Tokenization vs. convertible loans

Tokenization vs. convertible loans

Why do startups fail? - There are many reasons for why a startup is doomed to fail. Startups face numerous challenges, from developing a product, finding a market fit to establishing a sound business model. The most common reason, however, seems to be the lack of funding.

This assumption was confirmed by a study done by the US market research company CB Insights, which shows that the lack of funding is the number one reason for the failure of startups.

Fundraising is especially critical for early-stage startups. It can be a very lengthy and complex process which often results in the illiquidity of startups before they have the chance to raise new capital.

That is why German startups are increasingly turning to convertible loans as a funding option as they promise prompt and straightforward financing. But what are convertible loans and are they really the best solution for this issue?

A convertible loan is a loan granted to the startup by investors. What makes it special is that investors have the right to convert the the monetary value of the loan to real company shares in some point in the future. As a result, investors and founders do not initially have to agree on a valuation of the company or the price of the shares. This is a great time saver, which explains the popularity of convertible loans.

However, convertible loans come with significant disadvantages that are often overlooked.

Since the loan conversion takes place in the future, neither party knows the ownership percentage of the company they represent, which can be risky and can negatively impact the power dynamics within the company.

Another disadvantage is that the risk that investors take is hardly rewarded. Convertible loans are typically treated as equity pursuant to German tax law. This means, in case of insolvency, claims of the holders of convertible notes are paid out last. For investors, this most likely results in the complete loss of their investment.

Finally, the regulation of converting the loan into company shares poses an additional challenge. For example, if no obligation to convert is agreed on, investors can demand repayment of the loan, which could create liquidity problems for startups.

The question is whether there is a way to provide quick and uncomplicated financing for startups without having to resort to convertible loans. There is: the tokenization of company shares.

The term "tokenization" may sound strange at first if you are not familiar with Web3 applications. Simply put, it refers to representing assets or goods using tokens, which are digital proofs of ownership stored on a blockchain, making it forgery-proof and secure.

Tokens are an excellent option for simplifying the funding process for startups due to their unique properties.

But how can a startup benefit from using tokens to finance its company? The answer is offers an all-in-one solution for founders to tokenize their company shares. It simplifies the token creation and management process and streamlines investor onboarding through a standardized process.

Potential investors can quickly invest using standardized contracts via an invitation link. Through the intuitive dashboard, founders can easily monitor their company shares and participating investors.

Additionally, makes investing more appealing, as tokens allow not only the conversion into company shares, but also the distribution of dividends and liquidation proceeds.

Moreover, allows founders to determine the conversion of tokens into company shares, solving the uncertainties of convertible loans.

With, founders take a decisive step towards digital financing while saving time to focus on the most critical aspect - their company.

Published on

January 15, 2024

Moritz Neven
Moritz Neven

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