How I would start my next Startup in Germany without a GmbH

If you are an entrepreneur from Germany, I hope this article somehow finds you. I wish someone had forwarded this to me when I was getting started.

If you’re not in Germany, you’ll get a pretty good idea what you can expect doing business here and what your German founder friends might go through.

My advice is based on more than 4 years of experience as a founder of a German GmbH, a Delaware C-Corp, and receiving venture funding in both Germany and in the United States, after getting accepted by Y Combinator in W19 (Winter 2019).

If you never plan on raising funds or potentially selling the company in the United States, you’re much likely better off going for a GmbH — however even then I strongly recommend reading this, because there are a lot of ways to reduce unnecessary bureaucracy and road blocks.

Before diving into the spicy details, I would like to give you some background on how everything began.

© Photo by Felix Mittermeier from Pexels

Part 1: How we got started

In 2016, I didn’t know what a startup was. No one told me, I didn’t study entrepreneurship or had a buddy who’s been in the industry. I just wanted to build something for myself and see if likeminded people wanted to use it.

I was (and still am) a huge Magic: The Gathering fan, the worlds biggest trading card game with 38 million players and hundreds of thousands of different unique cards. As you may imagine, you’ll end up with a gigantic messy collection:

A box of unsorted magic cards © CC BY-SA 2.0

My cofounder Malte, who I met in university joined me and we solved this huge problem by building a mobile app that scans and recognises the card, fetching the market price and exporting everything in a neatly portfolio overview.

Takeaway #1: “things can start as a hobby and turn into a venture business very fast. Keep this in mind.”

Having no money as broke students, we turned to Kickstarter and quickly noticed that we need to incorporate in order to receive funding (or make money in general).

We went for the very basic UG (Unternehmergesellschaft haftungsbeschränkt) that was set up quite easily. At least, that’s what we’ve been told.

Even on day one, we made a key mistake by incorporating the startup as a private individual and not through a personal holding company.

The correct thing to do would’ve been:

• Peer creates Richelsen Ventures UG

• Malte creates Delfs Ventures UG

The new startup is owned by 50% Richelsen Ventures UG and 50% Delfs Ventures UG, instead of 50% Peer Richelsen and 50% Malte Delfs.

While we were able to undo this, this mistake will play a huge role in part 2 and created unnecessary headaches and legal costs.

The goal of an UG is to have limited liabilities from the start, however you need to convert it into a full GmbH, once you have generated €25.000. It still baffles me, that you need to buy your own shares in Germany, in order to receive the “status” and protection of being a fully incorporated company.

While the UG setup was fast and easy, little did we know how much overhead this could mean in the future.

We ended up raising a small amount of 6.171€ on Kickstarter and went back to business.

Takeaway #2: “What previously was just a hobby is now an incorporated company with legal obligations, revenue and customers. There is not much going back now to reincorporate. You should consider incorporating a holding company UG before you incorporate your startup.”

After our Kickstarter campaign we quickly found our first angel investor who joined the company — looking back at a *very very low *valuation, but that’s just the German market 🤷‍♂️ . Naive as we were back in the days, we’ve accepted to do a priced round on a 1.2M valuation (we had no clue that convertibles exist) and went straight to the notary.

As cofounders we now had to buy in, in order to receive our full shares. To get 50% of the GmbH, we both took out a loan and paid €12.5k in full.

Twelve-thousand-five-hundred is a lot of Döner Kebab Coins for me, a currency I like to use to put money into perspective. (My local Kebab costs 2€ — or 1 Döner Kebab Coin).

Now, you don’t need to convert the UG to a GmbH but if you want to be taken seriously in Germany by customers and investors, it can be a huge factor doing business. For our investor, it was a must-have.

Takeaway #3: “In order to start a GmbH in Germany you will need to buy-in. While you can most likely lend the money, it’s a risk you need to keep in mind. If you’re a solo-entrepreneur, that’s a whooping 25.000€ for you.”

Alright, so we got the GmbH, we’ve fully bought in (btw. buying in can be a very positive signal towards other investors to show you have skin in the game) and now we can go back to building a product. Right?

