Legal and tax aspects of typical forms of financing in the start-up lifecycle

Case 1: Foundation and initial financing considerations

1. facts of the case

In May 2024, Andrea and her boyfriend and life partner Johnny decide to jointly found a public limited company with the purpose of developing an appointment booking and payment software solution for hairdressers, StyleBooking AG. Andrea and Johnny found StyleBooking AG with savings totaling CHF 50,000, whereby they each subscribe half of the share capital of CHF 100,000 and in turn pay half.

Andrea and Johnny work diligently on the development of the StyleBooking software. While Johnny programs, Andrea takes care of all other aspects and achieves initial success in selling the software solution to hairdressing salons. The two do not pay themselves a salary, work from home and have no employees. Nevertheless, Andrea and Johnny realize that they cannot continue like this in the long term, firstly because they are running out of savings to cover their living expenses and secondly because they are simply making too little progress with just the two of them. Andrea and Johnny have drawn up a business case that envisages that they will need at least CHF 1.5 million over the next two years to develop the StyleBooking software to market maturity and drive sales. They are considering how they could raise these funds for StyleBooking AG.

Question

• What different financing options do you know of for StyleBooking AG?

Case 2: Convertible loan from FFF (friends, family and fools)

1. facts (continued)

At a networking event in January 2025, Andrea meets angel investor Madeleine, who is very interested in StyleBooking AG. Madeleine is not only prepared to invest CHF 100,000 herself, but also establishes numerous contacts from her network. Between February and August 2025, Andrea and Johnny managed to raise a total of CHF 900,000 from Madeleine and 17 other private investors in the form of convertible loans. These are individual contracts with different terms and conversion discounts of 22-30%.

Questions

1. What different types of convertible loans are there?
2. What needs to be considered with regard to capital protection regulations?
3. What further steps are recommended in connection with the planned convertible loans? Is an amendment to the articles of association necessary?
4. The investor Madeleine thinks that since she is investing so early, she should be compensated for the high risk. How is this usually done?
5. How are convertible loans taxed?

Case 3: Convertible bond

1. facts (continued)

As the sources of funding from the FFF circle have now been exhausted, but there is still a large financing gap to fulfill the business plan, Andrea and Johnny turn to Coiffure Suisse, the association of Swiss hairdressing businesses. With the support of the association, in December 2025 they succeeded in placing 12 additional mandatory wall loans of CHF 40,000 each with hairdressing salons at a single stroke at standard conditions, namely at a bullet interest rate of 1% p.a. and with a conversion discount of 22%.

Question

• What legal and tax issues do you see in this context?

Case 4: Further loans

1. facts (continued)

As there is still a financing gap after the convertible bond, Andrea and Johnny draw on their last private nest eggs and grant StyleBooking AG an interest-free shareholder loan of CHF 50,000 each with a two-year term in February 2026. In addition, Andrea uses a charm offensive to extract a verbal concession from the IT supplier to leave his purchase price claim for CHF 20,000 fixed for 18 months. In return, she promises a payment of CHF 21,500 on behalf of StyleBooking AG.

Questions

1. What legal and tax issues do you see in this context?
2. What are the possible solutions?

Case 5: Series A financing: Due diligence

1. facts of the case

Andrea has found a German venture capital fund(VC) that is prepared to invest CHF 1,000,000 in StyleBooking AG. She contacts her lawyer Maria to negotiate the terms. She urgently advises her not to take out another convertible loan, but to carry out an equity financing round with a capital increase in the course of which the outstanding convertible loans are also to be converted into equity. The VC agrees and takes on the role of lead investor, with a few other investors also joining in. A valuation of StyleBooking AG at CHF 10 million is agreed.

