You Don’t Need a Notary for Your Seed Round

By Tienko Rasker | Startup Life

In Leapfunder’s most recent article, you learned why an investor pool is critical for your company. Now you have the opportunity to find out if you need a notary for your seed round.

We often hear people are asking: why do we need to go through so much paperwork when setting up our company? Why is there so much legal paperwork to divide up the shares? Well, the answer is that you could probably get away without most of these formalities as long as everybody is friends, right? In the same way, you can probably have dinner and split the bill fairly at the end of the evening. But what happens if you’re no longer friends a few years later? It’s important to have a proper legal process when forming a company, even if you are doing this with your best buddy. 

Most legal stuff can be organised with an attorney. In some countries and in some situations, you also need a notary. A notary can act as a legal advisor, but more notably a notary is a strong witness that everything was legally organised. Whether you need a notary in a particular country depends on the law in that country. Some countries insist that a strong witness is present for the most important legal actions. Some countries don’t feel they need this additional witness. The guidelines below apply to Germany.

Company Creation & Share Issuance

In Germany, a notary is normally needed to create a limited liability company. The notary will put together the paperwork, and register the company with the official register of companies.

The same is true for creating new shares. This important step in the life of the company usually requires a notary to be present. That means that if someone holds a share certificate there is a powerful witness statement from a notary to prove that those shares are real.

The Convertible 

It’s now widely accepted in Germany that you can do a convertible note investment round without a notary. For this to be possible your ‘Wandeldarlehen’ does need to meet certain requirements. Any experienced startup lawyer can help you set it upright. 

It is often better for a startup in the early stages to do smaller investment rounds more frequently. This is an advantage because the value of the company is increasing very quickly. If you break your funding round into smaller tranches, you can raise a lot of the money a little later, and lose fewer shares in return. This is now common practice. Of course, if you are doing a funding round every 6 months then you should try to make sure that you can handle those rounds with the simplest possible process. For this reason, a convertible without a notary is a practical option.

The Shareholder’s Agreement

The Shareholder’s Agreement contains a number of clauses that are of critical importance for the health of the company. Perhaps the Good/ Bad Leaver clause is the most important. This clause regulates what happens with the founder shares in the case that one of the founders leaves. You need an agreement that regulates this. When a co-founder leaves it is often reasonable that they keep some of their shares, but not all of them. A Good/ Bad Leaver clause gives an exact rule about how many shares the leaving founder can keep, so that there is no reason to fight over this. In Germany this kind of agreement does require notarization. It is probably best to set up the Shareholder’s Agreement at the same as you create your company. At that time you are visiting the notary already. If you didn’t do it when you created your company: don’t wait! Set it up as soon as possible. You simply never know when could a co-founder leave: it could be tomorrow.

With this article, we thoroughly explained all 5 most important things startup founders need to know before raising capital. For more information, get in touch with Leapfunder.