Well, sort of. What comes next are a handful of institutions sending you letters asking you to pay for various fees and services by snail mail (jeez it’s 2020, Germany get your act together). This ranges from the company registry, the lawyer who you might have used to incorporate, your notary who signed your application, the IHK (Chamber of Commerce and Industry, an institution no one in the Startup industry really cares about, but which paid membership is mandatory to join), Der Rundfunkbeitrag (seriously, fuck them) plus another handful of scammers, who pretend to be an official institution and try to fuck around with you to get your money (and fuck them too).

Takeaway #4: Be aware: your company address will be listed publicly. The initial cap-table and ownership will be public. You will receive scam letters that look like institutions. Do not pay anything that looks fishy. Google all websites on these letters.

Another spicy mechanic is how to get a bank account while incorporating a company. The lawyer and notary want to get their money paid from by the bank account, however the bank wants you to first incorporate. It creates this weird chicken-egg scenario where you need to calm both parties and go into a pseudo-company mode called GmbH i.G., which means “In Gründung” (english: in the middle of being founded). I don’t know what to tell you, other than this process can take up to 3–4 weeks to get finished. Even most challenger banks (neo banks) are not really faster.

How do I know? We’ve incorporated another holding company UG and wanted to use a Berlin based challenger bank — it took us almost a month to get done.

Choose your bank provider wisely or at least switch early. We went with a 0$/month neo bank and it was horrible. However, once you have connected your bank account and debit cards everywhere, signed payroll, etc. there is not an easy way to switch.

Takeaway #5: Keep in mind creating a bank account can take up almost a month in Germany. I don’t know why. Switching is very hard and usually not worth the effort.

Going through all of this will really grind your gear, especially since all you wanted to do was build that neat product and make people happy. As a naive founder, I didn’t know if this is a lot of work or just mandatory standard procedure. I was thinking:

Well, if everyone is doing it, it must be the way it works, right? It’s just one of the things you need to deal with as a founder

Until we got accepted by Y Combinator. That’s when my perspective changed and I felt shameful, angry and disappointed…

A new beginning. Our app was growing, we were signing up users left and right who were scanning millions of cards. While we haven’t found a business model yet, we were confidant that as long as we keep growing and talking to customers, we’ll find a way.

However, after months and months of trying to introduce a monetisation strategy and failing we’ve came across a tweet by @paulg, retired founder of Y Combinator, the worlds most famous and sought after startup accelerator that the application deadline has been extended.

We sat down in the office, made a 1-minute video introduction in two takes and wrote the entire application in 12 minutes. Yes, I stopped the time, because I told my cofounder that “I don’t want to spend much time on this, the chances of getting in are soooooo low.”

Later did we learn that the W19 batch had one of the lowest acceptance rates of 1-point-something-percent, holy space cow 🐮🚀 .

After submitting everything, it only took a few weeks to completely forget about it.

A mail popped up along the lines of: “We would like to do a 10 minute interview in Mountain View with you. We compensate your travel expenses”. I don’t remember everything because this whole thing was just a blurry dream. I was joyfully screaming. I fell off my chair laughing and called my cofounder and friends.

We’ve applied soooo late that the interview was something like next week, so we didn’t blink an eye and booked the first flight we could find.

Arriving in our Airbnb in Mountain View we met 6 more teams who had the interview, whereas 5 got a “no” a day before our arrival. The mood was, well, bad. I tried to understand what YC was asking, what went wrong with these teams, only building up more anxiety.

We walked to YC through the suburban neighbourhood and I told my cofounder Malte:

“Listen, we flew 36 hours to get here. Let’s not fuck this up and get in!”.

He nodded as he always does. I have no memory of the interview. I felt like it went very very well only hearing this from other teams later on who didn’t got in.

A few hours later we got the call along the lines of .

YC: “We would like to fund you!

[…]

{insert joyful response from me and malte}

YC: “however your unique situation with the German company will make this very hard for you. You will need to flip into a Delaware C-Corp”

Very hard. I was scared. Like — scared scared. Before applying to YC I knew we would need to flip into a C-Corp (flipping means changing the company structure), but I never expected to get accepted in the first place. After the call, I felt paralysed. I didn’t drink more than a sip of my beer. I was both happy and anxious. My body was shaking, not knowing what will happen next.

Takeaway #6: In the startup world, things can change very fast. Do not expect to never raise money in the US. Do not expect to get a rejection as an excuse. Try to keep as many doors open for as long as possible. Do not do the same as we did in part 1.

