- Current challenges for esports teams in raising capital for professionalization.
- The distinction between financial investors and strategic investors is crucial for contract design.
- Essential contractual issues relate to voting rights, participation and type of investment.
- Beware of over-indebtedness: Young founders should check contracts carefully to avoid liability risks.
- Different problems with limited liability companies compared to stock corporations when raising capital.
- Creating relevant documents, such as term sheets and participation agreements, is essential for teams.
- Non-binding advice on costs and procedures is available, but limited to basic questions.
Currently, I advise a number of esport teams to raise capital and take the next step towards professionalization. So today I have a few brief comments on the problems I am dealing with.
Investment quo vadis?
If you want to re-establish a successful and profit-oriented esports team today, apart from factory teams, only external capital remains. Bootstrapping Esport teams is actually impossible by now(see this post for more on that).
By the way, some important basic information on how to acquire an investor for an esports team can be found in this article.
However, it is also important to consider whether you are looking for a financial investor or a strategic investor. This is not only relevant for the future, but also has an impact, of course, on how extensive and complicated contracts should be designed.
Important points to be clarified in these contracts are the investor’s voting rights, participation in the management, other activities, but above all the manner of the investment. In the case of young companies, it is important to take into account, in particular in terms of balance sheet law, that loans, agios or other arrangements must be made in such a way that the “cash” in the current account does not immediately result in over-indebtedness. Of course, there are many design options here, but they have different prerequisites and advantages and disadvantages. Without careful planning and advice, a young founder, who has mostly not studied law, should not simply accept contracts. Even as managing directors, the issue of over-indebtedness can quickly hide large personal liability risks, of which rarely anyone has any idea, since in my experience it is the rule that hardly anyone understands why over-indebtedness can exist, even though six-digit sums of money are in the current account.
Joint stock company or “silent participation”
By the way, these problems mostly arise with a limited liability company, because with a joint stock company(see this article) the raising of capital works similarly, but it can be easily constructed overall.
Incidentally, this also applies to an equity loan, which can be constructed, for example, in the form of a typical or atypical silent participation. This is a loan which grants the lender a profit-based contribution to the success in return. This proportion is predetermined and usually takes the form of a semi-annual or annual interest payment. However, the investor does not become the owner of the Esport team, but the company (usually probably a limited liability company) involves the investor in profits and exit proceeds as if he were the owner. Due to this construction, participatory loans can be designed quite flexibly. Whether such a loan is preferable to a shareholding in equity cannot be answered on a flat-rate basis, but depends on different circumstances.
This is mainly due to the fact that, unlike equity investments, a silent participation usually does not have a say, but there is a priority right to purchase profits and an improved situation in the event of an exit. So it’s up to you to decide whether you want or find a strategic investor.
Important documents
In addition to general advice, also on strategic issues, I help teams to prepare the relevant documents such as a term sheet, a shareholding and shareholder agreement as well as the adaptation or redesign of the social contract. Future investments would also have to be taken into account and, if necessary, managing director contracts would have to be adapted. This is especially true for the first smaller investors such as Business Angel, who can quickly cause problems in future investment rounds in the case of incorrectly concluded contracts, for example without the possibility of “dilution” and other arrangements, or have to be paid out dearly.
to ask?
I would also be happy to help with these questions with basic questions about costs and procedures without obligation. However, since an investment investment may also require extensive pre-contractual advice, this is limited to rudimentary questions in this case.
