The story of Waldorfshop

by Armin Steuernagel, founder of Waldorfshop

For us, the decision to pursue the route of using profit participation rights made sense for several reasons. On one hand, we wanted to raise mezzanine capital, which acts as equity-like financing. On the other hand, our philosophy guided us: Who do we want to involve? Who is the business for? And who do we want to bring along on this journey? Given our strong connection with our customers, we saw this as a chance to both involve them in Waldorfshop's growth and allow them to benefit through interest returns – ranging from cash interest to in-kind rewards like discounts. This approach was appealing to us as a company because it meant that our customers, who were now also investors, would be more likely to shop with us. These factors ultimately led us to this decision. Over time, we issued a total of four rounds of profit participation rights. Two rounds were in increments of €100,000, and then we introduced a model capped at 20 participants, where up to €200,000 could be financed in total. This structure adhered to the legal limits of what is permissible for profit participation rights. 

Our experience was quite enlightening in two ways. First, we were impressed by the level of enthusiasm from our customers to participate and provide capital—a reflection of our business model in e-commerce, which might not be available to every company on the same scale. With each new round we issued, the participation picked up speed. Second, it was crucial for us that the interest burden only kicks in when the company is profitable, especially during a phase of rapid growth and heavy reinvestment. This meant we didn’t face any immediate financial pressure until we were actually generating profits. In addition, we didn’t have to account for these rights on our balance sheet until that point, which kept things simpler during our growth phase. In case of losses, we also had the flexibility to cover them using the capital, reducing the real value of the participation rights over time. This allowed us to continue paying interest based on the nominal value, even if the company incurred losses.

However, compared to working with larger investors, managing the administration for this model was a significant challenge. We had 73 investors participating through profit participation rights, and the administrative effort—especially for tax reporting—was quite substantial. We worked with Genussrechte.org, an agency from the organic sector, that provided excellent Excel tools to help manage the process, including tax calculations. Still, it required frequent communication and reporting to the tax authorities regarding the capital gains tax.