PRE-SEED Funding FAQ

General conditions and prerequisites

What is the Pre-Seed BW program about?

Pre-Seed BW is a funding instrument that starts at an early stage in order to build up start-ups to the point where a larger financing round is possible in the next 1-2 years. The time until then can be bridged financially with Pre-Seed and the company value can be increased.

Pre-seed is a convertible loan that is usually 80% taken over by the L-Bank (interest-free) and 20% by a co-investor. More on this below under funding amount and distribution.

What are the requirements for funding?

The promising start-up project must convince the corresponding pre-seed supporting partner, co-investor as well as the Ministry of Economic Affairs, Labour and Tourism Baden-Württemberg and the L-Bank. The co-investor must commit to at least 20% of the required sum as a loan (more on both roles in the next questions). It is advisable if a proof-of-concept or even proof-of-market has already been made.

In addition, the following framework conditions must be in place:

• GmbH or UG must have been founded (disbursement is only made to legal entity).
• The start-up must have its registered office in Baden-Württemberg
• Start-up complies with EU rules for SMEs and is in the seed phase up to max. 5 years after foundation
• Previous investments are not higher than the funding applied for
• No major funding to date

Who is and what does a supporting partner do?

The Pre-Seed Partners were selected by the Ministry of Economic Affairs to support startups at Pre-Seed BW. They are the first point of contact in the funding process. Each startup chooses its own suitable partner.

We, the >SMART> GREEN ACCELERATOR, are very proud to be one of the partners and accompany startups in the development of the business plan and the application process. In addition, we provide support in the respective ecosystem and propose the startup to the ministry for pre-seed. We accompany startups until the next round of funding.

What should I look out for in co-investors?

Co-investors must be useful for the start-up’s project. This means, for example, that they should know the industry or have essential know-how to help the start-up further: They should open doors, establish contacts, give good advice now and then. However, they should explicitly not do any day-to-day business. In addition, co-investors from the circle of Family & Friends are not permitted for pre-seed.

A co-investor must provide at least 20% of the total pre-seed amount as a convertible loan, but can also be increased to the same amount from the L-Bank (50:50 ratio) (for more information, see funding amount and distribution).

Is it possible to apply for pre-seed despite EXIST funding or ifex innovation vouchers?

Yes. Pre-seed can be a very good connection.

Funding amount and distribution

How much money can a start-up apply for?

Between €50.000 and €200.000 can be applied for, with €200.000 being the standard case. 80% of the total amount comes interest-free from the state of Ba-Wü or the L-Bank and the remaining 20% from a co-investor. This share can also be increased so that the ratio of L-Bank and co-investor:in is 50:50. In the best case, this would be €160.000 from L-Bank and €160.000 co-investment.

Does the money have to be paid back by the country?

The money from the country is a loan with strong protection for start-ups. The start-ups do not guarantee it. However, the loan must be repaid from the big financing round after pre-seed – unless L-Bank wants to convert it into shares. But that is not very likely.

Are investments allowed before or during pre-seed outside the program?

At the time of application, the start-up’s equity capital may not be higher than the total amount applied for pre-seed. Previous investments (also with a conversion option) are therefore not a problem as long as they do not lead to this exclusion criterion. Any investments, including the taking out of further loans during the contract period, are permitted, but require the prior approval of the financing committee (more on this below).

Contracts and terms

Which contracts are concluded?

The start-up concludes a contract with

• The co-investor for a subordinated loan (more on this below) with a conversion option
• The L-Bank for a grant with a repayment reservation and conversion right (also subordinate).

There is no link between the two contracts. However, the terms should be of equal length (more on this below).

The pre-seed partner has a contract with the Land in which it undertakes to provide support.

What does "subordinated loan" mean?

The lender takes second place to all other claims with its claim, i.e. it would be paid last. This makes the loan similar to equity. L-Bank and co-investor thus move behind all other creditors, but ranked equally.

What are the terms of the contracts?

