PARTICIPATING IN STARTUP FUNDING
This is an initiative of P.T. Emas Cemerlang Bersama. In addition to our daily activities, we have an innovation and development platform for 2 products: the development of a collaborative robot for the clothing production industry and the development of a platform for collaboration of freelancers (Self-employed – independent without personnel) and micro entrepreneurs (Self-employed with personnel) within different sectors of the service and services industry.
Convertible Note of €1.500.000,00 – First tranche €250,000.00
The time has finally come, all procedures have been completed and we have received the green light to open the financing round. We are very happy that we can go public with our plans, 2020 went completely different for us than what was planned in the first weeks of January. We’ll expand on what this has meant for the company in another article, but we can reassure you that P.T. Emas Cemerlang Bersama has not sustained any major permanent damage. The agendas had to be completely adjusted. The consequences of the pandemic were particularly noticeable in the operating companies we lead. This clearly stagnated the cash flow of our own company, but we were able to keep everyone on board, even when it meant more money had to be made available for these operating companies.
Author: Y.S. Koen, Klaten, December 16, 2020
The Covid-19 pandemic has caused a shock and we were forced to rethink the plans for our future. The innovation projects threatened to be the victim of this. So, we have to be creative in how we can make progress in the development of these innovation projects. One of those projects had been on the shelf for some time, there was simply not enough time to tackle this issue, because it had no direct interest for one of our companies. It is a project that can be rolled out very well on a commercial basis, but then you develop something for third parties. If the time you have to spend on other things is compromised, you have to come up with very good reasons to activate it anyway. However, this would mean that the other project would receive less attention, while that project would directly affect the performance of operating companies within our portfolio. The project we have been working on for some time is the development of a collaborative robot for the clothing production industry.
The second innovative project that we are now launching is a collaboration platform for the services industry. In a next article, or several articles, we will discuss the content of the various projects. This article focuses on the issuance of the convertible note and what this note means for the participants. Roughly speaking, the total capital that we want to raise will be used 50/50 for both projects.
Convertible Note explained
A convertible note is a financial instrument that contains a written promise from one party (the issuer or creator of the convertible note) to pay another party (the beneficiary of the convertible note) a specified amount, either upon request or on a specified future date. A convertible note usually contains all the terms and conditions related to the debt, such as the principal amount, interest rate, maturity date, date and place of issue, and the signature of the issuer.
Although financial institutions can issue them (see below), convertible notes are debt securities that enable businesses and individuals to obtain funding from a source other than a bank. This source can be a person or a company willing to carry the note (and provide the funding) under the agreed terms.
Convertible Notes Are a Hybrid of Debt and Equity
- Convertible notes are originally structured as debt investments but have a provision that allows the principal plus accrued interest to convert into an equity investment at a later date.
- This allows the original investment to get done more quickly with lower legal fees for the company at the time, but ultimately gives the investors the economic exposure of an equity investment.
- Typical terms of convertible notes are interest rate, maturity date, conversion provisions, a conversion discount, and a valuation cap.
The Pros of Convertible Notes
- Convertible note financings are simpler to document from a legal perspective, meaning that they are less expensive and quicker to execute.
- Convertible notes avoid placing a valuation on the startup, which can be useful particularly for seed stage companies which have not had enough operating history to properly set a valuation.
- Convertible notes are good bridge-capital or intra-round financing options.
The Cons of Convertible Notes
- If future equity rounds are not completed, the convertible note will remain debt and thus require redemption, potentially pushing still-fragile companies into bankruptcy.
- To avoid the above, terms and conditions can be set that, if taken too far, defeat the purpose of the convertible note and end up taking as much time and effort as a traditional equity round.
- Certain clauses such as the valuation cap and the conversion discount can complicate future equity raises by anchoring price expectations.
Convertible notes have become increasingly popular in the world of startup financing, particularly in seed stage companies. However, before going down this path, it is important to understand the potential pitfalls of this type of financing and whether or not it is the best choice for your company. We will first give a brief overview of the basic concept of a convertible note and how it has some attributes of both debt and equity, and then we will look at the pros and cons of this form of financing.
When most people think of an investment, they are thinking about equity. In an equity investment, a company sells a percentage of their company (equity) for a sum of money. When a company raises funding by selling equity, there is no set schedule for the investor to get repaid, and the investor generally counts on making their money back, plus a return, in a future liquidity event (such as an acquisition of IPO) or through distributions of future profits. In a typical venture capital investment, an acquisition or IPO is almost always the way that investors make their money, with distributions of cash flow being a rarity. Another key point about equity investments is that because the investor is a part owner of the company, they typically have some sort of voting rights that govern various decisions of the company.
Most equity investments in venture capital-backed companies are structured as preferred stock, which is different than simply $X for Y% of the company. When the investment is structured as preferred stock, this typically comes with terms such as a liquidation preference, a preferred dividend, and approval rights over certain company decisions. In most types of preferred stock, the liquidation preference means that in a liquidity event, the investors get the value of their investment back, plus any preferred dividends, prior to the rest of the funds being distributed amongst the % ownership. The preferred dividends are generally not paid in cash but accrued and paid out when there is a liquidity event. As common stock is generally owned by founders and employees of the company, this means that all the investors must be paid back plus a guaranteed return (the preferred dividends) prior to any funds being distributed to the common stock. In addition to regular voting rights, the preferred stockholders also often have additional approval rights over items such as the terms of subsequent rounds of financing and acquisition opportunities.
Common vs. Preferred Stock
The most typical type of debt is a loan with a set schedule for repayment of principal and interest. Assuming the company can make the payments, the investor knows what return they are getting in advance. Given the uncertainty of early-stage startups, debt is not very typical when it comes to funding this type of risky venture. However, there are some institutional investors that provide debt to later-stage venture-backed companies, particularly those with recurring subscription payments such as SaaS companies.
There are a few notable facts when it comes to debt. In contrast to equity owners, debt holders do not have an ownership interest in the company and do not have voting rights. However, when it comes to the priority of payments in a liquidation scenario, debt holders are paid in full before equity holders, so it is perceived as a less risky investment. When it comes to the complexity of documentation and legal work that goes into setting up various investments, it is simpler and less expensive (at least in reference to a typical startup funding deal) to structure a debt deal in comparison to equity.
Convertible Notes: A Hybrid of Debt and Equity
In short, convertible notes are originally structured as debt investments but have a provision that allows the principal plus accrued interest to convert into an equity investment at a later date. This allows the original investment to get done more quickly with lower legal fees for the company at the time, but ultimately gives the investors the economic exposure of an equity investment.
Typical Terms and Provisions of Convertible Notes
Interest: While the convertible note is in place, the invested funds earn a rate of interest like any other debt investment. The interest is not typically paid in cash, but accrued, which means the value owed to the investor builds up over time.
