Company Builder

What is a company builder?

Company builder (also venture builder or startup studio) refers to a company that systematically founds new companies from its own business ideas and builds them up with its own capital. For this purpose it provides central services such as development, marketing or accounting, and holds a high stake in the new companies in the early phase, often the majority. Operational management is taken by founders whom the builder recruits for the respective project and appoints as managing directors of the new company.

The company builder is thus co-founder, principal shareholder and service provider at once. This distinguishes it from a venture capital fund, which takes a minority stake in existing teams, and from programmes that support third-party projects for a limited time. The relationships are regulated in the articles of association and shareholders' agreement of the new company, in the managing directors' employment contracts, in a service agreement for the central services and in agreements on intellectual property rights.

How a company builder works

It starts with idea generation in the builder. A team of its own examines markets, talks to potential customers and tests willingness to pay, for example with simple offers or pre-orders. Most ideas are discarded at this stage because no reliable demand appears. For the rest, the builder founds a separate company, usually a GmbH (German limited liability company), provides it with start-up capital and fills the management.

The founders join in different ways. Some builders employ founders for a limited time (entrepreneurs in residence), who help develop ideas and take over the management on a founding. Others look specifically for a management team for a validated idea. In the build-up phase, the new company uses the builder's services: software development, design, marketing, recruiting, accounting, legal and finance. As it grows, it gradually takes over these functions itself. Besides independent builders there are corporate builders, which build new businesses with the capital of an established company, often with an option for the corporation to take over the company later. Independent company builders in Germany are located mainly in the large founding hubs such as Berlin, Hamburg and Munich.

Shareholding structure in a company builder

The builder contributes the idea, start-up capital and services and bears the risk of the discarded projects. It therefore holds a high stake at the beginning, in many models the majority. The founder-managing directors receive a minority, the size of which depends strongly on the model. It depends on who contributed the idea, how much capital the builder commits, whether the founders draw a market-standard salary and how early they join. General market values therefore say little; what matters is how the shares develop over the following rounds.

Legally, the founders acquire their shares by assignment from the builder or by taking up new shares in a capital increase. The assignment and the obligation to make it require notarial recording (Section 15(3) and (4) of the German Limited Liability Companies Act, GmbHG). The shares are generally subject to reverse vesting with obligations to transfer back on early departure, the price of which follows the rules for good leavers and bad leavers. What matters is whether the contract classifies the departure as without fault, for example in case of illness, or as caused by the founder, for example on resignation or breach of duty. If shares are transferred below their value, the benefit may be taxable as employment income. Whether special rules such as Section 19a of the German Income Tax Act (EStG) apply is clarified by tax advice before the transfer.

Control and position of the founder-managing directors

With the majority, the builder determines the shareholders' meeting. It adopts simple resolutions by a majority of the votes cast (Section 47(1) GmbHG). This includes the removal of managing directors, whose appointment can in principle be revoked at any time (Section 38(1) GmbHG). Amendments to the articles of association and capital increases require three quarters of the votes cast (Section 53 GmbHG), so a builder with more than a quarter can block them. Founder-managing directors thus stand between entrepreneur and employed executive. Shareholders' agreements often balance this through approval rights, rules on the composition of the management and a good leaver position on removal without good cause.

Central services and service relationships

The builder's services are charged under a service agreement. Because the builder is also a shareholder, the fees must withstand an arm's length test. Excessive fees paid to a shareholder can be treated for tax purposes as a hidden profit distribution. For later investors, it also matters how long the contract runs, whether the company can terminate it and which services fall away afterwards.

If the builder's employees develop software, brand or content, the rights initially lie with the builder. They must be expressly transferred to the company or exclusively granted to it (IP assignment). If the builder finances the build-up through shareholder loans, these rank behind other creditors in insolvency (Section 39(1) no. 5 of the German Insolvency Code, InsO). Before a round, investors often require such loans to be converted into equity or at least not to be repaid from the new funds.

Consequences for later funding rounds

In a capital increase, all existing shareholders are diluted in proportion to their shares, so their percentage falls evenly. A high stake of the builder therefore stays high in the cap table, the overview of all shareholders and their shares, over several rounds. The stake of the founder-managing directors, by contrast, can fall to a level that investors regard as too small an incentive. A shift in favour of the founders does not arise by itself. It requires a separate agreement, such as an assignment of shares from the builder or an option pool for the team that economically comes solely at the builder's expense. A pre-agreed anti-dilution protection for the founders is also possible.

