Funding comes in many shapes and forms. If you are starting up a new company in Norway and you have a certain growth expectation, you will need to have some sort of funding.
There are roughly two types of financing: equity financing and debt financing. Equity financing means raising capital by selling shares in your company. Debt financing means you will find an someone to give you a loan.
Before you start your quest for funding, we recommend you to think about a few issues.
Investment or Loan
With an investment you give away a part of your company in return for capital and often the investor's network and knowledge. The advantage of a loan is that you keep full control of your company. With an investment you give away part of your company in return for capital (and often the investor’s knowledge and network). A loan, however, will have to be paid back including interest. When it comes to this decision, things are not black and white. It depends on the type of venture, what you are going to use the money for, your personal reasons and many other considerations whether it is best to opt for a loan or an investment. In fact, many startups have both.
Types of Investors in Norway
This is typically a wealth individual, participating personally or through a personal company. Considering the size of Norway's population there is a relative lage amount of these individuals. A business angel does not only contribute his of her money but also brings in knowledge, a network and effort. Angels usually participate in the early stages of a company, often at the very beginning.
Venture Capital (VC)
Venture capital is a type of investment that investors provide to small businesses and startups with a large growth potential in the long term. VC's are mostly known for their involvement in funding some of the (now) largest Silicon Valley tech companies. A Venture capitalist can be a single individual, but they are often organized in venture capital firms. Venture capital can also be allocated from investment banks or other institutions. Just like many other types of investment, the contribution is not always monetary. Many VC's contribute their kexpertise, knowledge and network to the companies they invest in.
Norway is a country with many rich individuals and has its fair share of family wealth as well. This wealth is often allocated to be reinvested. This can be any type of invesmtn: from real estate to startups. The goal is often to have a well-spread portfolio of investments with effective growth and to transfer wealth across generations.
A crowdfunding is usually conducted through an online platform. This is where the entrepreneur pitches his or her proposition including the required amount of funding, to the public. The idea is that many small investors (often individuals, but they can also be professional investors) will participate and together raise what usually would be done by a single or a few investors) will participate and together raise what usually would be raised by a single or a few investors. Although the crowdfunding industry in Norway is relatively underdeveloped, there are several online platforms. A good example is the DnB Startskudd platform.
Dealing with an investor
Finding an investor is an exciting process. Although we like to focus on the great possibilities a good investor can give you, we need to briefly discuss what happens when things do not go according to plan. If everything goes wrong, an investment is simply gone and the investor loses its investment. In practice, an investor will not simply throw money at your business without guaranteeing any sort of performance obligation from your end. It is therefore crucial that the expectations of investor and entrepreneur are aligned. No matter the exact role of the investor, this relationship should be based on trust. Both parties will have to give and take and realize that things often do not go according to plan. If the investor is a friend or even a relative, you should be even more aware that both parties have the right expectations. It is always recommended to walk through all scenarios together with a potential investor: what if the success is enormous? but also: what if the worst-case scenario occurs? No matter how close you are to this person, always make sure to formalize your agreement in writing. Unfortunately scenarios will occur that you had not taken into consideration. The best you can do is to make sure your agreement is as watertight as can be.
Before you formalize the agreement about an investment the first step is a so-called Term Sheet. This is by no means a mandatory document, but it helps both parties to put their negotiated terms on paper. Most of it is non-binding. A term sheet basically contains the agreements made about the amount of the investment, the shareholding to be acquired and the investor's participation. A term sheet normally precedes a participation agreement. The participation agreement contains the final agreed agreements regarding the investment.
What does a Term Sheet contain:
- the size of the investment;
- the equity interest;
- investor participation;
- the deadline for signing the participation agreement;
- which decisions can only be made by the shareholders' meeting;
- exclusivity of the negotiations;
- optionally a drag-along arrangement;
- optionally a tag along scheme;
- optionally an offer obligation, an anti-dilution clause, and preferential rights.
Formalize the investment
After the negotiation phase where you have worked out the main issues in a term sheet, you will move on to formalize your agreement with the investor. A participation agreement is a useful tool to this end.
A participation agreement contains the agreements about an investment in a private limited AS company. These agreements are made between the shareholders in that BV and the investor(s). In the contract you arrange, among other things, the agreements about the amount of the investment and the share interest that the investor receives in return.
Business loan at a Norwegian bank
Most business loans are distributed by a banks. Norway has a fairly well-developed banking system with a small number of large banking institutions. The general notion is that these banks are not very generous in handing out loans to small businesses and especially to more high-risk startups.
A Norwegian bank will be mostly interested in two things when granting your business a loan:
The company’s ability to pay back the loan. The bank will look at available cash and cashflow to determine this ability.
The collateral if the company fails to meet its payment obligations.
This collateral usually consists of assets that the bank can have a claim on if your company fails to pay back your loan. This can be for example inventory, stock or real estate.
It is not always just the above that matters for your business loan application. Other factors, such as your personal experience, your education level and your business plan can also weigh in the process.
Bank loans and the AS
An AS is a private limited company and therefore a legal entity, separated from you personally. This means that you as an owner are in principle not personally liable for the company’s losses and obligations. When granting a loan to a more high-risk business without much collateral to back up the loan, the the bank will most likely make sure you personally “co-sign”. In case the AS company is not able to repay the loan, the bank will want to make sure that you are personally liable for (at least part of the) outstanding loan.
When you take out a business loan as an sole proprietorship (enkeltpersonforetak/ ENK) or a partnership (DA) you are already “one” with your company so a debt of your sole proprietorship will automatically be a personal debt as well.
Find a bank
Business loan agreement
If you are agreeing on taking a business loan from an institution such as a bank you will have to agree to their terms. They will use their own agreement and often there is not much room for negotiation about the terms. In that case it is extremely important to go through all the terms very thoroughly. Preferably have someone with experience in bank lending take a look at it.
In the case that the lender is a private person or another company, you might be able to negotiate the terms and set up a business loan agreement together. If you are lending out money to someone else, this agreement makes sure you have everything covered. Use our contract service to make your own document. Contact one of our lending professional if you would like a second opinion.
What does a business loan agreement contain:
- Size of the loan. In the loan agreement you agree on the amount that will be borrowed. But you also make agreements about when and how the loan will be paid out.
- Interest. Interest is generally paid on a loan. In fact, the tax authorities oblige you to pay interest on the loan. Otherwise it might be qualified as a gift. In the loan agreement you make agreements about the amount of the interest.
- Redemption. Over time, a loan will have to be repaid. We call that repayment. This can happen all at once, but you can also agree to repay an amount periodically.
It has become increasingly common to use hybrid forms of funding. The Convertible Loan is the most well-known. Besides the loan terms (interest, payment etc.), the most important topic covered by the Convertible Loan Agreement is the conversion moment. This is triggered when a certain date is reached or a event occurs. At this point the investor can choose to convert the loan into an investment.
This type of loan is often used by startups, because at the very start of a startup it is often very hard to give a realistic valuation of a company.
Convertible loan agreement
Use our convertible loan agreement to make your relationship with your lender/investor watertight. The agreement covers at least the following matters:
- The size of the loan
- The interest rate
- The minimum price per share at conversion
- The maximum price per share at conversion
- The discount percentage on the price per share that the investor receives
- In which cases the loan is due and payable in the interim
- In which case(s) the loan will be converted into shares (conversion moment/event)