Maturity Date: Convertible notes carry a maturity date, at which the notes are due and payable to the investors if they have not already converted to equity. Some convertible notes have an automatic conversion at maturity.
Conversion Provisions: The primary purpose of a convertible note is that it will convert into equity at some point in the future. The most common method of conversion occurs when a subsequent equity investment exceeds a certain threshold. This is called a qualified financing. At this time, the original principal plus any accrued interest converts into shares of whatever new equity was just sold. In addition to getting the benefit of the accrued interest, which buys the convertible note holders more shares than they would have if they had waited and invested the same amount of money in the equity round of financing, they often get several additional perks in exchange for investing earlier. In the event that a qualified financing does not occur before the maturity date, some convertible notes also include a provision in which the notes automatically convert to equity, at a set valuation, on the maturity date.
EXAMPLE: An investor purchases €25,000 of convertible notes that carry an 8% interest rate and a 20% conversion discount. In a qualified financing that occurs 18 months after the convertible notes are sold, the company sells equity at €3.50 per share. At this point, the notes will have accrued €3,000 in interest, making the amount owed to the note investor €28,000. With the 20% discount, the conversion price for the notes is €2.80 per share, and the investor receives 10,000 shares of the new stock. Had the investor waited to purchase the stock at the time of the qualified financing, they would have received 7,143 shares of stock, so it is clear there is a big reward to the convertible note investor for taking the risk of investing earlier.
Conversion Discount: When the convertible notes convert to equity in the event of a qualified financing, not only do the note holders get credit for both their original principal plus accrued interest to determine how many shares they receive, they also generally get a discount to the price per share of the new equity. For example, if the discount is 20% and the new equity in the qualified financing is sold at €2.00 per share, the convertible note’s principal plus accrued interest converts at a share price of €1.60 per share.
Valuation Cap: In addition to the conversion discount, convertible notes also typically have a valuation cap, which is a hard cap on the conversion price for noteholders regardless of the price per share on the next round of equity financing. Typically, any automatic conversions that occur at the maturity date (if no qualified financing has occurred) are at some price per share that is lower than the valuation cap.
Equity vs. Debt vs. Convertible Notes
Pros and Cons of Convertible Notes as a Funding Mechanism
Now that we have discussed the typical terms and structure of a convertible note, we will now take a look at some of the reasons why companies use them as a way of raising investment funds, and some of the drawbacks as well.
- Convertible note financings are simpler to document from a legal perspective. This means that they are generally less expensive from a legal perspective and that the rounds can be closed more quickly. The reasons for this are pretty simple, being that the company and the investors are putting off some of the trickier details to a later date. In most equity financings, numerous corporate documents need to be updated to close the round such as certificates of incorporation, operating agreements, shareholder agreements, voting agreements, and various other items. All of this adds to the time and expense of completing a round of equity funding.
- Raising a convertible note as opposed to equity allows the company to delay placing a value on itself. This is particularly attractive to seed-stage companies that have not had time to show much traction in terms of their product and/or revenue. In exchange for giving investors a discount on the price that is set later, the company is able to push that decision to a later date. Because of this, convertible notes are often used as the first outside funding invested in many companies, and a large number of institutional seed investors such as 500 Startups exclusively use convertible notes in their accelerator investments.
- For a variety of reasons, many companies need to raise some amount of funding between larger rounds of equity, and the features of a convertible note make it an ideal vehicle to complete those types of transactions. For example, one company that I have worked with had a transformational software deal with a large enterprise customer that was set to close. The company would need to ramp up its staff in order to service the new customer and was planning to raise a new round of equity once the deal was signed; however, they could not disclose the specifics of the deal until that time. In order to get a jump start on the work once the deal closed, the company wanted to raise a smaller amount of funds via a convertible note as it would allow the funding to close more quickly. It would also allow the company to delay the valuation decision for the equity round, as that would likely be more favorable once they were able to disclose the full details of the new contract.
- While there are many reasons why companies and/or investors choose to utilize convertible notes, both sides of the deal really need to think through the potential future implications of using this method of financing. The biggest issue that I have seen with seed stage companies is the question of what happens if the company cannot, or chooses not, to raise subsequent equity financing. While many convertible notes do include provisions for an automatic conversion on maturity, many do not. Given that we are mostly discussing very early stage companies, most of these companies are burning cash, and will not have the funds to repay the note at maturity if it does not convert. The best way to avoid this situation is for both the company and investors to have a clear plan for both success and failure. In most cases, if a company cannot raise additional funding past an initial convertible note seed investment, it is because the company does not have traction and will either end up going out of business or being acquired for a nominal amount. One interesting example from my work involves a company that received a seed investment in the form of a convertible note from a startup accelerator, and was not able to raise additional equity funding, but was able to gain enough traction to continue operations and get to cash flow breakeven. The company did not have nearly enough cash to repay the note, but it was not going out of business either. However, if the investor foreclosed on the company, it would have essentially put the company out of business and guaranteed that their investment would be worth nothing. This left both the company and the investor in an awkward position that took several years to get resolved.
- The awkward situation of the company described in the preceding anecdote can be avoided by negotiating the terms of an automatic conversion at the maturity of the note. However, if you go too far down the road of defining what that next round looks like in regards to all of the terms and provisions that would be included in a typical equity round you actually lose some of the benefits of using a convertible note in the first place. One example related to a company that I have worked with involving a promising software startup that was graduating from an accelerator program. It had a basic product, some name brand clients had already signed contracts, and the company had attracted potential investors. They chose to fund the round with a convertible note but given that the note may have been enough funding to take the company past the maturity date, they wanted to know what their investment would be like if that happened. As it turned out, this led down the road to negotiating exactly what the specific terms of that equity round would look like, and the company ended up spending as much on legal fees as if they had just done the equity round to begin with.
- The majority of convertible notes issued in seed funding scenarios at this point in time include a valuation cap and an automatic conversion price. While you are technically delaying putting a price on the company, oftentimes the cap and conversion price effectively acts to anchor the price negotiations of the next round. Even if investors are willing to pay for a big uptick in valuation from the note valuation cap, you can end up with some very strange situations. For example, if the subsequent round of equity is preferred stock with a liquidation preference equal to the price per share of that round, convertible note holders can end up with a liquidation preference of several times their investment if there is a large uptick in valuation. In situations like this, the new investors may try to force the note holders to adversely amend their terms in order to close the deal.
EXAMPLE: A startup company with 1,000,000 shares of common stock closes a seed funding round of €1,000,000 in the form of a convertible note, with a valuation cap of €5,000,000 pre-money valuation on the next round of financing. For simplicity, assume the note carries a 0% interest rate. The company makes a lot of progress and has a venture capital firm willing to do a €4,000,000 Series A financing at a pre-money valuation of €20,000,000, with a liquidation preference of 1X. The €4,000,000 series A investment will buy 200,000 shares of preferred stock at €20/each, with each share carrying a liquidation preference of €20, plus any accrued dividends. Because of the valuation cap, the €1,000,000 convertible note will convert to the same type of equity at the rate of €5/share, but those shares will have a liquidation preference of €20/each plus dividends which means they would effectively have a 4x liquidation preference! It is highly unlikely the series A investors would allow this to happen and would likely require the convertible note holders to renegotiate.
