Alternative Financing: Instruments

Alternative Financing: Instruments

Grundlagen beantworten
Content Type
Einzelarbeit - lesen
Activity Time
25-30 Min

Guiding question

Which instruments fit the financing of companies in steward-ownership?

Alternative Financing: Instruments



Steward-owners need financing instruments that fit their company, enable self-determination and promote asset retention—the principles of steward-ownership.

In concrete terms, this means financing instruments in which investors receive adequate returns that are proportionate to risk and performance, yet are nonetheless capped, without taking over the company's steering wheel, i.e., its voting rights. The following section discusses financing instruments that are compatible with the idea of steward-ownership.

Equity-like debt

Subordinated loans

Subordinated loans are unsecured loans subordinate to other debt, and therefore can act like equity on a company’s balance sheet. An investment is paid to the company as a loan, and repaid over a pre-defined term; the interest rate can be either fixed or variable, tied to inter-bank lending rates or the company’s performance. There are many possibilities for structuring the terms – for example, they might specify that interest is only paid until a predetermined multiple of the principal has been returned. Subordinate loans work well for investors, who are often happy to assume equity-like risk but prefer the simplicity and flexibility of a debt agreement. Companies taking on subordinate loans have to be comfortable treating loan repayments as a cost, rather than distributing net profits as they would have had they issued equity. The advantage of treating interest payments as costs is that it lowers a company’s taxable income. Whether the lenders have to tax the interest as interest income or as dividends depends on the specific design of the contract and the respective tax authorities.

Convertible Loan

Convertible loans are traditionally subordinated loans where the loan debt (loan amount and accrued interest) plus a risk premium (discount) is converted into another financing instrument as well as the terms of the round during a subsequent financing round. The instrument can be both a conventional corporate participation as well as other equity-like or debt instruments.

If convertible loans are used for steward-owned equity financing, the loan agreement specifies that conversion is only possible into steward-owned equity-compliant instruments, i.e., for example subordinated loans, profit-sharing certificates, silent participations, non-voting shares with repurchase rights, etc. (see other financing instruments in this document). Convertible loans are a good option, especially for start-up financing and bridge financing, as the concrete repayment terms do not yet have to be defined in the initial contract. This is particularly attractive for start-ups where the concrete path to profitability is still unclear, as well as for their investors, as it avoids jeopardizing the development of the company by prematurely committing to fixed repayment dates and the accompanying financial burden. It is also possible to specify the financing instrument into which the conversion will take place in advance and to leave it flexible in order to include the other investors who will join in the next round. The assumed risk of the earlier investors is also considered in the conversion, for example through fixed discounts in the contract (better position compared to later investors by X%). It can also be stipulated in the initial contract that the investors will recoup at least a certain multiple of their investment; in this case, only the timing and modalities of repayment depend on the form of conversion. Convertible loans are frequently used in the "traditional investment world" and are therefore also very familiar to conventional investors, which is another advantage.

Atypical silent participation

This type of security, which is common in Germany, is a mezzanine capital instrument

that acts like equity but without the control. It is a non-trading partnership (in German a “GbR”, short for “Gesellschaft bürgerlichen Rechts”) between an investor and a company. The investor participates directly in the profits and losses of the company, with these profits or losses becoming effective for tax purposes as they occur. Atypical silent participation works well in Germany, in part because the losses investors incur before a company achieves profitability immediately reduce their tax liabilities. It is also much easier to implement than an actual equity investment; it does not require notarization, yet it works just like equity from a financial perspective. Atypical silent participation does not need to entail voting rights, but it can include certain red lines (or “zustimmungspflichtigen Punkte”).

One disadvantage is that atypical silent partners must also participate in the company's asset growth,  and a buyback of the company's shares can therefore be expensive.

Typical Silent Partnership

The "typical silent partnership" would be an alternative that does not include this participation in asset growth and can stipulate a pure profit or loss sharing (possibly also in combination with interest promises), but otherwise functions in the same way as the atypical silent partnership described.

