How much equity does a new company need?

This post is part of a series in which we are sharing our experience of founding a company in Germany. We hope that it will help others working their way through the foundation process. This post is about some of the considerations when creating the foundation documents, you can read more about which documents are required in a previous post. Also, think about reading the first post in the series for more details.

How much equity does a new company need?

Every company is different, so there is no hard and fast rule for how much share equity the company will need. It helps to have a business plan which outlines the costs the business plans to incur and ensure that the share equity and any other forms of financing cover the cost.

The choice of legal entity can have an impact on how much share capital is required. €25,000 is the minimum equity requirement for a GmbH. We knew we’d eventually need more than €25,000 to build our product. But we weren’t sure if we should pay in the full investment amount as equity, or if there was another way to get the money into the company. We spoke to both our lawyer and our tax adviser here and the recommendation was to only invest the minimum equity requirement at foundation. We could, at a later date, use a different mechanism to bring more money into the company. There are three possibilities for founders to put money into a business:

  • Increasing share capital (Stammkapitalerhöhung): Complex as it requires a notary and entry into the commercial register.
  • Contribution toward capital reserves (Einlage in Kapitalrücklage): Getting the money into the company is easy, but taking it out again is more complex.
  • Loan (Gesellschafterdarlehen): Probably the most convenient option. The loan requires a detailed loan contract and regular interest payments. But loans have the key benefit that they can easily be paid back to the founder at a later date. A loan repayment does not need to be taxed in the way you would need to tax profits being paid out to a founder.

Aside from funding the company, there is another consideration when deciding how much share equity to start with: the notary will charge for the registration of the company based on its value. If you put more equity in the business it is worth more and the notary will charge more.

We made two minor mistakes when defining how much share equity to pay into the company:

  • Not paying in all the share capital at once: The regulation that governs the GmbH as a legal entity allows founders to pay in just €12,500 of the total €25,000 share equity at the point of foundation. This can make sense if the equity is not available at foundation. It didn’t make sense for us though, because we knew we needed the money. Unfortunately, this stepwise payment was recorded in one of the foundation documents, so it required some administrative steps in order to make the second payment. Not a big deal, just a minor annoyance, but avoidable.
  • Putting too little share equity into the UG: The UG only requires €1 of share equity. Such a low level is completely impractical because virtually any payment would send you into bankruptcy. It makes sense to start with more share equity. In the case of the UG in our structure, we had enough funds in the bank to cover about a year of expenses. But then more capital will be required.

    Read the other posts in this series:

    Disclaimer: We’re not lawyers or tax advisors, to stay on the safe side consult an expert before doing anything 😉