***Source: The information Executive Summary till this point is from an article of Jeffrey Briggs, Finance Expert at Toptal.com***
Understanding the basics
Is a convertible note debt or equity?
Convertible notes are originally structured as debt investments but have a provision that allows the principal plus accrued interest to convert into an equity investment at a later date. This means they are essentially a hybrid of debt and equity.
What is a cap in a convertible note?
A valuation cap is a hard cap on the conversion price for note holders regardless of the price per share on the next round of equity financing. Any automatic conversions that occur at the maturity date (if no qualified financing have occurred) are at some price per share that is lower than the cap.
How does a convertible note work?
Convertible notes are debt instruments that include terms like a maturity date, an interest rate, etc., but that will convert into equity if a future equity round is raised. The conversion typically occurs at a discount to the price per share of the future round.
MAIN KEY POINTS:
- A convertible note is a financial instrument that contains a written promise from one party (the publisher or creator of the note) to pay another party (the beneficiary of the note) a specified amount, either upon request or at a specified future date;
- A convertible note usually contains all of the terms and conditions related to the debt, such as principal, interest rate, maturity date, date and place of issue and the signature of the issuer;
- In terms of their legal enforceability, convertible notes lie somewhere between the informality of an IOU and the rigidity of a loan contract.
In this we are the issuer of the convertible note, in series, depending on the program the participant opts for. The participant acts as a lender who receives the convertible note with the said consideration. The convertible note has a convertible clause, whereby the principal is converted into shares within the projects or the parent company; P.T. Emas Cemerlang Bersama, the initiator of both projects.
This gives the participant the opportunity to profit from the growth of both projects and thus realize a financial gain at the desired moment after the conversion.
We all hear and see the success stories of startups and their almost unlikely growth. However, few of us can benefit from this. We choose to involve the public in the growth of the projects. To achieve this, participation in the projects is possible from the sum of €200.00. We keep the issue of the convertible note in our own hands, we do not want to spend unnecessary funds on non-direct costs for the projects. Nor do we intend to raise unnecessary amounts of money in the different phases. Everything has to be effective, including the investments that have to be made at every stage of growth.
Millions are often thrown into the coverage of startups and funding rounds. What strikes us regularly is that round amounts are sprinkled and a million more or less does not make much impression. But maybe we are too much of an entrepreneur to get involved with such.
In the phase in which both projects are, clear objectives must be achieved within the set budgets. For both projects, a working prototype must be realized within the budget of ±€750,000.00. This will be easier for the collaboration platform to achieve, but there are other sources of income that are spent on the development of the collaborative robot, for example the sale of products via our own web shop.
However, this financing round is only the beginning for both projects. In the next financing process, the projects will be separated. Where the collaborative robot enters the next phase of development, the collaboration platform moves towards an operational model. The expectation is that a fully independent operating company will be set up for each project for the next financing round. We are already working hard for the collaboration platform to provide the correct legal structure.
Now the reader will wonder why we are doing this funding round under the banner of P.T. Emas Cemerlang Bersama and not directly in a separate entity? This is done exclusively to provide security to the participants. If we let the participant participate in a new legal structure, then he/she invests in an empty shell, which gives no certainty in the event that something will go wrong. This is unacceptable for us as initiators. We are the initiators of both projects, so we will have to show a certain responsibility. P.T. Emas Cemerlang Bersama guarantees the nominal amounts invested by the participants and the interest payment that must take place. Each time, a reservation will be made for the payment of interest at the end of each calendar quarter. These interest payments are not deducted from the principal. The company pays the interest payment directly from its own cash flow. This article discusses every point of the agreement, but it’s wise to call attention to the principal amount at this point. The entrepreneur guarantees the principal amount that the participants will invest under this convertible bond loan until the moment of conversion into shares.
The characteristics of participating in the Convertible Note series
The issue contains a series of convertible notes with a total value of €1,500,000.00. This funding will be used exclusively for the development of both projects. The participant is given the opportunity to spread the risk over two different projects within one investment. Two different sectors, two different user target groups, so there is really diversification. Even though we will use the funds for both projects at the same time, each project has its unique trajectory to follow. The first project, the collaborative robot, has a longer development path to endure, as it is a Multi complex problem (hardware and software problem) that we want to solve. Where in the 2nd project we can proceed to roll out the beta version of the platform after a relatively short period of time. The intended period that we want to be operational with the platform is the last quarter of 2021.
The term of the convertible note is 6 years, this period has been chosen because we want to create sufficient value for each project in question, so that we can achieve a successful stock conversion to everyone’s satisfaction. As compensation for this period, P.T. Emas Cemerlang Bersama provide an interest rate of 6% per year. It is up to the participant whether they choose to have the interest paid out as a prepayment, annually or quarterly, or whether they take the opportunity to build up the interest with the nominal investment and have this total amount converted into shares.
The conversion will be triggered once a Series-A round of funding takes place. This is another financing round in which the new investor wishes to immediately acquire preferred shares in the company concerned. This is usually a 2nd or 3rd round of investment, where the product is operational and there is reference to which a certain value can be given for the future expansion. This will be a significantly larger investment than what we are currently doing. It is important that a valuation, a percentage of the company, is now given to today’s convertible note that will convert into shares in the future. The percentage we estimate this financing round at is 15% of the future value if the entire convertible note is issued to investors. As a result, current and future business operations including the principal amount of the €1,500,000.00 promissory note has an expected value of €10,000,000.00 (post-money valuation).
This is a very fair valuation as the value of P.T. Emas Cemerlang Bersama in current operational capacity is estimated at a minimum of €7,500,000.00. We are not sure about the valuation of the side activities of P.T. Emas Cemerlang Bersama, or companies under management, as these are uncertain times. This is too much of an uncertain factor, so we are not including them in our valuation at this time, but it is expected that they represent a balance sheet value at the end of the 2021 financial year. Not all participations can be made liquid in the short term, which is another reason not to include them in the valuation of the company. Until the moment the conversion will take place, P.T. Emas Cemerlang Bersama guarantees the full nominal investment amount and the interest payment.
In addition to this loan, which has not yet been processed in the books at the time of writing, P.T. Emas Cemerlang Bersama has no external debts other than with its own shareholders or founders. We have not incurred any operating losses in the last 3 years, 2017-2019. The shareholders declare that they will not be entitled to these funds until the conversion has taken place, and they will refrain from taking other shareholders on board until the moment of conversion, barring extreme emergencies. Neither have any shares been pledged to third parties. A maximum of 25% of the shares will be reserved for participants in the issue of the Convertible Note.
