What are profit participation rights?
Economically like a share, without voting rights, shareholder status or commercial register entry.
Profit participation rights (Eigenkapital-Genussrechte) are a contractual participation in a German GmbH or UG that puts investors in the same economic position as shareholders: they receive a share of profits, exit proceeds and liquidation proceeds, but no voting rights, no shareholder status and no entry in the commercial register (Handelsregister).
beel uses profit participation rights so that founders can bring investors on board digitally and without a notary.
What are profit participation rights in general?
Profit participation rights (Genussrechte) are contractually agreed financial rights in a company, such as a share of profits. They do not include membership rights such as voting rights. What exactly a profit participation right covers is set out in the respective contract.
beel's profit participation rights are designed to qualify as equity under German commercial accounting rules: they are subordinated in insolvency, there is no claim to repayment of the investment, and they have no fixed term.
What rights do holders of profit participation rights have?
- Profit participation: pro rata, once the shareholders' meeting resolves a distribution
- Exit proceeds: pro-rata payout in an exit after the profit participation rights are returned
- Liquidation proceeds: equal in rank to the shareholders, subordinate to creditors
- Information right: entitlement to the annual financial statements
- Put option: return to the company at set times. The company can restrict or exclude it.
Not included are voting rights, a say in decisions and shareholder status. More on this: Dividends, liquidation & exit proceeds and What is the put option?
How are the rights secured?
The rights are set out in the investment contracts. In addition, the company makes a public reward (Auslobung) under Section 657 of the German Civil Code (BGB): a public promise to grant every holder of a profit participation right the same rights. As a result, the rights pass to the new holder on transfer, and buyers on the secondary market do not need to check earlier transfers individually.
How do profit participation rights work technically?
beel represents profit participation rights digitally, based on the Ethereum blockchain. Each profit participation right is unique and can be transferred between accounts. Investors manage their profit participation rights through their beel account.
What does this mean for founders?
- No notary and no commercial register entry for each investment. A one-time shareholder resolution is all that is needed.
- Investors appear in the cap table, not in the commercial register. Voting rights stay with the shareholders.
- Economically, every issuance dilutes the existing shareholders, just like a capital increase. The cap table calculation example shows how this works.
- Conversion into GmbH shares only happens if an investor exercises the put option and the company chooses this form of compensation.
Legal & Tax Information
From your company's perspective, profit participation rights are treated as equity for commercial accounting purposes and as debt for tax accounting purposes. No VAT applies.
For tax purposes, investors can treat profit participation rights as comparable to GmbH shares. However, please note that beel does not provide legal or tax advice, and this document should not be considered as such. We recommend consulting lawyers or tax advisors for specific questions. We're happy to connect you with the experts who helped design our legal and tax structure.