Invest Subsidy for German Startups
How do investors receive the INVEST subsidy?
A special feature of equity investments in German startups is that they may be eligible for INVEST subsidy. The INVEST subsidy is a state promotional programme for venture capital investments and is awarded by the Federal Office of Economics and Export Control (BAFA). The INVEST subsidy is intended to support young and innovative companies in their search for an investor. Private investors, in particular business angels, will be encouraged by this subsidy to provide venture capital for these companies. However, the INVEST subsidy is subject to strict conditions.
What are the benefits of the purchase subsidy for investors?
Within the framework of the INVEST promotion programme, an investor receives a purchase subsidy amounting to 20 percent of his investment sum. For the investor, this reduces the risk of his equity participation. After submitting the application online and receiving a positive decision, the investor receives his refund.
For example, if an investor invests EUR 100,000 in a startup eligible for an INVEST subsidy and his application for funding is approved, the BAFA will refund EUR 20,000 to his account as a subsidy. The maximum eligible investment amount is EUR 500,000 per investor per year. The maximum annual subsidy per investor is therefore EUR 100,000.
What are the conditions for the subsidy?
The INVEST subsidy can only be applied for in the case of equity investments. It cannot be claimed in the case of investments by means of participatory loans.
A further condition is that the shares acquired through the investment remain completely with the investor. The investor must hold these shares for at least three years. If he sells them before the end of the minimum holding period, he runs the risk of having to repay the purchase subsidy. If the startup fails before the end of the minimum holding period, the investor does not have to repay the subsidy.
For an investor to be entitled to the INVEST subsidy, he must be a natural person resident within the European Economic Area (EEA). Alternatively, an investor can acquire the shares through a GmbH or UG. However, this investment startup may not consist of more than six natural persons in order to be entitled to the purchase subsidy.
The minimum investment amount must be EUR 10,000 and the acquisition of the shares must not be credit-financed. If an investor already holds shares in a startup , further investments are generally no longer eligible. An exception exists if the shares already held have already been supported with INVEST subsidies at the time of purchase. In this case it is a follow-on investment which is compatible with the INVEST guidelines.
Additional exit subsidy on the sale of shares
In addition to the purchase subsidy, the INVEST funding programme also includes an exit subsidy. If an investor sells his shares as part of a company sale (exit), he receives a subsidy of 25 percent of the profit in the form of a tax refund. The assessment basis for the amount of the capital gain is the difference between the selling price and the issue/purchase price of the shares.
The profit from the sale of the shares must be at least EUR 2,000. The maximum exit subsidy can be 80 percent of the investment sum.
For example, if an investor has acquired shares worth EUR 100,000 and sells them for EUR 500,000 after more than three years, he will receive an exit subsidy of EUR 80,000 if his application is approved.
For an investor to be able to apply for an exit subsidy, he must be a natural person resident within the EEA. In addition, the shares sold must have already received the INVEST subsidy at the time of purchase.
How does the application procedure work?
First, the startup must submit an application for INVEST eligibility to BAFA. An online application is sufficient. The applications are submitted before the start of a financing round. The application procedure is deliberately kept very lean so that the investors receive their support quickly and un-bureaucratically and the investment process is impaired as little as possible.
The investor then applies for approval of the purchase subsidy. The application can be made online on the BAFA website and takes about 5 minutes. The date of the online application is decisive, even if the investment is made later. Once the online application has been submitted, the investment contract can be concluded between the investor and the startup. The online application must then be printed out, signed and sent to BAFA. Complete processing can take up to 6 months. If both applications (from the startup and the investor) are approved, the investor receives the subsidy directly by bank transfer to his account.
All details on the INVEST subsidy can be found on the BAFA website. There you will also find an "Investor Information Sheet" in the lower part under the menu item "Information", on which all details of the application procedure are clearly listed.
INVEST subsidy in case of convertible loans
The acquisition of shares via a convertible loan is eligible for INVEST subsidy.
In this case, the granting of the convertible and the payment of the convertible amount to the startup may only take place after the investor has submitted his application. The company must have additional financial resources at its disposal through the convertible loan, i.e. the money must be provided to the startup externally after the investor has applied for it.
If the convertible is granted before the subsidy is approved, the investor bears the risk of possible non-approval. The subsequent conversion of the convertible into shares in the startup must be provided for in the convertible agreement. The conversion of the shares (nominal value plus agio) must take place within 15 months of the issuance of the approval notice and must be proven to BAFA within this period. Payment of the subsidy (on the converted amount) is only made after conversion. Only those shares which are acquired with the granted convertible amount are eligible. Shares that are acquired with an interest claim (that has accumulated in the meantime) cannot be subsidized. The minimum holding period for the shares begins with the conversion.
A combination of convertible loans with milestone agreements is not permitted. Only one capital call can be made, even if the conversion of the convertible takes place via several rounds of capital increases.
How does primeCROWD deal with INVEST subsidy
Since the INVEST subsidy is not compatible with the pooling of investors via an SPV (Trustee), primeCROWD deals with this on a case-by-case basis. In general, if large-ticket investors (e.g. above EUR 100k) want to benefit from the INVEST subsidy, primeCROWD will discuss in good faith with this large-ticket investor and the startup whether such investor will not be pooled but treated as individual investor and therefore also be visible on the startup’s Cap Table. The tradeoff here is to limit the number of individual investors on the Cap Table in order to ease follow-on financing rounds and the INVEST subsidy benefit such large-ticket investors.
Small-ticket investors will be pooled via the primeCROWD Trustee and are therefore not eligible for INVEST subsidy.