Tranches, Series and Programs
The Convertible Note has 6 tranches of € 250,000.00 each. We will begin fundraising the first tranche as soon as this writing is published. After reporting the expenditure of the first tranche, we will release the next tranche to participants. Partly after consultation with the participants in each previous tranche, we will decide whether to raise capital for one or more tranches at a time. We do not want to attract funds that we will not use within a reasonable time. We will accept subscriptions for new tranches to be issued, but these are reservations for issuance of any new tranche (s), the subscriptions will be allocated in order of subscription received.
The Convertible Note is issued in series of € 200.00 per Note, with a total maximum of 7,500 Notes for a total nominal value of € 1,500,000.00. Each tranche contains 1,250 Notes. A Note is not divisible, each Note is registered by 1 natural or legal person, multiple owners per Note at a time is not possible. A Note is transferable to a third party, however P.T. Emas Cemerlang Bersama must be informed of this and must be registered as such before these third parties can derive any rights from it.
The participant can participate in 3 different programs; Basic, Advanced and Premium. The different programs have no influence on how many shares per Note will be allocated after conversion. Each Note is allocated a proportional number of shares after the conversion, however how many shares the participant is allocated differs per participation and program. For further conditions of the different programs, we refer to the explanation on our website: www.emcebe.com/participation/.
There are differences in the participation amount for each program, with the basic program the participant can participate from the value of 1 Note (€ 200.00). In the Advanced program you can participate from 5 Notes (€ 1,000.00) each time to be increased by an equivalent amount. In the Premium program, participation is possible from 10 Notes (€ 2,000.00), to be increased by an equivalent amount. The premium program in particular has a limited issue of a maximum of 125 participations for the total Notes Series. The future participant can indicate in which program they want to participate; however, it is in order of registration whether participation in the relevant program will be possible. It is not possible to deviate from the number of participations allocated for the Premium program; this will always have a maximum of 125 lots of 10 Notes each. Should all participants of the first tranche choose to participate in the Premium program, the premium program will be closed for subsequent tranches. It is up to each participant to decide in which program they wish to participate, if available.
The next differences between the programs can be found in the conversion discount. This is the discount for which the participant can obtain the shares after conversion. This discount is 10%, 15% and 20% respectively for the Basic, Advanced and Premium program. In the further explanation of the agreement it will become clear why this can be of great importance to clearly consider in which program the participant wishes to participate. Then there is a noticeable difference in participation within the Premium program, compared to the other 2 programs. Participation in the Premium program will be treated as a senior debt, whereas participation in the Basic and Advanced program will be classified as a junior debt. You can read more about this in the further explanation of the agreement later in this article.
Then there is one last difference to note. If a participant purchases a product through our online shop, there is a discount on the purchase amount of the goods for the participants of the Advanced program of 5% and for participants within the Premium program of 7.5%. This discount only applies to the purchase price of the goods, shipping costs and any import duties are not included in this discount, which is entirely at the buyer’s expense. The discount also does not apply to items that are offered in any sale period. Participants within the Basic program can always purchase products from our online shop, but they do not receive a standard discount. With every purchase of articles in our online shop, you again support the innovation projects, as all the profit that we realize with the sale of these articles becomes fully available for the projects.
Besides any financial gain, what are the benefits of participating?
By participating, the participant has the unique opportunity to experience what investing in a startup entails. We all know the success stories of big Tech startups, such as Facebook, Google, Apple, Microsoft and of course the Dutch Adyen and less associated with Tech but still in the startup category, Amazon, Tesla, Uber. Each and every one of them has created millionaires and billionaires. Who has never wondered: “If only I had bought shares at an early stage”? It is always the same group of people who make money from this, whether you have to work for these companies, you can qualify for employee stock options, or be an early investor. They rely on the public to make use of the products, but it is not the public that is involved in the start-up investment and can therefore reap the financial benefits.
But let me be open, startup financing is not for the “weak stomach”. There is usually no frame of reference, so the financial valuation of the start-up at an early stage is often “guesswork”. If you invest in a startup, you have to dare and be able to see through a lot of fog. There is nothing more changeable than the path to success many startups must take. Success is certainly not guaranteed, but if it is successful, it is a multiple. Stories of dozens of times doubling your investment is certainly not an exception. It is considered so normal that if only 6X or 7X is achieved on the investment then it is only a meager success. If you want to get rid of your investment in the event of a first setback, do not invest in a startup. NEVER invest with money that you cannot afford to lose. If it is said that there are no guarantees in investments, then that counts a 1000% for investing in a startup. As “easy” as it seems to get back a multiple of your investment amount, it is just as easy to let it end in disappointment.
Investing in a startup is not for greedy characters as you will always be disappointed. If the return on the investment is not in line with your expectation, then the sentiment is negative, even though the result may be positive. When returns exceed expectations, you will keep asking yourself why you stopped investing. Investors make more wrong decisions out of greed than out of prudence. The same goes for stingy characters, if you don’t want to let anyone share in the possibility chances are that you will block success with it, because there really aren’t that many people who can support a startup all by themselves financially. Those who cannot divide have less chances of multiplying.
Never invest in a startup if you have set a purpose for the returns and have that as the reason for making the investment. Start-up financing is not to supplement your pension, nor is it to supplement the study fund for your children. With a startup, the end date is never known clearly, it is almost 100% guaranteed to be postponed, so don’t count on an outcome when it suits you, you will be disappointed. That afterwards you spend the return on your investment in the startup on a purpose, your pension accrual, the study fund, that’s what you do it for, you have taken the risk, you will be rewarded for it, so enjoy the results. But it can never be the reason why you invest.
Why then, because of the experience that the participant will gain with this. With no other investment in a company do you get the chance to go through so many different phases in a relatively short term, whether in the field of financing, growth or product development, everything goes faster than with a traditional company. It is not for every entrepreneur to lead an innovation start-up, on the other hand, almost no founder of an innovation start-up feels suitable to lead the company through the next phase. The only one who hasn’t changed seats at a successful startup is Amazon’s Jeff Bezos. Even the beloved Steve Jobs at one point felt inadequate to lead the next phase of the company, prompted in part by shareholder pressure.
If the participant is interested in experiencing this, regardless of the ultimate outcome, the investment will certainly be a success. Now we cannot determine what other startups do, but we will involve the participants in every step we take. We even want to include a representative of the participants in the supervisory board. Every month we will report to the participants association and every quarter we publish a report on the progress of the innovation and operational activities of the company. Although they are not consumer products that we develop, ultimately the public will certainly benefit from the products. Where necessary, we will involve the supervisory board in strategic decisions, where the delegate of the participants has a seat. There is also an annual general shareholders’ meeting at which in the early stage the supervisory board has an important vote and later the shareholders themselves.