For companies from a company builder, investors in a Series A, the first larger funding round with professional investors, look above all at the fully diluted stake of the operating team. This means its stake after the round and after counting all options and conversions. Further factors are independence from the builder's services and whether the builder holds companies in neighbouring markets. Clean documentation, an early validated market and a shareholder that can take part in follow-on rounds often have a positive effect.

Worked example: founder stakes in a company builder up to the Series A

A company builder founds a GmbH for route planning software and, after two founder-managing directors join, holds 70%. The founders hold 15% each. A seed round, an early round with smaller amounts, and a Series A follow. Both rounds issue new shares of 20% each.

• Seed round: EUR 1.5 million at EUR 6 million pre-money gives EUR 7.5 million post-money and 20% for the new investors
• After the seed round: builder 70% × 0.8 = 56%, founders 15% × 0.8 = 12% each, together 24%
• Series A: EUR 6 million at EUR 24 million pre-money gives EUR 30 million post-money and 20% for the new investors
• Without adjustment after the Series A: builder 56% × 0.8 = 44.8%, founders 24% × 0.8 = 19.2%, seed investors 16%, Series A investors 20%
• With adjustment: before the Series A the builder assigns 8 percentage points to the founders, 4 percentage points each with new vesting; afterwards the builder holds 48% and the founders hold 32%
• After the Series A: builder 48% × 0.8 = 38.4%, founders 32% × 0.8 = 25.6%, seed investors 16%, Series A investors 20%
• Value at the post-money of EUR 30 million: founders 25.6% × EUR 30 million = EUR 7.68 million instead of 19.2% × EUR 30 million = EUR 5.76 million; the builder gives up EUR 1.92 million in calculated terms

Even without an assignment, the builder no longer holds a majority after the Series A, at 44.8%. In both cases it keeps a blocking minority with more than a quarter of the votes: amendments to the articles of association and capital increases are not possible without it. Whether the assignment below value triggers employment income for the founders must be clarified for tax purposes in advance.

Distinctions: company builder, venture capital, accelerator and incubator

• Venture capital: Funds take a minority stake in companies whose founders developed them themselves. The company builder develops the idea itself and often holds the majority at the start.
• Accelerator: supports third-party teams for a few months in return for a small stake. The builder supports its own foundings permanently as principal shareholder.
• Incubator: provides mainly space, infrastructure and advice for projects with their own idea. The builder additionally provides capital, staff and the idea.
• Corporate venture capital: Corporations take stakes in existing young companies. A corporate builder founds new companies instead of taking stakes in third-party ones.

Common mistakes

• Incentive structure clarified too late. If the team's stake becomes an issue only in the Series A negotiations, builder and founders negotiate under the time pressure of the round.
• Service relationships not documented. Without a written service agreement and traceable fees, the cost base and arm's length basis cannot be verified in due diligence, the review by the investors.
• IP rights stay with the builder. Software, brand and domains held by the builder are transferred before a round. Otherwise the most important asset depends on one shareholder.
• Dependence on central functions. If finance, technology or recruiting remain permanently with the builder, the company lacks a management team of its own. Investors factor in the cost of building up these functions.
• Conflicts of interest left open. If the builder holds companies in neighbouring markets, non-compete rules and information flows must be set in the shareholders' agreement.

Frequently asked questions

How many shares does a company builder hold?

At the beginning often the majority. With every funding round its stake falls, in the worked example from 70% to 44.8% after the Series A. There are no fixed market values, because the split depends on the origin of the idea, the capital committed and the founders' salary.

Do venture capital funds invest in companies from a company builder?

Yes. They apply the same standards as for other companies and additionally examine the operating team's stake, the dependence on the builder's services and the location of the IP rights.

Can a company builder remove the founders as managing directors?

Yes, if it holds the majority in the shareholders' meeting and the articles of association provide nothing else. Removal ends the office, not automatically the employment contract. What consequences it has for the shares is determined by the leaver rules of the shareholders' agreement.

Can founders bring their own idea into a company builder?

With some builders, yes. If the founders bring the idea, first customers or technology, their stake is generally higher.

What happens to the central services after a Series A?

They are usually replaced step by step by teams of the company's own. A transition plan is common, setting out which services the builder continues to provide until when and at what fees. The cost of the company's own functions belongs in the planning of the round.

The Roemer Capital view

For companies that come out of a builder, the preparation of a Series A begins with a sober calculation. We model the fully diluted cap table across the planned and the next round, so that builder and founders see where the team's stake then stands. An adjustment can be negotiated more objectively before investors are approached than during the round.

In the financial model, we set the builder's services at costs that withstand an arm's length test and plan in the build-up of own functions. Service agreements, transfers of IP rights and shareholder loans are disclosed in full in the data room. Legal and tax implementation lies with the company's law firm and tax adviser.