Profit Participation or Fixed Interest Rate?

Forms of investments and strategies

A comparison of two equity crowdfunding models

5 minute read

Companisto provides investors the opportunity to choose between two equity crowdfunding models. On one hand, you have the loan with profit and exit participation in a startup; on the other, you have the venture loan with an annual fixed interest rate. Both models have pros and cons. Which of the two the investor chooses depends on what he or she wants out of the investment. We’ll provide you with a brief overview of both models here.

 

Companisto offers investments in startups in form of a subordinated loan with profit participation. This investment is a form of venture capital and is thus a long-term investment that contains risk. Since risk and returns go hand in hand, however, this model’s potential profit margin is very high. The minimum amount for investing in startups is €100. The contracts run for seven to eight years and the loan receives an annual interest of 1%.

The disbursement of the interest occurs at the end of the contract period.  Investors also receive profit participation on a performance-related basis. However, there is no sharing of losses and no obligation to make subsequent contributions. Profit participation is based on performance because startups generally do not generate profits in the first few years and cannot serve profit participation before then. On average, they reach profitability after four years.

The amount of the profit participated in varies from startup to startup and depends on the sum invested. Payout occurs once a year. In general, startups prefer developing the company than generating profit. This means that all profits generated usually are reinvested in the company, for example by hiring new employees, expanding facilities, or purchasing modern machines.

Even though this means no immediate profit distribution for investors, this process is also in their best interest. After all, the real goal of this equity crowdfunding model is for the startup to be sold after five to eight years by a multiple of its initial value – that is, achieving a so-called exit. In order to achieve the highest sales value possible, the company has to grow quickly during its early stages. Since investors also participate in the exit, they receive a share of the sale proceeds.

 

For example, when Doxter made its successful exit, the Companists who had financed the startup received a six-figure return for their engagement. They were thus rewarded for supporting the startup, which developed a platform to book doctor’s appointments, in its early stages in 2012. The sale to the Luxembourg-based competitor Doctena occurred four years after the company was founded.

Foodist also achieved a successful exit. The startup that sent an exclusive selection of international delicacies to its monthly subscribers ran three financing rounds on Companisto from 2013 onward and grew along with the crowd. Their business model convinced more than 2,000 Companists, and Foodist received around €1.5 million. After only four years, the listed media company Ströer acquired Foodist and the Companists participated in the sales profits in proportion to their investment.

Companisto recently started offering lifetime involvement. The participation contracts no longer intend for the Companists’ capital involvement to end through termination by the startup after the minimum duration of the contract ends. That way, investors can partake in the startup’s successes and a potential sale for the rest of their life if they so choose. They also have the choice to end their involvement after the minimum duration of the contract ends.

 

The second equity crowdfunding model is participation in a growth company in the form of a subordinated loan. This form of equity crowdfunding includes neither performance-based profit participation nor exit participation; however, it offers investors an annual fixed interest rate of 8%. This capital participation does not include participation in losses or an obligation to make additional contributions.

Growth companies are companies that have been on the market for several years and now wish to expand, for example by hiring new employees, launching a new product series, or expanding their manufacturing facilities. These companies turn to the crowd in order to cover the costs needed.

One example of a classic growth company is the chocolatier Sawade. Since 1880, the Berlin-based enterprise stands for high-quality pralines, truffles, and chocolate specialties. The company wanted to rebrand itself and become one of Germany’s leading manufacturers. Sawade offered Companists capital involvement with a fixed interest rate of 8% for this purpose. With success: 1,097 Companists invested €1.35 million in the Berliner chocolatier.

 

The minimum amount for investments in growth companies, too, is very low; investors can take part in a company with an investment of at least €100. Unlike startups, growth companies already generate profit, meaning that they are able to pay investors an annual fixed interest of 8% in return. Payout occurs semi-annually. 

The duration of the contract is only three to four years, which is less than the startup loan with participation in profits. In comparison to investments in startups, venture loans include neither profit nor exit participations. However, the business model has already been tested and, as a result, bears lower risks than capital involvement in a startup.

Whether or not you, the investor, prefer the profit participation model or the fixed interest rate ultimately depends on your investor type. Is your investor personality more defensive and conservative, or are you more of a moderate and risk-taker? Take our investor personality quiz in the article “What Type of Investor Are You” to find out!

 

 

Have we aroused your interest? Then register on Companisto today!


 


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André Jasch

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