Raising capital via token financing vs. a traditional equity investment

February 22, 2022
Wolfgang Richter

Partner, Rechtsanwalt, Abogado (Madrid)

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What are the arguments in favour of raising capital via token financing through a profit participation right instead of via a traditional equity investment?

Every investor is familiar with equity participation, be it in a GmbH, AG, Limited or whatever the respective legal form is. There is a general understanding about participation rights, about the agreement of transactions requiring consent, about the basic exit possibilities from the investment. An exit via a listing on a (traditional) stock exchange is a fine prospect, but if that is a concretely realisable possibility, then the investment is already a great success. In the start-up or scale-up phase of a company, this is probably not (yet) the case.

With a profit participation right, on the other hand, there is any freedom of design as to what the investor receives:

  • a defined share of the company’s profit;
  • a share in the profit of a defined part of the company;
  • a share in a differentiated defined cash flow, for example in the turnover of a certain product, different percentages of the assessment basis defined via threshold values or a priority basis – in conjunction with a maximum remuneration etc.;
  • it can be structured as equity or debt (with different tax consequences);
  • individualised co-determination rights can be agreed;
  • combinations with rights of use and other incentives can be agreed;
  • flexible structures can be found between the equity investment and such a profit participation right investment, for example in such a way that equity investors also participate in the profit participation rights; in this way, capital increases that would otherwise be difficult to implement can be solved by a profit participation right situation.

The list could be continued indefinitely. This advantage of flexibility is at the same time a disadvantage: because for investors this is often uncharted territory and therefore there are reservations about venturing into the unknown.

But the unknown has immediately visible advantages: I can find investors for parts of the business in a differentiated way, I can provide this with a cross-border usable token structure, and I can give investors a quick way of liquidity via a DeFi listing, unlike traditional equity financing. It’s worth taking a moment to think about this alternative.

Contact our specialised team of DeFi and blockchain experts here. From our highly topical advisory practice, we can provide concrete help.