Crowdfunding: tips for when things go wrong

Thanks to Radboud Bergevoet for his interview in Misset Horeca:

Much is written about the risks of investing in crowdfunding. Investors are warned not to decide on an investment too quickly, to invest a maximum of 10% of their assets and to spread them well over several campaigns. But what actually happens if the business owner is in dire straits? What rights does a business owner have and how can a sustainable cooperation between investor and business owner provide a solution? We decided to talk to Folkert Foppema, financial director CrowdAboutNow, and Erik Jansen, corporate law attorney provide the answers.

'A business owner who cannot fulfill his obligations does not have that many rights. After all, the main rule is that everyone must fulfill their obligations. The Netherlands' highest court, the Supreme Court, has also repeatedly ruled that any creditor may in principle demand payment of 100% of the outstanding debt. So also an investor through a crowdfunding platform. A deal is a deal," says Erik Jansen.

Are there any exceptions?

Erik Jansen: "Only in exceptional cases, the Supreme Court reasons, can there be an abuse of rights by a creditor if he continues to demand 100% of his outstanding claim and does not want to settle for a lower percentage or later repayment. Consider a situation in which all other creditors do agree to a percentage payment against final discharge back and forth, or a so-called "interest vacation. Thus, that one creditor holds up an out-of-court debt resolution because it holds business owner to the original agreements. As a result, the debtor can go bankrupt.'

So what can the business owner do?

"Then the interests of the debtor, of all the creditors who do agree to the new proposal, and also of the other stakeholders in the company, such as employees, customers and suppliers, must be weighed more heavily than the interest of the one creditor who insists on standing firm," Jansen said. In such a case, business owner can ask the judge in summary proceedings to force the creditor-investor to also agree to the percentage agreement or interest vacation. To achieve this kind of solution, of course, business owner must be able to engage in dialogue with investors. And that is not easy with every platform.

As Erik Jansen wrote in an earlier article, practice shows that crowdfunding platforms often block a debt agreement with investors, with the platform often addressing the business owner privately. However, there are also platforms where a debt agreement seems to be the solution for a sustainable cooperation between business owner and investor. Where the business owner can avoid bankruptcy in case of financial problems and the investor eventually gets his invested money back. Even if it sometimes takes longer than originally intended.

What is sustainable collaboration?

Folkert Foppema: "Crowdfunding is more than just raising funding. A big role here is the involvement of investors in a plan: crowd engagement. In good times, this means that investors are involved in the opening of a business, for example. Or at the launch of a new product. In bad times, it means that - when a business owner cannot meet the agreements with its investors - they can start the conversation with their investors. In the form of a debt settlement, also known as restructuring, new agreements can be made. Thus, a strategy can be sought to get through difficult times. The business owner can fulfill its dream and the investor gets (part of) its invested money back. And that, as far as I'm concerned, is the best outcome.

And what does such a restructuring look like in practice?

'In a restructuring, the business owner makes alternative arrangements with the investor. Here the business owner will offer its investors several options for making new agreements. The investor enters into a new agreement with the business owner. He can also choose not to agree to the proposal. When investors agree to alternative arrangements, this often creates breathing room for the business owner to put financial matters back in order and still meet repayment later. In case investors do not agree, a collection process needs to be initiated. Either by one investor or by the investors collectively," says Foppema.

How can the investor best be prepared for the worst-case scenario?

'You can already think about scenarios with each other when entering into investment agreements. Also the scenario in which there are setbacks in the company. Discuss how the business owner can approach investors with a request for partial discharge of debts to avoid bankruptcy. In other words, take off those rose-colored sunglasses even at the beginning of the relationship. Consider the worst-case scenario as well. And then don't forget to include the arrangement in the contract," Jansen said.