A fitting financing process

To WILDPLASTIC®, a basic component and driver of a circular economy is non-extractive, regenerative financing – investments designed to support the purpose of the company without extracting more value than they give in. So this is what they set out to build throughout their financing rounds. Through steward-ownership and aligned financing, they ensured that the company cannot be controlled by investors and cannot be sold as a speculative good. Still, to grow and make a difference in the world, the company needed capital and aligned financing partners, who share the same vision and want to support the company – whilst making a fair return.

• Initial financing 2019: grants, loans and convertible loans

In the very beginning of developing the initial idea of WILDPLASTIC®, the team received grants from the IFB Hamburg, a development and investment bank supporting innovative business models. Thus, they had initial funding to start off with, which did not have to be paid back. WILDPLASTIC® also received a loan from the GLS Bank, a sustainable bank. Receiving a bank loan as a startup is rather unusual, however the impact-driven business model was attractive to the bank – and the loan was backed by steward-ownership aligned risk capital of €75,000 from Purpose Ventures. On the basis of these three investments, WILDPLASTIC® was founded as a steward-owned company in 2019.

The early-stage financing from Purpose Ventures was set up as a subordinated convertible loan (see full case study for the German templates: steward-ownership.com/wildplastic) in alignment with steward-ownership. To do this, the investment agreement states that the convertible loan could only be converted into steward-ownership aligned options, so either (1) equity without voting rights or (2) debt. For future financing rounds, the convertible loan would be converted into a debt-based instrument structured in the same way as for other future investors, but with slightly better conditions (a discount) to account for the added risk in the beginning.

• First round of financing 2021: subordinated loan

In 2021, WILDPLASTIC® completed a round of financing, raising a total of €635,000 as equity-like debt from four investors plus a bank loan of €450,000 from GLS Bank. With that money they took further steps towards scaling up their business model through supply chain development, product development, marketing and increasing the team. The investments of the four startup investors were structured as an equity-like subordinated loan running over 10 years. A multiple-of-investment of 3.5 after ten years was mutually decided on as a risk-adequate return target. This multiple took into account Wildplatic’s situation and the time scale and structure of the investment. The repayments were structured as bullet payments, meaning that the final sum is paid back at the end of the loan period of 10 years: If its financial situation allows it, WILDPLASTIC® was scheduled to repay a 0.5 multiple-of-investment in year 6 and year 8, thus already freeing up liquidity for the investors.

If WILDPLASTIC® had not been able to follow the fixed repayment schedule, the final return target would have increased. As the investment was structured as a subordinate loan, the repayments could only be made if they didn't endanger the solvency of WILDPLASTIC®. Given that the investment was contract-based, both the investors and WILDPLASTIC® had the option to renegotiate the contract and repayment terms if needed, without having to involve external parties like a notary. A speciality of the investment contract were certain consent-, information – and consultancy-rights for investors for a few specified points such as significant changes made to the company’s purpose. The investors also have the usual information rights to the annual financial statements and financial plannings. Consultancy rights mean that the company is obligated to listen to and consider the investors’ feedback before making a decision concerning one of the specified points, for example large investments of the company. These rights of investors ensure that the investors are involved in (major) decisions being made and that WILDPLASTIC® can count on their input and leverage their experience. In addition to the subordinated loans, WILDPLASTIC® also received another bank loan, which was de-risked through the provision of risk capital.

• Second financing round in 2023/2024: redeemable equity

In 2023, WILDPLASTIC® needed further financing to be able to take on large partnership contracts. Their liquidity was not high enough to pre-finance the costs for raw material and production necessary to fulfill the contracts. As they were now bankable and the purpose of the capital was quite low in risk, they applied for a bank loan. Initially, the loan was expected to be confirmed, as the subordinated loans were considered as equity-like and thus a substantial security by the bank. However, in the final check in autumn 2023, the bank declined the loan as their compliance regulations didn't allow for a loan to a "company in difficulties" – even though it recognized that the quality of the subordinated loans doesn’t actually result in overindebtedness and the payback of the loan would have been preferential to the investment capital already in the firm. So WILDPLASTIC® still needed capital and would not get it from a bank due to the classification of the subordinated loans as debt in the balance sheet. The fact was: as long as the balance sheet looked like it did, they would not receive a bank loan. They realized they wouldn’t manage to both convert the current financial setup and apply for a bank loan again in time to cover their financial needs. So they decided to convert the existing capital and at the same time raise new risk capital in a steward-ownership aligned way, thus expanding their group of investors. The investments of the initial funding and first financing round were converted from subordinated loans into redeemable equity without voting rights. Additionally, they raised another €825,000 using the same instrument.

This change results in a new capital and share structure for WILDPLASTIC®: Investor shares, Steward Shares and a Golden-Share held by the Purpose Foundation. While the steward-owners only hold 3 out of 56,775 shares, they hold 99% of the voting rights so they have full entrepreneurial control over the company. The investor shares have been separated into different categories to represent the different risk and repayment profiles of investors from the first and second financing rounds.