Demand Dividend as a form of participation

A demand dividend is a preferred equity share that requires a company to make periodic payments to investors based on a percentage of its available cash flow, usually until the investors have achieved some predetermined return – i.e., the “total obligation”. For example, Company A raises $250,000, and in return pays out 5 percent of its “free cash flow” until investors have received a total of $500,000 in distributions, or a 2x return on their initial investments. The repayment typically starts after a “holiday” or “honeymoon” period.

A demand dividend can be legally implemented through the use of shares as well as atypical and typical silent partnerships.

Company Profile

Demand dividend returns work well for companies interested in keeping their voting rights and that do not want to exit or go public, and therefore need to provide investors with liquidity from their own cash flows or other growth capital. They are best suited for companies beyond the proof-of-concept stage with relatively healthy growth projections and a reasonable line of sight to stable revenues. They are less well suited for early-stage companies that are far from achieving positive cash flow and those that still rely on continuously reinvesting their profits.


  • “Total obligation”

Definition of demand dividend (e.g. % of EBITDA, other free cash flow formula)

  • Holiday period
  • Conditions for loan term extensions
True equity on books
Free cash flow formulas can be complex to architect and negotiate.
Capped return - the company knows its true obligation to investors
Can be seen as an additional risk for follow- on equity investors
Holiday period enables a company to grow without the burden of payment obligations

Revenue/royalty share

Under a revenue/royalty share loan, operating revenue is shared with investors to

repay investments. In a revenue share, investors and entrepreneurs are both interested in the company’s ability to create sustainable revenue. Investors are repaid incrementally

as the company generates more sales, typically receiving a predetermined return on

their investments.

Revenue shares are easy to implement and monitor because revenue is an easily measured, uncontroversial metric of performance. Entrepreneurs benefit from a flexible payment structure, as payments to investors are directly proportional to company performance. If the company’s revenue grows quickly, investors are repaid over a shorter period of time; if growth is slow, investors achieve their returns over a longer timeframe. Investors also benefit from the security of having direct access to revenue regardless of the company’s other financial metrics. The model is less well suited for companies in sectors with high scaling costs, as they may end up having to repay investors even as they are still making significant losses.

Company Profile

Revenue sharing is most suitable for companies that know their cost structure well and do not foresee any significant changes to it. For companies that are still changing and adjusting their business model, margins, etc., setting a revenue share can become a major risk.


  • Total obligation
  • Proportion of sales or revenue accessible to investors
Easy to implement and measure
Can be seen as an additional risk for follow-on investors and debt providers
Flexible payment structures for entrepreneurs
Can put a company in a difficult position if costs remain high when royalty payments activate.
Secure for investors
Well-known structure

Profit-Sharing Certificates

Profit-sharing certificates (Genussscheine in German), are a hybrid financial instrument that combines features of equity and debt. They represent a contractual right to participate in the profits and success of a company, similar to a dividend, while also carrying some characteristics of debt, such as a fixed term and a fixed interest or profit-sharing rate.

Investors who hold profit-sharing certificates, are entitled to receive a portion of the company's profits, which is typically determined based on a predetermined percentage or formula. The profit distribution may be made in the form of periodic payments or lump-sum payments at certain intervals.

Unlike shareholders who hold equity in a company, certificate holders generally do not possess voting rights or direct ownership of the company. However, they have a higher priority in receiving profits compared to common shareholders.

Profit-sharing certificates can be issued by both public and private companies, and they are often used as a means of raising capital or attracting investors who are seeking a combination of equity-like returns and fixed-income characteristics.

