In most cases, it is the founders themselves who provide their newly founded company with initial financial resources. In this first phase of a company, it is often still in the development stage. Product development, market analysis and strategy planning are in the foreground. Market entry has often not yet taken place.
A first round of financing with outside funds is then often provided by family members, friends or early-stage investors such as business angels or venture capital investors (so-called "seed financing" or "early stage financing"). Investments in the seed phase are often structured as so-called convertible loans. In this case, a loan with a fixed interest rate is initially made available to the start-up, which is then converted into equity capital of the start-up at predefined conditions within the framework of the first larger financing round, including the accrued interest.

After market entry and the generation of the first sales, the first large-volume financing (so-called Series A financing) takes place, which is then followed by Series B-/C-/D- etc. financing. etc. will follow.

Convertible loans are usually concluded solely between the company and the lending investor. This is the great advantage of this form of financing: contract negotiations and conclusion are considerably simplified and shortened by the two-party principle. In order to avoid the risks of a delay or even refusal of the later conversion of the loan by the existing shareholders, it has become established practice to obtain a corresponding approval resolution as well as a declaration of consent and commitment by the shareholders already within the framework of the loan agreement and thus in advance.
The convertible loan is provided with a moderate interest rate and the maturity is chosen in such a way that, given the expected development, a further financing round and thus the conversion can take place beforehand.
This conversion, in turn, is structured as both a right and an obligation. Because of the low interest rate, the investor has no risk-adequate remuneration if the conversion does not take place and thus does not participate in the increase in value of the company. In this respect, one should also not forget that it is still venture capital, since the investor cannot expect repayment of the loan in the event of insolvency.
Of particular importance here is the determination of the conversion price.
A simple possibility is to convert the conversion loan, including the accrued interest, into equity at the conditions of the next equity financing. However, an investor will only accept this in the case of bridge loans or brige financing.
In cases where the financing via a convertible loan represents an independent financing, i.e. is not only intended to serve as a bridge loan, a discount on the issue price of the next financing round is usually agreed. A valuation cap can also be agreed.

In a milestone investment, the payment of certain parts of the committed total investment is made dependent on the achievement of certain goals or milestones. These can be economic goals, certain development progress or market entry. Milestone investments are to be distinguished from so-called "ratches", which grant investors further shares if targets are not reached, without them having to make a contribution.

A milestone investment is therefore particularly useful for investors if they want to encourage the start-up to achieve certain goals as quickly as possible in order to then receive further funds. For start-ups, this can be a way to convince investors and minimise the risk for them. If the start-up does not reach the agreed milestones, no further money has to be paid out.

With the agreement of a second closing, investors can extend their investment within an agreed period of time after the initial contribution of financial resources (contribution) - but usually without being obliged to do so. The conditions under which the second closing can take place are already set out in the original investment agreement, so there is no need for renegotiation.

Investors do not just invest in a company or in a product. In most cases, the founders themselves are of crucial importance to the investors. The basic idea of a vesting agreement is to bind the founders to the company for a minimum period. Since this is legally only possible to a very limited extent in Germany, vesting creates a financial incentive. If the founders leave the company or stop or limit their work for the company, their shares in the company lose value or they do not profit from the increase in value or even lose their shares altogether, depending on the contractual arrangement. The concrete design is very variable.

The participation of employees in the company or in its turnover and profits is becoming increasingly popular. The basis can be a so-called ESOP, an employee share ownership programme. An ESOP must be concluded between the shareholders, as they thereby waive the profit-sharing to which they are entitled from their shares in favour of the employees. ESOPs are a relevant selling point in attracting good employees and are therefore highly relevant.