This can narrow down options, as not all investor rights can be granted or limited with every type of financing instrument. For example, direct voting rights are generally only possible through equity, while certain debt-based instruments can limit possibilities of involving investors in decision-making.

Be aware that, in some jurisdictions, it may be challenging to reduce or eliminate certain rights. For instance, mandatory distributions to investors might be legally required, or it may be difficult to separate voting and dividend rights for equity holders. 

When deciding on the appropriate financial instrument, consider the narrative around your financing round. Using a language and financial instruments that investors are already used to can make it a less daunting process for them and make communication easier.

This is why some companies prefer using familiar instruments for investors, such as equity, convertible or subordinate loans (or other financial instruments often used in your country) to make the fundraising process smoother and more straightforward. However, others may feel confident about initiating a dialogue on alternative financing options and choose instruments that align more closely with their business model or philosophy, even if they are less well-known in the financing world. Some companies, like Vyld for example, take existing instruments – such as profit participation rights in their case – and shape them within legal bounds into a tailored structure that meets their unique needs (More information on Vyld’s case here).

On the other hand, some companies feel that using instruments that are too familiar for investors leads to them not fully understanding the special nature of steward-ownership-aligned financing. For example, holding shares is normal to them – so it can also be more difficult to explain that yes, they hold shares, but they are structured in a way that they have no voting rights and a limited return. To ensure that investors are fully committed to and completely understand the nature of the investment relationship, these differences have to be communicated clearly. This communication and clarity can be easier achieved if the financing instrument is completely new to investors anyways.

If equity has already been issued in previous financing rounds, adjusting the financing structure to align with steward-ownership principles can present significant challenges ( → Sub-Chapter: Your Previous (Equity) Investors). 

An often seen option here is that new, more aligned investors take over the “conventionally structured” shares with voting rights and uncapped returns and transition them into more aligned financing instruments. So, before designing or selecting a new instrument, it’s wise to consult with your lawyer or tax adviser. Converting voting shares into non-voting shares with capped returns might be simpler than setting up a new structure or restructuring them into mezzanine financing instruments or loans.

If you're looking for inspiration or guidance on how other companies have successfully navigated this process, refer to:

When planning future financing rounds, think about whether your choice of instrument could limit your options or complicate fundraising later. While some instruments are easy to convert, equity is something you’re typically committed to across multiple rounds. On one hand, this provides stability and can make it easier to attract new investors in follow-up rounds. It also simplifies governance, as terms are consolidated within the bylaws or shareholder agreement rather than spread across multiple contracts with different investors. However, if you’re seeking more flexibility, mezzanine instruments may allow for greater adaptability (adjustments, shifts, and conversions) over time, across financing rounds and often at lower cost.

Another point to consider is that too much debt might limit future state funding or capital from banks as over-indebtedness is a disqualifying factor for some loan and grant providers. Covering financing needs with equity or equity-like instruments with higher risk reduces the risk for debt providers. This stratification of risk can sometimes enable startups with a high risk of default to secure co-financing from banks.

When navigating uncertainty in financing, selecting a financial instrument that offers flexibility and adaptability becomes increasingly important. However, it's important to distinguish between two types of uncertainty relevant to financing decisions. Are you uncertain about your company's future development and looking for instruments that can better adapt to its economic growth – such as those that capture more upside potential? In that case, equity or equity-like instruments might be worth exploring.

On the other hand, if your uncertainty lies in choosing the right financing instrument or investment partner, and you want to maintain flexibility in that regard, equity may not be the best option. Instead, contract-based or debt instruments might provide greater adaptability, as they can be more easily modified or terminated compared to equity, offering you more control in uncertain times. Having said that, it's also worth considering the qualitative differences between structuring typical clauses (e.g., dividend distribution, waterfall logic, founder compensation, consulting, information, and veto rights) in debt instruments versus equity investments. For instance, in a breach of contract situation, debt instruments allow for immediate termination and make the debt repayable. Equity investments, on the other hand, do not offer a straightforward exit route.

As explored in the chapter “Deep Dive Return”, there are different ways of going about designing “limited” returns, while still allowing a financial instrument to grow with the company and flexibly reflecting the uncertainty and risk in its upside potential. When deciding on a financial instrument, a key question is whether the instrument can be structured with fix/flexible return caps and fix/flexible redemption structures.

If you're looking for a fixed return and repayment profile, you have a wide range of financial instruments to choose from. Traditional debt and several mezzanine financing instruments are a good solution when both the company and the investor prioritize predictable and steady returns and schedules. If you want to involve your investors in profit and loss participation, some mezzanine instruments or equity might be more appropriate choices. These instruments allow for (differing levels of) shared risk and reward, meaning that investors' returns can be tied to the company's performance and repayment schedules can be more flexible compared to traditional debt (→ refer to the chapter of the financing instruments for more information). If you are comfortable with a more open approach to return limitation (namely, limitation by influence) and desire maximum flexibility regarding whether payments are made, equity financing could be particularly appealing.