The VC first carries out due diligence, which leads to the following result:

• Johnny founded IT Services GmbH in 2021 - three years before StyleBooking AG was founded. He is the sole shareholder and managing director of IT Services AG. The purpose of IT Services AG is IT consulting and programming of IT solutions for third parties. Although Johnny offered such services and also had third-party clients, he also began developing the StyleBooking software when he was not fully occupied with projects for third parties. Over time, this activity took up an increasing proportion of his total working time.
• Johnny was convinced by the idea of the StyleBooking software and decided to register the "StyleBooking" brand as a precaution. The registration was in his own name.
• In mid-2022, Andrea, who also believed in the success of the StyleBooking software, decided to give up her job at a bank and support Johnny in the development of the StyleBooking software instead. She took on all tasks that were not related to programming, in particular establishing contacts with numerous hairdressing salons to introduce them to the StyleBooking software and market it.
• The first sales successes soon followed and in 2023 IT Services GmbH concluded license agreements with numerous hairdressing salons for the StyleBooking software.
• IT Services GmbH therefore had initial income consisting of license fees for the StyleBooking software and also (decreasing) income from the other work that Johnny did for third parties. IT Services GmbH did not pay a salary to Johnny and Andrea, but all income was invested in the development and establishment of the StyleBooking software business.

• Andrea was increasingly dissatisfied with this situation, as Johnny was the sole owner of IT Services GmbH. The two therefore decided in 2024 to jointly found StyleBooking AG, in which they each hold 50% of the shares (see case 1).
• From the time StyleBooking AG was founded, Andrea and Johnny acted towards third parties under this brand and also concluded the license agreements with new customers with StyleBooking AG. However, the existing contracts were continued with IT Services GmbH and the income for these contracts also continued to flow through IT Services GmbH. From this point onwards, however, IT Services GmbH no longer conducted any other business; Johnny focused 100% on the further development of the StyleBooking software and no longer accepted orders from third parties.

Questions

• You are the VC's lawyer. What do you write in your legal and tax due diligence report? Are there any red flags?
• What advice would you give your client VC? How can the fund best protect itself if it still wants to make the investment in StyleBooking AG?

Case 6: Series A financing: implementation of the capital increase

1. facts (continued)

Once the merger has been completed, the capital increase at StyleBooking AG is also carried out. Maria prepares the necessary documents together with the notary. The capital increase is notarized in October 2026. 

Questions

• What needs to be considered in connection with the offsetting of convertible loans?
• The convertible loans offset have a total value of CHF 1,380,000. In addition to the VC investing CHF 1,000,000, there are other investors who are prepared to pay a further CHF 800,000 in total. How much is the issue tax that StyleBooking AG has to pay and within what period does StyleBooking AG have to pay it?

Case 7: Bank loan

1. facts (continued)

Business at StyleBooking GmbH is going extremely well, with one in five hairdressing salons in Switzerland already using the StyleBooking software. However, the growth of StyleBooking AG has reached its limits, as there are not too many hairdressing salons in Switzerland that would like to digitize their booking and billing process that are not yet using the software.

Johnny and Andrea therefore discuss a possible expansion to Germany with the VC. The VC is prepared to support them and invest another million. However, the additional funds are to be raised via bank financing, as the VC does not want to be further diluted.

Schweiz Bank AG is prepared to grant StyleBooking AG a loan, but not a blanket loan; instead, it requires collateral.

Questions

1. What collateral could StyleBooking AG provide to Schweiz Bank AG?
2. What does bank financing mean for the shareholders of StyleBooking AG? What are the advantages and disadvantages compared to another round of financing?

Case 8: Private Debt Fund

1. facts (continued)

To finance the Europe-wide roll-out of the StyleBooking software, Andrea and Johnny enter into negotiations with the American private debt company Greed Capital in the summer of 2030. Through its Cayman Island-registered Senior Debt Fund IV, L.P., Greed Capital offers StyleBooking AG a loan of CHF 8 million for four years at an interest rate of 8% p.a.

Now that all convertible loans from 2025 have been converted in the course of the Series A financing round and the individual loans from 2026 have been repaid, StyleBooking AG currently only has the bank loan from 2027 outstanding.

Question

• Is the interest subject to withholding tax?