From a minimum participation amount of € 200.00, each participant will receive all information from the reporting, or at least the link to the information published on our website. We are directly available for questions and comments, in addition we will oblige the participants association to maintain contact with all participants. From what we understand this is a unique approach, as it is highly unusual for the early investors to sit on the supervisory board. We have made the decision to do this anyway, as we believe that the first participants are the main investors. They drive the flywheel so that everything can be put into operation. After the conversion to shares, the association will be dismantled, however, due to the conversion, the participant will become directly the owner of the project company with all the information available. Perhaps the participants / shareholders can decide to continue the association, although this will no longer be facilitated by us, because at that time we must treat all shareholders, new and old, equally.
The greatest advantage for the participants is therefore that they have direct insight into the progress of the investment for a relatively low amount. A participant will not be excluded because of the size of the investment amount. This cannot be said of traditional business investment. The participant does not have to make an investment of 6 figures to be seen as fully-fledged and to experience involvement in the progress. We have deliberately opted for public participation because we believe that everyone should be able to benefit from it and not just a select few who can reap all the benefits for themselves.
Because we enable a direct investment, the participant does not pay any administration or management costs, it is not our business model to manage the investment of the participant, but to enable innovation. So that kind of costs are not passed on to the participant. The same reason can be found why the participant makes the transaction directly to us and not through a payment processor. The costs involved; this can amount up to 11% if we include the currency transaction costs. We can really spend this money better. We may miss out on some participants, but we choose to deal efficiently with the funds that are made available to us over the ease of payment. It is a one-time transaction and not a monthly payment.
As soon as the first tranche has been fully paid up, we will make the association available to participants. Initially we will appoint an independent board, but it is expected that a delegation of the participants will sit on the board. The association will propose a representative who, on behalf of the association, will be given a seat on the supervisory board of P.T. Emas Cemerlang Bersama. The association will collectively represent the interests of the participants. All participants automatically become members of the association, the participant himself determines the involvement in the association and the investment.
The association will maintain a membership administration and a participation register, this participation register will be updated every quarter following the notarial confirmation of participation / investment. The “original” register of participants is managed by the company, after which the civil-law notary will confirm the changes in this register every quarter and report this to the association. Every year, a delegate from the association must attend the shareholders’ meeting of the projects and the initiator of the innovation projects. After this meeting has taken place and the annual reports have been sent to all members, a meeting will be organized. This is the general members meeting; this is a mandatory meeting that the board of the association must organize.
In addition, the association has the option to call an extraordinary members meeting. This is a means that can be used to have a vote conducted on certain subjects. For example, if we, P.T. Emas Cemerlang Bersama decide to split off the projects, then the association can call a meeting to inform its members in detail and a vote can take place to find out whether the majority members agree with the decision of the company and the condition under which a particular event will take place.
Following such a vote, the management board will have to formulate an advice and submit it to the supervisory board of the company through its delegate. The advice of the association cannot be seen as a decision, it is an advice to the operational management of the company. However, the executive committee cannot simply ignore the advice of the association. If the board finds that they cannot go along with the advice of the association, they will have to formulate this and inform the association about this, either afterwards. The board should consider that if it goes against the advice of the association, they are dealing with dissatisfied participants. If the decision of the board has far-reaching consequences for the participants and their interests, the association can submit a request for an extraordinary shareholders’ meeting of the company through its delegated commissioner. Such a request for an extraordinary shareholders’ meeting should be regarded as a last resort and must at all times be honored by the executive board and its supervisory board.
The executive board of P.T. Emas Cemerlang Bersama and his supervisory board will have to inform the association in advance when decisions are taken that could change the characteristics of the participation. It is up to the board of the association whether it convenes its members to proceed a vote. The decisions for which the board of the company must inform the association prior to the decision concerned include the following matters, but will not be limited by these matters alone:
- Issue of new tranche (s) of the convertible note;
- Initiation of a new financing round;
- Acquisition from or by third parties;
- Splitting the innovation projects and thus creating a separation with the company;
- Establishment of legal entities to facilitate such separation;
- Appointment and reappointment of board members and members of the supervisory board;
- Cessation / termination, in part or in whole, of activities that affect the development and progress of said projects;
- Conversion of convertible notes to shares.
The operational management of the company will, together with the board of the association, compile a list of priorities that include the above matters and, where necessary, expand it with other matters that the operational management must comply with regarding the provision of information to the association. However, the company reserves the right to label certain matters as confidential and thus to give the association board the obligation to regard and treat the relevant information as such. This may mean that not all members/participants are informed in advance, but this can only be regarded as exceptional and therefore applied in extreme necessity. Justification for the decision to pre-designate certain information as confidential will have to be included in the provision of information to members when such matters are subsequently shared with members.
Finally, we would like to emphasize that the company assumes the right, in the event of improper management, to suspend one or more board members or to remove them from the board position. This mainly in the case that actions of improper management by this board member or several members harm the participants and / or the projects and the company. When such actions come to the attention of the operational management of the company or the supervisory board, it will first proceed to inform the board of the association. If the board of the association does not take adequate measures against the member or members concerned, the operational management of the company may apply measures whereby the member or members concerned are suspended or expelled. In the event of a suspension, this is of a temporary nature, for example in the event that further investigation into the facts will have to be carried out. The member or members concerned will be given the opportunity to defend themselves against the alleged facts, decision will always be made known to all members in writing. When there is a cancellation, this is of a permanent nature and cannot be appealed against. The relevant member of the board will also lose his membership of the association. It is up to the company to settle this further with the person or persons concerned. Taking such measures is only possible in extreme necessity and when direct or indirect damage to participants, projects and / or company can be demonstrated. It is up to the members to nominate a new board member.
A closer look at the agreement
Here we will further elucidate the agreement per article and describe what we believe needs explanation. However, this does not mean that the reader cannot or may not have further questions. If a particular article or topic is partially or completely unclear, please let us know immediately. At the bottom of this writing you will find all our contact information. You can also reach us via our website: https://www.emcebe.com or via the chat function of the platform where you are reading this article.
Article 1. Interpretation
1.1 Definitions: This one speaks for itself, it should be clear what all the terminology means if one reads the description, if not clear, let us know.
1.2 Interpretation: The same applies as under 1.1.
Article 2. Conditions
2.1 Conditions: A. The Note is issued with the following condition: A statement will be prepared and made available by the directors and other shareholders as necessary that they are aware of and agree to the issue of the Note and its terms. In addition, when required, existing shareholders will prepare and provide waivers and indemnities so that there are no restrictions on the conversion to equity securities for participants.
B. that the company enters into agreements with other investors within these series under the same terms and conditions, except for the amount of the investment. The minimum amount of Notes in this series is €200.00, within this tranche 1,250 Notes will be issued for a total amount of €250,000.00, in total within the entire series there are 6 tranches of €250,000.00 each, which equates to 7,500 Notes with a total investment amount of €1,500,000.00.