The two contracts are not linked to each other, but should have the same term. There is no basic term in this form. Contracts are concluded for 24 months. An extension by 12 months each is possible until a maximum of 5 years is reached.

What is the interest rate on the co-investor loan?

The interest rate with the co-investor is freely negotiated bilaterally, usually at market rates.

In case you have any questions about the interest rate for the L-Bank loan: This is interest-free for the first two years, then staggered:

Year 3: 2%
Year 4: 4%
Year 5: 6%

What is the financing committee?

Decisions and changes related to the contract are made in the financing committee. It has the final say in everything concerning the project and must therefore be informed and asked for approval. This concerns e.g. the following topics:

• Changes in legal form
• Acceptance of new team members
• Admission of new partners in the sense of co-investors
• Conditions for new shareholders
• …

The last point refers to the fact that no “side agreements” may take place. All conditions must be equally available to L-Bank and co-investor.

The financing committee is composed of the following representatives:

• Ministry of Economic Affairs, Labour and Tourism Baden-Württemberg
• L-Bank
• Co-investor

Please note: If there is more than one co-investor, they have only one vote! Decisions are made unanimously.

The financing committee will come to decisions by circular letter.

 

Funding process

Who decides whether the start-up receives pre-seed and how is the decision made?

If all requirements are met, at least 20% of the co-investor’s commitment is given and the pre-seed supporting partner is convinced, he or she presents the start-up to the ministry and the L-Bank. A jury meeting takes place, where the start-up pitches the business idea. If there is a positive vote after the jury meeting, the application documents can be submitted to L-Bank. The approval after the jury meeting is valid for 6 weeks.

Which application documents are necessary must be submitted to the L-Bank?

• Application
• Investment in accordance with the Money Laundering Act
• Co-investor:internal contract
• Financial plan
• Data protection release
• Shareholders’ agreement or articles of association
• Declaration of encumbrance for existing shareholder loans or confirmation of no such liabilities

The startup receives the templates for the aforementioned documents from the support partner
Further documents are:

• LOI(s) Co-investor(s)
• Business plan or detailed pitch deck
• Extract from the commercial register or certificate of incorporation
• Last annual financial statements or opening balance sheet
• List of shareholders and copies of the founders’ ID cards
• Shareholder resolution to take out a loan

What does "funding reservation" mean?

Decisions are made within 15 banking days after submission of the necessary documents. If there are no objections, disbursement is usually allowed within a few days.

Once the application documents have been submitted, when will the start-up receive feedback from L-Bank?

Large financing round, repayment and conversion options

What does "major financing round" mean? When is this considered successful?

Rapid growth requires significantly more funding than early-stage financing. Pre-seed therefore serves to kick-start the process, but the start-ups should start looking for the next, larger round of financing on the basis of this funding. This can be a private investor, a VC company, a bank or other capital providers.

A financing round is successful if it is higher than the requested loan amount. A successful financing round during the pre-seed contract period triggers the conversion option of the L-Bank and the co-investor (more on this in the next questions).

What are the conversion options for L-Bank and co-investors?

The conversion option is triggered if a successful financing round takes place during the term. The co-investor is entitled to a minimum of 3% (“floor”) and a maximum of 10%. The floor also applies to the L-Bank, so together the maximum is 20%. The conversion option is usually not used by the L-Bank, but is very likely to be used by the co-investor. Co-investors and L-Bank therefore decide separately and independently of each other – always bilaterally with the start-up.

Important: Co-investor and L-Bank may convert, but do not HAVE to.
The conversion itself takes place at the market price / company value.

What are the conversion options without a successful financing round?

If no successful financing round takes place during the term of the contract, it may still be possible to convert the contract. However, the agreement and the modalities for this case should already be determined between co-investor and start-up when the contract is signed. However, the financing body must agree to this agreement.

What are the repayment options if not converted?

With a large financing round, the loan must be repaid unless L-Bank and the co-investor want to convert.

