Equity investors from the founder's side: business angels, VC, crowdinvesting, Beteiligungsgesellschaften, valuation, dilution and term-sheet basics

What you will learn

• The four main sources of outside equity for a small German company.
• How pre-money and post-money valuation turn an investment into an ownership share.
• How dilution compounds over two rounds and how an option pool changes the founders' share.
• The term-sheet clauses that matter most: liquidation preference, vesting, anti-dilution, drag-along and tag-along.

Explanation

Loans and leasing (lessons 3 to 5) must be repaid whether or not the business succeeds. Equity is different: the investor buys a share of the company and is paid only if it becomes more valuable. For the founder it is the most expensive capital in the long run but the only one without a fixed payment duty.

Business angels are private individuals who invest their own money, typically €25,000 to €250,000, for a minority stake, often adding industry experience. In Germany the federal programme INVEST – Zuschuss für Wagniskapital, run by the BAFA (Bundesamt für Wirtschaft und Ausfuhrkontrolle), refunds a private investor 15 percent of an eligible investment of at least €10,000 in a young, innovative small corporation; as of 2026 applications run until 31 December 2026, and conditions change, so check the current guideline.

Venture capital (VC) funds invest other people's money in companies that can grow very fast; they need a few large winners to pay for many failures, so a stable craft or local service business is normally not a VC case. Crowdinvesting platforms collect small amounts from many private investors, usually as subordinated loans or profit-participation rights rather than shares; under the EU Crowdfunding Regulation (ECSP) a project may raise up to €5 million in twelve months through a licensed platform. Beteiligungsgesellschaften, in particular the regional Mittelständische Beteiligungsgesellschaften (MBGs), provide equity-like capital to established small firms, most often as a stille Beteiligung (silent partnership): the firm pays a fixed remuneration plus a profit share, and the capital counts as economic equity in a bank rating without voting rights for the investor.

Three terms drive every negotiation. The pre-money valuation is the agreed value of the company before the new money arrives. Post-money valuation = pre-money + investment. The investor's share = investment ÷ post-money. Dilution is the fall in every existing owner's percentage when new shares are issued.

A term sheet is the non-binding deal summary written before the contracts. Five clauses matter most:

• Liquidation preference: at an exit the investor first receives a multiple (usually 1x) of the invested amount, then the remainder is shared. "Non-participating" means the investor chooses either the preference or the pro-rata share; "participating" means both, which is much worse for founders.
• Vesting: founders earn their shares over time (often four years with a one-year cliff) and return unvested shares if they leave early.
• Anti-dilution: if a later round happens at a lower valuation ("down round"), the earlier investor receives extra shares; "weighted average" is standard, "full ratchet" is aggressive.
• Drag-along: a majority can force minorities to sell in an exit; tag-along: minorities may join a sale on the same terms.
• Option pool: shares reserved for employees, often created before the round so that only founders are diluted by it.

Worked example

Hypothetical example: two founders own 100 percent of a GmbH. An angel invests €500,000 at a pre-money valuation of €1,500,000. Later a VC invests €1,000,000 at a pre-money of €4,000,000 with a 1x non-participating liquidation preference. Round numbers; notary fees, taxes and advisers are ignored.

Round 1. Post-money = €1,500,000 + €500,000 = €2,000,000. Angel share = €500,000 ÷ €2,000,000 = 25 percent. Founders: 75 percent.

Round 2. Post-money = €4,000,000 + €1,000,000 = €5,000,000. VC share = €1,000,000 ÷ €5,000,000 = 20 percent. Everyone else keeps 80 percent of their old share: founders 75 × 0.8 = 60 percent; angel 25 × 0.8 = 20 percent.

Exit at €3,000,000. The VC's pro-rata share would be 20 percent × €3,000,000 = €600,000, which is less than the €1,000,000 preference, so the VC takes the preference. The remaining €2,000,000 is split between founders and angel in the ratio 60 : 20, that is 75 : 25 → founders €1,500,000, angel €500,000. The founders own 60 percent of the company but receive 50 percent of the proceeds.

Exit at €8,000,000. Pro-rata for the VC = €1,600,000 > €1,000,000, so the VC converts: VC €1,600,000, angel €1,600,000, founders €4,800,000. The preference bites only in weak exits.

Common mistake

Practice activity

On paper: founders own 100 percent. An investor offers €500,000 at a €2,000,000 pre-money valuation and requires a 10 percent option pool to exist in the post-money capital table, created before the money comes in. Calculate (a) the investor's share, (b) the founders' share after the pool, and (c) the "effective" pre-money valuation of the founders' stake.

Key takeaways

• Equity has no repayment duty but is the most expensive capital if the company succeeds; VC suits only fast growth.
• Investor share = investment ÷ post-money; dilution compounds, so model two rounds, not one.
• A 1x non-participating preference reshapes the payout in weak exits; participating or multiple preferences are red flags.
• Where the option pool is created decides who pays for it.

Next step

Whatever the financing mix, the business must know week by week whether it can pay its bills; lesson 8 builds a 13-week direct cash-flow forecast.