2.2 Non-fulfilment: If the conditions, as stated in 2.1 are not realized within a period of 90 days, the agreement will be dissolved. When the Note is canceled within this clause 2.2. neither party has any obligation to each other than termination of the agreement. In other words, if the company does not comply with the condition mentioned in 2.1, the agreement will be dissolved, and the investment amount will be returned.
Article 3. Investment amount and terms of the note
This entire article may be clear, the investment amount must be transferred in its entirety in 1 transaction to a bank account that the company makes available for this on the date as agreed. The company may not use the funds for anything other than the projects or otherwise agreed with a majority of participants in these Note series. Clause 3.4 equals 2.1B.
Article 4. Conversion
This article deserves special attention. It will be a topic of discussion as long as the investment will last. Even after the conversion has taken place, it will continue to be discussed. This is the moment when it becomes clear what the return on investment will include.
The conversion will take place when a qualifying equity financing takes place whereby new shares are issued to the investors of this financing. On the day these new shares are issued, the conversion into shares will also take place for the participants in the convertible note.
Since this is a new round of capitalization for the company, it will receive a higher valuation than at the time of the issue of the convertible note. This means that the participants of the convertible note will get a better conversion value.
Below is a calculation example to provide clarity, no rights can be derived from the numbers used in this calculation example and the result.
Simplified Calculation Example:
At the time of issue of the convertible note, the whole received a financial valuation of €10,000,000.00 (post-money valuation). This is the valuation of the current value of the company + the investment jointly contributed by the participants.
Again, this is a simple calculation model, there are more components that are included in the full stock allocation calculation. But it should be clear that participants in the Note pay significantly less for the shares than later investors.
The greatest return can be realized later in the process, but it is a decision that the participant must make himself. What may become clear from this calculation, that the moment of conversion is not the all-decisive moment for the level of return. The conversion ensures that a return can be realized because each participant is allocated his/her shares.
If the participant has access to his/her shares, then each participant can determine for himself/herself whether and when he/she wishes to sell these shares, in whole or in part. Everyone will have to consider the decision for themselves, too early can omit the large return, too late can also have adverse consequences. Because, can the project keep up with its capital needs? But that is also the charm of such an investment.
Then there are a number of situations conceivable where the investment comes to a halt. The agreement deals with these situations as completely as possible, if a situation is not included, then the approach is in any case clear. In all cases it will be clear that the participant will not be able to make an individual decision, but the association will not be bypassed in making a collective decision. In every situation, the company is obliged to inform the association in advance and ask for a decision.
In the event of a liquidity event, which is a liquidity event, which can be read in the definition list (Article 1 of the agreement), the investor / majority of investors will have to decide whether to agree and offer the Note for conversion. Should an individual participant, or majority, decide not to submit the Note for conversion, the company is obliged to pay out the investment amount, plus an additional amount equal to the investment amount plus unpaid interest payments, within 20 business days of a liquidity event, to this participant(s).
Then there is the conversion expiration date. This is in the exceptional case that we do not attract any investments other than this Note investment. Then the Note expires in 6 years, or sooner if we decide this jointly with all participants. The company will then have to issue new shares within the company and allocate them for the participants. Together with the association, we will arrive at a conversion rate where all parties, including ourselves, can be satisfied with.
All other points within this article discuss the implementation and provisions under which a conversion must take place. We think these points speak for themselves, if anything is not clear, we advise you to contact us immediately and we will (try to) answer all questions.
Article 5. Interest
The interest is an annual simplified interest, not interest on interest payment, but 6% interest on the investment amount annually. This interest will be paid as soon as the investment amount will convert into shares, the interest can be added to this. Whether the interest is paid to the participant when the participant claims his investment amount, the following article 6 deals with this.
Taxes: This is up to each individual investor to determine whether or not tax should be paid on any interest. We do not make any statements about this, as we do not know what everyone’s personal financial situation will be. We will have to register when we make a physical interest payment to one or more participants.
Article 6. Repayment and Prepayment
The company undertakes to pay the investment amount, with any outstanding interest, to the participant within 5 working days when he claims it through a written claim. However, the participant confirms with the signing of the agreement that such a requirement will not be issued before the expiry date.
The investment amount is not eligible for an upfront payment, before the Note’s expiration date or a liquidity event. The participant may require a pre-payment of the interest, however after the annual interest has been allocated.
Article 7. Company’s Undertakings
The company must not act contrary to this agreement. No changes may be made within the company that could be detrimental to the participants. If a situation arises that could endanger the survival of the company, the company will have to inform participants at an early stage and clearly explain the steps to protect participants from any injustice. Should the company fail to do so, the board can be held responsible and liable with all the consequences that entails such. The rest speaks for itself.
Article 8. Insolvency Events
This article sets out under what circumstances an insolvency event can take place.
This gives the participant the right to make the investment claimable.
Article 9. Warranties
This article is self-explanatory and should be clear to all participants. The company guarantees the participant that the company is a legal entity that is existing since 2015, so it was not established just for this purpose only. Any subsequent company will be incorporated by law and must obtain all permits and licenses in order to operate properly.
To the extent necessary, the company holds the intellectual property of the developments or, where necessary, we will register the intellectual property in order to collect and retain all rights to protect the project and the rights of the company and participants.
With the innovation we do not violate any intellectual property rights of third parties and thereby also declare that we are not involved in any legal proceedings from third parties that claim the right to any development that we carry out.
Article 10. Additional Investor Rights
Points 1 and 2 speak for themselves, we fulfill these rights by considering the association as such and by sharing all reports directly with the association. In addition, we will share financial information with all participants every quarter.
Point 3 of this article relates directly to the participants in the premium program. At least for the nominal investment amount, they may purchase additional shares for the same conditions as the new investor enabling the conversion.
All participants are eligible if they are willing to make the next investment for a minimum of € 10,000.00. We may not make an offer to any investor / participant if local law in the relevant country of origin of the investor / participant does not permit this.
Article 11. General
All points under this article should be clear.
Article 12. Governing Law
We are an Indonesian company, so it goes without saying that the Indonesian legislation on this agreement applies in the first place. However, where possible, we will make this agreement applicable to international law if it will not harm the interests of the company or its participants.
Article 13. Dispute Resolution
This article may be clear.
In the realization of the agreement, we took the interests of both parties into account as much as possible. We have come to the conclusion that this agreement fully guarantees the investment and we have done everything to provide both parties with sufficient security. Risks will be limited to a minimum, but certainty can never be guaranteed when it comes to return or the outcome of the investment.
Partly through the establishment of the participants association, we provide a wide opportunity for the participant to participate in the policy making of the company and innovations. We commit ourselves to keep informing the participant about every step in the process that we want/have to make. Everything will have to be done to realize both projects.