Here comes the part 2 you’ve been waiting for, that basically explains why you should not do part 1 or at least what I would not do again in my future startups.

Part 2: The Aftermatch

Introducing: The C-Corp flip. Flippidy Floppidy we reached out to our shareholders and the new legal team Orrick, Herrington & Sutcliffe, (short: Orrick) who had an office and the necessary legal expertise in both Bay Area and Germany.

Very quickly we received the unsatisfying news that due to raising a priced round in Germany at a 1.2M valuation, there’ll not be an easy way to flip the company into a Delaware C-Corp without creating a huge taxable event.

If we would do the standard flip, which legally means selling the company to the newly formed US company the taxable event would be 1.2M * 24-ish% = 288.000€ per founder, since we didn’t own the shares in a personal holding company UG. El-Em-Ah-Oh. If we would own the shares in a UG it would be much less, around €10k per founder. Still a huge amount of money but bearable. There was a way to artificially lower the valuation or under report the companies valuation but there was a risk that it could lead to legal troubles for the shareholders, something we had no interest in at all.

We’ve decided to go for a “synthetic-flip”. Which means both companies agree to be affiliated and in case we ever sell the German company, the US company would buy it first, resulting in a so-called deferred share agreement, something that a lot of Canadian, Italian and French companies do in order to flip into a C-Corp.

The deferred share agreement meant, the taxable event would occur in the event of an actual liquidation of assets (i.e. IPO or exit) where the taxation can be paid — not in the event of a geographic flip that has no cash payment.

We ended up spending way too much money on legal fees in order to get this done right and not run into any legal risks. Something we could have prevented if we (A) didn’t raise a priced round, pricing the company at 1.2M and instead using convertibles (B) creating holding companies for the founders or (C) not incorporate as a GmbH in the first place.

For my future endeavours, I will go straight with option (C). Here’s why:

It took us one week to fully incorporate the Delaware C-Corp from making the decision to having an operational bank account at SVB. You can do everything online. You don’t need a physical location, where countless scammers or century-old institutions will send their mail to. You don’t need to play a chicken-egg guessing game with the bank. You don’t need to buy your own shares. You don’t need to do anything other than focussing on building something people need.

It was this brutal moment I noticed how much time I have wasted working on unnecessary bureaucracy in Germany just to get started.

Having gone through both incorporating in Germany and in US I have a strong opinion that the GmbH is not a valid corporation for any startup. Another topic I will address in the future is how vastly different and easier the process of fundraising is the US. Hint: Don’t do a priced round in Germany.

Now, there are definitely counterintuitive things you’ll need to figure out in the US, some might create even more overhead than in Germany. I’d argue doing payroll is much easier in Germany, since you don’t need to care about benefits, health plans, etc. as it’s run by the government (yeah #Medicare4All rocks, I can tell you). However, in the US you can postpone a lot of these things, until you have the resources to spend time on them.

Remember:

The #1 thing for any startup is to find product-market-fit and get to ramen profitable. Get rid of all other distractions.

Here’s what I would do next time:

1. Create a German Holding Company UG (i.e. Lastname Ventures UG)

2. Use Stripe Atlas to incorporate a Delaware C-Corp and a Mercury

3. Use Clerky to raise money via Safes (Simple Agreement for Future Equity) and not as a priced round

4. Do payroll through contracting with Deel, a company a friend from YC started that does payroll for remote teams with regional compliance

not legal/tax advice: You may need to incorporate a German subsidiary if you operate from Germany and you may need to take board meetings for the Delaware C-Corp outside of Germany. Contact your professional advisor to identify potential double taxation issues.

Everything can be done from home, without a physical location, without a notary and without a lawyer. The only thing that takes time and will grind your gear is setting up the German Holding Company. If you have one already: great! Keep it afloat.

In a magical wonderland, I could go from having an idea, to incorporating, raising the first angel check and paying the first employee in less than 2 weeks.

This type of speed is why Silicon Valley is decades ahead of the German Ecosystem — luckily, with the power of se Internetz you can build a Silicon-Valley-esque startup, that is fast, easy and compatible with the global equity markets from your parents basement. Like we did.

Thank you for reading and onto building the next great thing!🦄

Peer