Finland: Common Funding Types For Early-Stage Startups

Last Updated: 13 June 2017
Article by Nordic Law

This article will be dedicated to presenting common funding types for early-stage startups, so that the next time you hear from an investor you met at Slush or Arctic15, you will hopefully have a basic idea of the funding alternatives.

Funding is an essential part of a startup's further-development. If your startup has a very scaling business model, the growth of the startup will require hefty sums of good ol' cash. In that situation, the best alternative is of course that the startup would be able to finance the growth with the on-going cash flow from business operations, with capital injections from the founders or simply just by bootstrapping. That way the founders can make sure that all the valuable equity and control of the startup stays in the hands of the founders. Only if those are not enough to enable the proper growth of the startup, should the founders start to seek alternative ways of funding.

If your startup has managed up until now to grow without external funding, your first external funding round will certainly be confusing as there are several different funding types to choose from. You got your equity financing, you got your debt financing and, as a cherry on top, you got your mezzanine financing, which is a sweet mixture of equity and debt financing – in the end, the correct funding type should always reflect the particular needs of your startup and the milestones you hope to achieve.

We will below explain in an understandable manner the various funding alternatives, as in the end the startup founders should always have a clear understanding of the common funding types as they are the ones who will have to develop their own fundraising strategy and vision.

Equity Funding

As mentioned above, the main types of startup funding are divided into equity and debt funding.

Equity funding, as the title implies, refers to financing your startup in a way, in which you receive money in exchange for issuing shares of your stock. The startup can either give existing shares or issue new shares to investors. The common alternative is that investors are issued new – often preferred – shares in exchange for their investment. The issuing of preferred shares means that, in addition to the common shares of the founders, a new share class of preferred shares is created. The preferred shares give the investors certain additional rights and control regarding the startup.

It is up to the founders to decide what kind of equity they are willing to give up, but the later the funding round, the more likely the founders have to give up additional equity. The first funding round is often the seed round, which nowadays can be further-divided into pre-seed, seed and second seed rounds. Seed rounds are often raised from private investors as well as business angels and most likely the founders will have to give up equity ranging generally between 10-25% in exchange for investments ranging normally between EUR 250k – 2M.

When it's time for your startup to hit the big leagues and you are seeking larger investments, the dreaded VCs come to play starting with the Series A. Normally a typical Series A ranges from EUR 2,5 – 5M in investments in exchange for at least 25-40% of equity in your startup. It is a big decision to take on board VCs, but then again, a VC can offer significant and much needed capital investments, which may take the startup to the next level.

After the seed rounds and the Series A, the next funding rounds are not hard to guess – please welcome Series B, Series C and so on. If you have struck gold with your startup and its business model, the equity funding's grand finale will either be an acquisition or an IPO.

Debt Financing

Debt financing is also a viable funding option for SMEs, but another question is whether it is in reality suitable for startups. In debt financing, the startup loans cash from various credit institutions and/or private investors. The startup will have to pay back the loans, regardless of whether or not it is making a profit.

Debt financing is, almost without exception, interest-bearing, which also has to be taken into consideration when thinking about the price of the funding.

Especially regarding startups, most credit institutions offering debt financing will require in exchange for the loan some kind of a collateral. The collateral is in place to make sure that the credit institution will get its money back – startups should be aware that banks will do almost anything to get their money back. As it is with casinos, the bank always wins.

It should also be emphasized that the collateral requirement makes the debt financing a challenging, if not an impossible, alternative for startups. Very few, if any, startups are in their early stages in possession of property that could act as collateral to a loan rendering debt financing to a secondary funding alternative for startups.

Mezzanine Financing

In order to make sure that your head is really spinning, let us present to you the sweet mixture of both equity financing and debt financing – mezzanine financing, which in our view brings together the best of both worlds. Mezzanine financing is a financing form consisting of various elements that traditionally has been connected to either the equity or debt financing model.

During recent years, a growing amount of startups have come to realize the value and flexibility mezzanine financing has to offer compared to the traditional equity and debt financing models. Mezzanine financing gives startups access to much needed capital without an immediate requirement to give up important equity to investors.

Mezzanine financing is normally divided into the following:

Subordinated loans given by investors to startups, which are considered as debt but treated as equity capital in case of loss of the equity capital (such as bankruptcy situations).

Convertible notes, which by now should be familiar to all startups that have raised their first funding rounds. A convertible note is an excellent and agile way of funding especially growth-stage startups. The convertible note is based on a written agreement between the startup and the investor giving the loan. In the agreement the startup and investor agree on the terms, which must be fulfilled in order to convert the loan into shares of the startup. In other words, the convertible note starts off as a debt instrument, but if certain terms are fulfilled, the original debt instrument is converted into an equity instrument. The convertible note is a very suitable instrument in situations where the valuation of a startup is challenging to determine. In that situation, the startup can raise a convertible loan from the investor and when the valuation of the startup has clarified, the loan can be converted into equity of the startup. As the investor has got an opportunity to convert the loan into equity, the costs of the loan are in general lower compared to normal loans meaning that the interest of the loan is more startup-friendly.

SAFE-instrument, or Simple Agreement for Future Equity. It has slowly reached even the shores of Finland and it is no surprise that the origins of said instrument is the US and A, the promised land of unicorns. With the SAFE, the investor, through a simple one-document agreement, makes a cash investment in a startup, but gets shares of the startup at a later date, in connection with a specific event. A SAFE is not considered as debt financing as such (more like an option in accordance with the Finnish Companies Act), but in lack of a better categorizing, the SAFE is a form of mezzanine financing. The startup and the investor need only to agree on a valuation cap and the date when the investment is converted into shares of the startup. This means, for example, that no interest is paid to the investor and as the SAFE can be agreed on with only one document, the startup is able to receive investments in no time with minimal transaction costs (i.e. legal costs).

Another similar alternative to a convertible note or the SAFE is an option loan, which gives the investor giving the loan, in addition, an option to receive shares of the startup for an agreed price.

Also worth mentioning are profit sharing loans, in which the profit that is paid to the investor is dependent on the profit the startup is making.

Mezzanine financing enables the founders to retain the ownership of the startup meaning that it is a more flexible and founder-friendly alternative compared to traditional equity financing. Especially the SAFE discussed above is a very interesting new form of mezzanine financing with its flexibility and speed, whereby it has the potential to become the uncrowned king of the world of mezzanine financing.

It is worth mentioning that to investors various forms of mezzanine financing can be riskier as mezzanine financing is considered a mixture of both equity and debt financing. That means that if the startup would for example go bankrupt, the investor that has given mezzanine financing would not get back any money before all "official" debts of the startup has been paid. Especially if your startup is in the early-stages, certain investors are not interested in offering mezzanine financing – or at least, not until the business model has been proven and the risks of investments are lower.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.