Our expectations for the projects
At this stage of development, it is difficult to sketch a scenario. It can go in any direction, both with the development of each project, but also with the trajectory that must be followed. But if we did not support one of the projects, we would never realize them, or enter into agreements with investors / participants for an investment.
We are very positive about both projects and see a very bright future for each project. For both projects, this investment, in which we now want to involve the public, will not be the last investment round. Partly for this reason, we find this form of financing extremely suitable, the convertible Note. It allows us to only raise funds that we need at each stage of development, which is why we opt for the tranche model. It forces us to be accountable every time for what we have achieved with the money and what we will spend the new funds on.
Each project will have its own trajectory. The project of the platform for freelancers and micro enterprises will achieve the fastest visible and tangible results. It is expected that we will be able to develop commercial operational activities during the second half of 2021 and thus generate income for this platform. As soon as possible, we will work towards making the operational activities being profitable. There is a scenario in which this should be possible within 3 years. Income is realized because the platform charges a fixed fee to the members of the platform (the freelancers and micro enterprises) for each hour that they generate orders via the platform. Profitability will be realized if a certain volume will be achieved. This volume is highly dependent on the sector we will be focusing on. We will personalize the platform and charge an appropriate fee for each sector within the service industry.
Not one platform for the entire industry and that the customer need tracker skills to find the best contractor for the assignment. Each sector has its own approach, the platform is tailored to the “product”. If a client has multiple assignments for different sectors, he/she will have to find his/her contractor on different platforms, but the layout will be almost the same, so the client will be able to navigate easily without ending up in a maze.
The intention is that we will roll out sector by sector, we have 3 sectors in mind to start. We are taking the lead in this; other sectors will be approached if the market requires so. Two of the sectors are within facility services, the third is in healthcare. In all cases, the client is central, the client will be the most frequent user of the platform and for them we will focus on ease of use. Where we distinguish ourselves from the rest is that we do not charge membership fees. No hidden costs structure. Fully transparent in our cost structure.
It is up to us to guarantee the involvement of both parties by optimizing the user-friendliness on the part of the client and offering a one-stop shop experience. On the part of the contractor, we want to bind them by applying a fair rate for work in progress, sufficient assignments so that they do not have to compete with other contractors within the platform. But also, by relieving the contractors of all tasks within their company other than performing the actual work.
One of the most important tasks of the platform will therefore be marketing and sales. Recruiting assignments is a lifeline for a company, without assignments the company is at risk, but there is often little time for it. An operator must concentrate on the execution of his work, which means that there is much less time for marketing and sales. It is often seen as a necessary evil to be done, leaving a lack of focus in this area. We solve this problem. A freelancer or micro entrepreneur often does not have experience in this field, the costs of which are too high for a small company. We can do this because we make it accessible to the collective, so we can invest in knowledge and skills.
This also applies to knowledge in other areas, through the platform the contractor will have access to specialization in the field of accounting and taxation, legal, insurance, finance, technology, Human resources and everything that comes with it. The work that must be carried out for this will be charged separately; this is not included in the standard fee. But the collective use of this expertise will make it much cheaper for the operator to use it.
Various strategies are available to get the platform to the attention of clients. We don’t have to reinvent the wheel. There are several successful platforms we can learn from. The trick is to quickly grab the attention of the market. Being disruptive, that is the question that is often asked, because having a disruptive effect on the market you are in works to your advantage to grab attention. How are we going to disrupt the market? This can work to our advantage, but also to our disadvantage, because we will be under a magnifying glass. Every mistake will be punished mercilessly. But in this too we can learn from others who have already followed this path. As long as we strive for that one goal and that is offering a solution, not causing another problem.
In the beginning our focus will therefore be on putting together a good product that we can use. It will not be the best product available, but it will be functional and easy to use. The platform will be a continuous development and will move with the market. Depending on what the market demands, we will make additions, although we will not respond to every hype. To find a balance here, we will bring in knowledge from every sector. Each sector will have its own unique platform, but also its own operating company, where the technology of the platform will be the binding sector. We do not need to set up a separate administration and accounting department for each sector. The same applies to human resources and legal specialization in corporate law.
Where we can integrate, we will have to integrate, but the same applies to specialization, with the aim of providing the best service for the best rate. The goal will be to become at least the top 10 of providers for every sector where we become operational within 3 years. This is not an unrealistic goal, provided the budgets are available. Thanks to our consultancy department, we already have a good look at the sectors where we want to start, in all cases the market is ready to be disrupted. We will not be able to change the product immediately, but we can change it without it becoming the Emperor’s story. In all cases, we must offer a better product to the customer without it directly costing them more money.
Our expectation is that we will be able to achieve our goals to be among the top 10 in all 3 sectors. But even if it will only apply to 1 sector, we can still speak of a success, because we are then so dominant that it will reflect on other sectors. These three sectors will always remain our attention, we are thinking about having expansion to other sectors carried out by third parties in a kind of license agreement, or franchise. This can also apply to expansion into other regions. Three sectors as a showcase for other markets does not have to be a disadvantage. Issuing licenses and / or franchise contracts can be another source of income.
The reason we quote this is to make it clear that growth doesn’t have to be a problem. Securing additional income in this way is a necessity. Growth should be accompanied by income, as soon as we continue to record positive income, growth will be financed “easily”. Initially, the costs goes before the benefits will come, but we will always have to see an opening where the benefits become positive and we no longer need external financing to continue to achieve growth. Growth in volume can be sustained for a long time, but a finite story, so the growth in quality will have to serve for expansion into other regions and sectors. We see no point in achieving growth by taking over larger market parties. We believe it should always remain a platform for freelancers and micro-enterprises. For this we will also have to guide these freelancers, because as soon as they grow themselves, they can become too large to serve as a member of the platform any longer. Because otherwise they could take a too dominant position in their operational region that they could push away smaller contractors, the platform thus loses its target group on the contractors’ side.
Without going into too much detail, because a future article will be devoted to that, we will express our expectation here about the next investments that the platform will need. Our expectation is that a subsequent investment will be necessary to operate the platform. The advantage is that we then have a product and organization ready for implementation. Is this the investment round where the conversion will take place? That will be the big question, to which we do not yet have a clear answer. But we think it is better if there will be an intermediate round first. Because if we can show operational values for the conversion round, then the valuation will be many times higher, whereby we can immediately create better value for ourselves and the participants. You can only sell your skin once, but if you do it, then it should be done really well. It is expected that this conversion investment will take place within the first 3 years. Much shorter than the term of 6 years.
Then the next innovative project, this is of a completely different caliber. With a road map that cannot be compared. We will discuss here both a hardware and software problem. It will take much more time to be able to present a working production model. We want to be able to present a working prototype within the budget of this investment round. This will be the focus of attention, it will be a very big challenge to achieve this with limited resources, but not impossible. We have already invested capital in research. As a result, we know quite accurately what the prototype will have to meet. This is just the hardware side of the whole project. But if we can present a working prototype that reflects our philosophy, we are convinced that there are more than enough candidates who are willing to come in for the further financing with us. The amounts involved in the total development significantly exceed the total budget of the other project, whereby we are already talking about the exploitation phase in the other project.