Company profile:

  • Profit-sharing certificates are an easy investment instrument to involve employees in employee-owned companies or members in cooperatives.
  • Startups with angel investors: As early-stage startups often seek funding from angel investors, profit share certificates can be used as an alternative or complementary instrument to equity shares. These certificates entitle the investors to a share of the company's profits instead of ownership in the company.
Easy to implement and measure
Can be seen as an additional risk for follow-on investors and debt providers
Flexible payment structures for entrepreneurs
Can put a company in a difficult position if costs remain high when royalty payments activate.
Secure for investors
Well-known structure

Non-voting Redeemable Preferred Equity

Like traditional equity, non-voting equity represents financial ownership of the company. Redeemable shares can – and sometimes must – be repurchased by the company at a predetermined valuation, either gradually or at a fixed maturity date. The redemption value and date are often clearly defined in the shareholder agreement. Redemptions can be paid from different liquidity sources, including cash, successive equity rounds, or debt.

For steward-owned companies, these shares are created without voting rights. In lieu of voting rights, investors normally require protective provisions to ensure they have some recourse in emergency situations, e.g., a CEO defrauding a company.

Unlike revenue-based financing models, non-voting redeemable preferred equity keeps money inside of companies during their crucial early years of growth. Redeemable preferred equity also has the advantage of capping redemption valuation at a certain multiple of the original purchase price, preventing shares from becoming too expensive to buy back once a company has achieved profitability. For an investor, a redeemable share has the advantage that repayment is relatively secure and predictable assuming the company remains solvent.

Company Profile

Non-voting redeemable preferred equity works well for steward-companies that want to raise substantial amounts of capital ($1M+) over multiple rounds while maintaining control over decision-making. Ideally, the company has a pathway for revenue growth that allows it to meet the mounting repayment obligations. This tool is one of the most generally applicable and has been used in cases ranging from venture-backed startups to mature companies going through a recapitalization process. For later stage companies, non-voting redeemable preferred equity will often include a “base” dividend to provide a secure ongoing income source for investors.


  • Calculation of the buyback price or maximum
  • Timetable for the buyback, vesting periods, if applicable
  • Conditions under which investors or the company can call for share redemptions
  • Base or guaranteed dividend rate
  • Protective provisions for investors
Similar to conventional equity, familiar to investors
Requires careful balance between capital raised and growth expectations
Clear path to liquidity for investors and founders
The return on investment (ROI) is lower than planned if growth targets are not met
Sets a clear anchor price, path, and structure for future capital raises
Due to changes in the articles of association, notary appointments, and other factors, this instrument is legally more complicated than other instruments.

SAFE notes - Simple Agreement for Future Equity

The SAFE note, which stands for Simple Agreement for Future Equity, is a type of financial instrument commonly used in startup financing. It is an alternative to traditional convertible notes and serves as a simplified and standardized investment instrument for early-stage companies. It is designed to provide a straightforward and efficient method for investors to invest in startups without immediately determining the company's valuation.

The SAFE note is a promise to issue shares to the investor at a future equity financing round, such as when the company raises funds through a priced equity round (e.g., Series A funding).

Usually, the SAFE note does not specify an initial valuation for the company. Instead, it often includes a discount rate, which entitles the investor to receive shares at a discounted price compared to the price offered to future investors in the equity financing round. Unlike traditional convertible notes, SAFE notes do not accrue interest or have a maturity date. They are intended to be a simpler and more founder-friendly investment instrument.

Company Profile

SAFE notes are best suited for early-stage startups seeking funding from investors who are comfortable with the uncertainties of valuation and are focused on high-growth potential. particularly for companies anticipating future equity financing rounds or potential liquidity events. Also, startups that prefer a streamlined and founder-friendly investment instrument may find SAFE notes attractive. SAFE notes are often used to attract early-stage investors who are willing to invest in a company's growth potential without immediately determining its valuation. These investors are typically looking for potential high returns and are comfortable with the inherent risks associated with early-stage investing.