The loan from L-Bank can be repaid without interest after the first 12 months. However, if the start-up finds an investor:in within the first 12 months and wants to break away from L-Bank, this amount can be repaid plus a one-off interest rate of 20%. In this way, the L-Bank is released and the shares can be used elsewhere.

The interest rate for the co-investor’s loan is negotiated bilaterally (more on this above under terms and contracts).

How is the market price / company value for conversion determined?

The market price corresponds to the value of the start-up for the investors in the first large financing round. Two pieces of information are necessary for this: The sum of the planned investment and the company shares issued for it. Based on this, the market price is extrapolated to 100%. As a rule, the pre-money calculation is used.

Example: A start-up gives away 10% for €1 million, so 10% of the company will be worth €1 million in the future. 100% of the company is therefore worth €10 million (post-money company valuation). If you subtract the new investor’s share from this company value, you arrive at the pre-money valuation, which in this example is € 9 million.

Was ist mit der Deckelung von 10%, wenn das Co-Investment bei geringem Marktpreis 10% übersteigt?

If the market price of the start-up is so low that the money paid in by L-Bank and co-investor is higher than the value of the capped 10% for conversion, the remaining amount remains in the company as a loan.

Example: The € 40.000 of the co-investor corresponds to 15% of the company’s value. The co-investor can nevertheless only convert 10% (= €26.666) and the remaining €13.334 remains as a loan.

Can a co-investor also assert its conversion right directly after conclusion of the contract?

Yes, this is possible. However, since it affects the contract, the financing body must be informed and asked for approval. In addition, the same conditions must be offered to the L-Bank. Otherwise, these are not permitted side agreements.

Advantages for start-ups and co-investors

What are the benefits for start-ups?

Pre-seed offers the opportunity to first get to know an interesting partner:in without having to give away too many shares for too little money at the beginning. The conversion option is capped at 10% each for co-investor and L-Bank, i.e. a maximum of 20%. In addition, of course, there is the close support of the pre-seed partner, who is very familiar with the contracts and requirements.

How do the co-investors benefit?

The co-investor can also get to know the start-up first without committing to anything big. Pre-Seed offers co-investors the chance to experience and help shape the development of an interesting start-up, but to reduce the risk enormously with only 20 to 50% of the required sum. As a bonus and recognition, the co-investor receives a conversion option with a minimum of 3% (“floor”) as well as a discount of 20% and the right of first refusal. Pre-seed also saves the co-investor money on due diligence, which would otherwise be carried out by lawyers and tax advisors. Last but not least, a co-investor enables a startup to receive a substantial amount of money from the state. This can strengthen the start-up scene in the region.

Worst case scenario: No follow-on investment and no conversion interest

Can repayment be claimed by co-investors and L-Bank?

The subordination agreement in both contracts protects the start-up and places the claims of the co-investor and L-Bank behind the claims of other creditors. Repayment may therefore only be demanded if this does not give rise to grounds for opening insolvency proceedings. Partial payments are, however, possible.

The obligation to file for insolvency in the event of general insolvency nevertheless exists. In the event of a loss or insolvency, the loan is forfeited.

Is the co-investment tax-deductible in the event of a total loss of the start-up?

In addition to institutional investors, private investors can also claim losses from loan defaults for tax purposes. The Federal Fiscal Court (Bundesfinanzhof, BFH) issued the corresponding ruling in October 2017.

Are the founders personally liable in case of total loss?

No. To apply for pre-seed, the company must be an effectively formed and established limited liability company (GmbH) / entrepreneurial company (haftungsbeschränkt). Private individuals are therefore not liable.

The L-Bank can revoke and demand repayment if it is clear that the project cannot be realised (§4.1 e). However, the rule on avoiding insolvency proceedings also applies here. In fact, this is somewhat vague, but the protection here is also subordination. Here, too, the statute of limitations applies (after 5 years). That is a very high level of protection.