing round,
Capital increase &
conversion
GmbH/UG LenderInvestor

22. Investment & capital increase
daniel@streifflaw.de
GmbHInvestor 400k €
25k shares
800k € pre-money value
37.5k shares
1.2 m € post-money value
12.5k
shares
Why cap increase?
● Selling shares only
benefits sellers &
Finanzamt
● GmbH can spend
capital reserves
Formula: old shares * investment / valuation = new shares
Example: 25k * 400k / 800k = 12.5k

23. Conversion example
daniel@streifflaw.de
GmbHInvestor
● 400k investment
● 800k Pre-money-valuation
→ 12,500 new shares
25,000 shares
Lender
● 147k loan
● 1y at 1.5% interest
● Total amount 150k
● 25% discount = 600k
→ 6,250 new shares
~ 28.6%
~ 14.3%
+ 12,500
+ 6,250
43,750 shares
Founders
~ 57,1%

24. Conversion example with cap
daniel@streifflaw.de
GmbHInvestor
● 400k investment
● 800k Pre-money-valuation
→ 12,500 new shares
25,000 shares
Lender
● 147k loan
● 1y at 1.5% interest
● Total amount 150k
● cap of 450k
● 25% discount = 600k
→ conversion at 450k
→ 8,333 new shares
~ 27.3%
+ 12,500
+ 8,333
45,833 shares
~ 18.2%
Founders
~ 54,5%

25. So cap or no cap?
daniel@streifflaw.de
● Caps align company & lender interests for a high valuation
● Caps set a benchmark for finance round valuations, but
relying on future valuation is the whole point! (risk = return)
● Compromise: a high cap sets a positive benchmark, doesn’t
hurt & allows for a high floor as well
● If you say “cap”, I say “floor” → valuation corridor
● If you say “cap”, I say “no discount” (cumulatively)
● Capping the total of all convertibles reduces uncertainty

26. Part III - Funding
your GmbH / UG
1. Why LegalStrasse & How it works
2. The funding dilemma
3. The solution: Convertible Note
4. Pros, Cons and Don’ts
daniel@streifflaw.de

27. Pros of the convertible
daniel@streifflaw.de
● Solving the valuation & finance dilemma fairly
● Fast, cheap and easy
○ no due diligence (or extensive guarantees)
○ standardized
○ little negotiation
○ at most relatively low notary costs only
● Allows gathering several investors as lenders
● Founders maintain control (agility & independence)

28. The dark side of the convertible
daniel@streifflaw.de
● Valuation issue only postponed or preset by caps and floors
● Misaligned interests in financing round
○ b/w company & lender w/o cap
○ b/w investors & lender
● “Shadow” cap table & future majorities hard to predict
● Pressure to get € up to blackmail situations (hostile lenders)
● Too young for “entry drug” into finance campaigning

29. Some parting advice:
when to avoid the convertible?
daniel@streifflaw.de
● You don’t really need the money right now
● You want to deeply involve your strategic investor &
can agree on a fair valuation (or find clever workarounds)
● The professional investor of your dreams (esp. a
strategic partner) does not do convertibles
Crucial: timing, money and how well you fit with the investor

30. daniel@streifflaw.de
Enjoy & have fund!

31. Thanks to Gregor Cresnar from Flaticon.com for designing all icons!
Thanks for
listening!
Comments &
questions to
daniel@streifflaw.de