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By Tamo Zwinge

In Good Times and in Bad: Lifetime Participations

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Many Companists have already heard the news. Once again, we have developed our investment model for Companists:

We recently introduced lifetime participations. Companists can now, if they choose to do so, participate in a start-up's profits and exit proceeds for their whole lives.

Numerous Companists – but also start-ups – have personally contacted me and asked me what exactly is changing now. Therefore, I would like to summarize the most relevant information from these conversations in this article. Moreover, I would like to explain to you which goals we, the Companisto founders, are trying to reach through this change.

 

What exactly are lifetime participations?

Companists' participations in all new start-ups on Companisto now last a lifetime. Therefore, the participation contracts will no longer include a clause stating that start-ups can end the Companists' shareholder relationship after the minimum term has ended. This ensures that the Companists will, if they choose to do so, be able to participate in the start-up's profits, as well as a possible exit for the rest of their lives.

However, the Companists will naturally retain the right to terminate participation once the minimum term has been reached. If a Companist terminates the contract, he or she will be repaid the invested capital in addition to a fixed interest rate of 1 % p.a. The Companist will also retain the profit participations paid out so far. However, if the Companist terminates the contract, he or she will no longer be entitled to profit or a possible exit participation. Furthermore, there will not be a renewed business valuation. Contract termination on the side of the Companist makes sense if the Companist wants to receive his or her invested capital back, and is no longer interested in future profit or exit participations.

 

What is the strategic idea underlying this development?

Thanks to the development of the investment model, the Companists' participations have now almost completely reached the financial level of equity. Similarly, in the case of equity, the start-up may not terminate the participation nor may equity shareholders simply give back their shares without an exit and then demand a share of a non-realized company value. This precise starting position is created by the development of the Companisto investment model.

This new approach has significant advantages for the Companists as well as the start-ups: Companists no longer need to worry about not profiting from an exit, due to their participation ending prior to the exit. In addition, their profit participation will not end after just eight years.

The advantage for the start-up is that a calculable liquidity outflow can only occur prior to an exit, namely to the sum of the invested capital including fixed interest. This predictability is extremely valuable for the start-up and subsequent follow-up financers.

 

But is it not unfair to suspend the business valuation if Companists terminate their participation?

Participations in start-ups are participations in the good times as well as the bad. Everyone is in the same boat. Neither the founders, nor the business angels nor the venture capital companies can simply give back their shares to the start-up and then demand a participation in the start-up's not yet realized company value. This also applies to other equity investors or shareholders. All investors have the same objective: namely that the start-up will one day be sold resulting in a high return for all parties. Until that time, no one can demand a pay out from the start-up.

Therefore, the Companists have a special right in comparison to the start-up's shareholders as they can terminate their participation and receive their investment back. The start-up's shareholders do not have this right. In the end, the Companists are already in a more favorable position that the start-up's shareholders.

 

Won't this approach reduce potential returns?

On the contrary, the Companists' potential returns significantly increase due to this development as the start-up's exit provides the best chance for a large profit. And it is precisely this opportunity to receive a higher return that is significantly increased by the Companists' lifetime exit participations. The second best chance for large payments is profit participation. These naturally tend to occur after numerous years. In this case, the Companists' chance to make a profit also increases as profit participation now lasts a lifetime. To sum up, the development of the investment model has major advantages for Companists.

 

Where can I find the regulation on lifetime participation in the contracts?

Regulations on lifetime participations are listed under points 18.2 and 18.3 in the profit-participating loan contract.

 

As a Companist, what is your opinion of lifetime participations? Do you consider it progress or a step backward? Share your thoughts with us! I look forwarding to interesting discussions.

Sincerely yours,
Tamo Zwinge

 

About the author: Tamo Zwinge is the founder of Companisto and used to work as a lawyer specializing in corporate law, corporate transactions and private clients in the major international law firm CMS Hasche Sigle. He was a participant in expert hearings at the Finance Committee of the German parliament on the protection of the small investors act and has published international legal essays on corporate governance in the US and UK. Tamo Zwinge holds a First Class Honors Master of Laws (LL.M) degree in commercial law with a focus on "International Company and Capital Markets Law", "Corporate Governance" und "International Sales and Finance" from Auckland University.



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