Relatively simple, short and easy to understand -> can expedite the negotiation process.
Requires careful balance between capital raised and growth expectations No fixed repayment or interest
SAFE Notes allow investors to postpone the valuation to a later point, typically until the next financing round.
Uncertain valuation: there is a risk for founders that the financing becomes more expensive than they had originally planned on if the valuation increases in the next financing round.
Offer some flexibility to the parties involved in the agreement, particularly regarding the valuation of the company and the timing of payout.
In some jurisdictions, SAFE Notes may not be legally recognized or enforceable.
Limited Investor Rights: SAFE notes generally do not come with the same set of investor rights and protections as equity shares or convertible notes.

Stichting Administratiekantoor (STAK) structure

A Stichting Administratiekantoor (STAK) is a Dutch legal structure that can be a useful construct for structuring investments in steward-owned companies.

Legal basis

A STAK is a special form of a foundation whose purpose is to hold company shares (that can be without voting right) and on that basis, issue shares, so-called certificates to investors  on that basis. It is often used in Dutch corporate structures to create a separation between voting rights and economic ownership of shares in a company.

As it is relatively easy to set up a STAK structure and due to its lower transaction costs when issuing and trading certificates, the structure is frequently used, also by companies not originally based in the Netherlands. The Belgian jurisdiction offers a similar structure called private stichting.

No business operations may take place within the STAK, as it would then be taxed as a limited company (BV)  from a tax point of view. The structure is merely meant for holding company shares.

STAK structure for Investments

When using a STAK structure for investing in a steward-owned company or in a steward-ownership aligned way, two share classes are created:

  • One share class has voting rights (issued to the steward-owners, these are not issued to the STAK but remain in the main company),
  • The other class has economic rights (like dividends and financial benefits). This share class is issued to the STAK. In the STAK, the shares are converted to certificates that can be issued to the investors, in return for investments. Buyback price and the timeline can be defined in the shareholder agreement (called administratievoorwarden).

The STAK foundation is controlled by a board of trustees that manages the shares held by the foundation. This board must at minimum consist of one member. The board can also decide to dissolve the foundation – the certificates are then annulled and their corresponding assets are transferred to the certificate holders.

The certificate holders are usually investors who want to invest in a company and receive adequate financial returns without having a say in the company's decision-making. A STAK can also be used to aggregate multiple small shareholders together as a single shareholder to make trading of certificates easier. This flexible setup renders a STAK to be a useful vehicle for collecting investments.

Because of its flexibility and its nature, a STAK structure can be used for many different types of financing structures, i.e. crowdfunding/ investing rounds with redeemable shares but also for other forms of equity financing. It is especially useful for financing rounds with many investors who each contribute minor sums.

Benefits and Downside of STAK structure for investments structured according to steward-ownership

The STAK however has one downside for steward-owned companies making it a tricky financing tool for steward-owned companies:

While the shares issued to the STAK can be assigned no voting rights, the certificates issued to investors have to legally have voting rights  (in the STAK only). The minimum voting rights that need to be assigned are 1) changing of bylaws of the STAK and 2) choosing new board members of the STAK.

This implies that the voting rights act indirectly because the certificate holders cannot directly influence the shareholder meeting but solely order the board of the STAK to act in a certain way. The STAK board holds the privilege to participate in shareholder meetings and shape discussions. Certificate holders might exert pressure on the board to explore topics such as trading certificates, annual gatherings, the endorsement of fresh board members, and the potential to veto alterations in economic rights.

The STAK board can not neglect the economic interests of certificate holders. If it does, the certificate holders could sue and the STAK would be dissolved, giving the certificate holders direct control over the shares that correspond with their certificates.

To prevent such meddling, a STAK should be set up with additional safeguards to protect the steward-ownership structure:

  • Issue non-voting shares to the STAK (as specified in the shareholder agreement and the statutes of the parent company)
  • Issue a golden share to an independent foundation so that it becomes impossible for certificate holders to exert any influence on the STAK board regarding a potential change of statutes of the parent company
  • Set up mechanisms to enlarge the circle of who proposes and approves new board members - besides certificate holders. This can help to prevent certificate holders to replace the STAK board with members more aligned with their interests.
  • Do not assign the certificate holders the right to attend shareholder meetings of the parent company.

As a STAK structure is a widely used legal construct, most notaries and lawyers knowledgeable in the Dutch jurisdiction have standard templates for setting up such a structure.

Lower transaction costs: Trading can be done without a notary (before, shares need to be issued and converted to certificates that are then held by the parent entity)
Requires to set up a separate legal entity under the Dutch law with statutes in Dutch
Certificate holders are not listed in the trade register of the Chamber of Commerce (and can remain anonymous)
Legally, the certificate holders have limited voting shares through which they can influence the STAK board. Additionally safeguarding the governance to be SO-proof might require additional research.
The STAK itself can not operate as a company and is therefore not subject to tax
Employees can be granted profit rights through certificates without the voting rights associated with share ownership

A big Thank You to We Are Stewards for their input on this section

Securing liquidity for investors and founders

All investors need a straightforward way to get liquidity from their investments. For early-stage investors, liquidity typically is provided through external acquisition of the company or an IPO. Because steward-owned companies do not aim for an exit, however – at least not in the traditional sense – they need alternative ways of providing investors with liquidity. Fortunately, there are several well-proven alternatives.

Cash share buybacks

The simplest and most direct way to provide liquidity for investors is from the cash generated by the company. If a company has sufficient cash reserves after a period of growth and/or saving, buybacks can be arranged with investors based on a valuation of the company or a pre-agreed buyback price or formula. To ensure buybacks do not occur solely at the discretion of the company, investors in steward- ownership start-ups usually get a put-option, or a “redemption right”, which forces the company to use a certain percentage of free cash flow for buybacks that are valued at a predetermined price.

Leveraged buy-out

A common way to recapitalize a more mature company is to buy out earlier investors with debt, in combination with subordinated debt or preferred non-voting equity that the company issues. This works well if the company has positive cash flows or hard assets and can secure a loan with a reasonable interest rate. Debt providers often require covenants and/or liens on assets to secure their investments. Preferred equity providers might want a minimum dividend that is paid annually with a defined upside, since they don’t control the company or its decisions regarding dividend payouts.

Equity raise

A startup company may want to provide investors with some liquidity through partial share buybacks as it grows and raises larger and larger rounds of equity. This relieves the return pressure for early investors, while ideally securing the company cheaper capital for continued growth.


Some investors are willing to accept a long-term share of dividend distributions in lieu of liquidating shares. The conditions under which dividends are distributed must be agreed upon beforehand, as investors typically do not hold board seats or have controlling votes in steward-owned companies. This can take the form of a “base” or “guaranteed” dividend triggered by a milestone or a performance metric built into the dividend agreement.

Non-voting or low-voting IPO

Steward-owned companies do not allow the sale of their majority voting interests.

This does not, however, preclude a company from offering shares on the public market. Indeed, roughly 70 percent of the value of the Danish stock market value is derived from steward-owned companies. These and other mainstream companies have opted to offer either strictly limited and minority controlling interests or non-voting economic shares on the public market. The latter is the preferred method for steward-owned companies, as it enables investors to capture gains from valuation increases without compromising the control of the company.

Sale to another steward- owned company

In some cases, a steward-owned company may take over another if they share a common purpose and operating philosophy. In these cases, the new parent company may take on additional capital, or use cash reserves to provide liquidity to investors and founders of the company that is being acquired. Unlike a traditional exit, this transaction does not undermine the mission of the company. In some cases a larger steward-owned company may simply be the best next steward for a steward-owned start-up.


All of these instruments enable steward-owned companies and companies transitioning to steward-ownership to provide investors with liquidity. These instruments do not threaten the independence of a steward-owned company, nor do they compromise a company’s commitment to mission-preservation. Unlike the financing instruments conventionally leveraged to provide liquidity, many of these tools require longer investment periods. Luckily, a growing number of investors understand the importance of patient capital to ensuring a company’s mission and impact over the long-term.

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Published by: Purpose Schweiz

Graphics and illustrations: Purpose Stiftung