We are confident that we can develop a working prototype within a period of eighteen months, however, the question is whether this will be a semi-autonomous working prototype. It is expected to have a mimicking function with a human operator who will perform the work and the robot will be able to perform the same actions. To achieve this goal, we will have to go through 2 phases. The first phase will be the development of the robot and the second phase will be the storage and processing of current production data of the human movements. The how and why of the 2 phases will be described in more detail in a subsequent article.
We will do everything we can to achieve both phases within budget. If we succeed in this, the way will be cleared for this project to be separated and further developed into an entity designed for this purpose. This separation will also be when the conversion will occur. We leave it to the participant to decide whether they want to continue their investment or regard it as a liquidity event and thereby terminate their investment. In all cases, we will fully inform the participants and at that time express our expectations for the more distant future. The time span for this will again be a maximum of 3 years, whereby we see the period as very broad, because we try to pursue the goal of realizing a working prototype within a year and a half.
There will be 2 more articles in this series, both articles will each deal with one of the projects. We recommend the reader to follow our blog: www.emcebe.com/blog/. Here the reader can find out more about us and get further updates. If the reader has any questions and/or comments, we can be reached at: firstname.lastname@example.org. Further contact information can be found on the first and last page of this article.
We are very positive about both projects, two completely different markets, each with a different user group. The time pressure on both projects is not dictated by market dynamics, but pressure imposed by us, especially because we want to continue to perform and not get bogged down in further development. Bringing a project / product to the market means that it is the best and most honest test ground. The market will make it clear to us exactly how the project is doing. But because the market does not impose that time pressure on us, we can take advantage of it by being allowed to perform, but not having to perform, in other words: It doesn’t have to be 100% perfect from the day of introduction. We thus give ourselves the space to go back to “the drawing board” if we receive signals from the market that it is not yet good enough.
As a result, we have a margin of error on which we are not immediately charged, because we have the time on our side to come up with a better product and satisfy our customers and investors. Performance enables us to appropriately reward the trust our investors have given us. We are convinced that we have built in sufficient security to achieve a positive result. The time and effort and financial resources that we have already invested in both projects supports us in that conviction.
We attach great importance to the establishment of the association of participants. We see the association as an additional consultative body, from which we will benefit in various ways. With this we guarantee a closer involvement of the participants in the investment and development of the projects. Every report to the association is a test for us whether we are still on the right track. If we regularly have to take responsibility for the work we perform, we are automatically obliged to reflect. In addition, we expect a thorough input from the participants if they discover shortcomings or have questions about the information, which in turn helps us to investigate further on the topic of discussion.
We have deliberately kept the participation amount as low as possible so that a larger audience can and wants to use it. It requires more organization on our part, but with that we achieve the goal of making it a public participation and not only suitable for an elite group of investors who are not shy about an investment more or less. We hope to provide participants with insight into what is involved in investing in a startup and go through all the phases with us.
Although we are very positive about the projects, we would like to point out to everyone that there are risks associated with any form of investment. We have succeeded in keeping the risks to an absolute minimum, but we cannot give any upfront guarantee about the end result of the investment. There are several factors that are beyond our control, including:
- Currency risk; The development and exploitation of the projects will not only take place in Indonesia, project 2 will roll out in Europe and Indonesia at the same time, it is quite possible that the exploitation company will have its headquarters in the Netherlands, while the development will mainly take place in Indonesia, therefore currency risk may occur. At the moment we are not taking any measures for this, we may be obliged to do so in the future. This may negatively affect the performance of the project as we are forced to allocate financial reserves to hedge this currency risk.
- (Geo) political risks; Because we operate on various continents, extreme circumstances can be a factor influencing the performance of the projects. This is not plausible within the term of the Note (6 years), but it cannot be ruled out completely.
- Global Economic Outlook; A financial and / or economic crisis can affect the performance of the projects. We believe that both projects are robust enough to withstand a financial / economic crisis. It will affect performance at that point, but it will not affect the viability of the project. The biggest risk in this area will be exposure to such a crisis when we need new investment to drive further growth. That is why we will keep an eye on the situation and will not limit ourselves to one or a few investment models. This public participation is an example of this.
- Market dynamics; Our projects are not extremely sensitive to market dynamics, we do not have a consumer product, and the research has been very extensive, so that we have been able to prepare very well. From the start of the research for the collaborative robot for the garment manufacturing industry, we were aware of upcoming changes in this industry. However, this will only work in favor of our project, we expect that the clothing production will move more towards the consumer and will no longer use centralized mass production. The threat may be that someone else will come up with an even better product than what we are developing and that they will be able to introduce their product to the market more quickly. But this is unlikely to happen. Developments are underway, but they are investigating in a different direction than how we approach the project. In a subsequent article we will go deeper into this matter, we advise the reader to read all 3 articles to be fully informed. The following applies to the platform project, the development will not be a groundbreaking discovery, everyone can do what we want to do, there are several initiatives already underway, but the way we want to distinguish ourselves in the approach to the product and implementation for the users we will be so innovative that we can have the market on our side. But as has been stated before, there are no guarantees on the degree of success.
In addition, it will be important how we deal with the funds made available to us by the participants. The company has no external debts, so there will be no doubt that the funds will not fall into a hole that needs to be filled. Fixed costs are limited, we have no lease and / or rental contracts. The business building is paid with own resources, no mortgage costs. There are no dearly paid advisors involved in our company who can submit a pricey invoice. A salary freeze was introduced in 2018, this salary freeze relates to the board of directors and management of the company. No one is eligible for a salary increase, everyone (6 persons) receives a maximum salary allowance of €700.00 a month. This will continue until the conversion takes place. Only general employees and absolute specialists receive market-based salaries. This salary freeze is also not a freeze in such way that it will be “straightened out” at a later time. No hidden expense allowance has been agreed. This will also be reflected in the financial report that will follow every quarter.
In addition, a statement will be drawn up by the existing shareholders in which they confirm that they will not claim any form of dividend payment during the term of the Note, will not claim any outstanding debts to the company and that they will not waive their shares until conversion takes place. In this way a natural situation has arisen in which everyone involved also has a personal interest in the success of the projects. Everyone has “skin in the game”, which creates a healthy balance between us and the investors.
We would like to draw the reader’s attention to 2 other articles in this series, so that a complete picture of the content of the participation in the convertible Note emerges. You can find all articles on our social media channels and in the blog section of our website. If you have any questions and / or comments regarding this or the following articles, you can reach us at:
P.T. Emas Cemerlang Bersama
Axa Tower Lt.45, Jalan Prof. Dr. Satrio 18, Karet Kuningan, Setiabudi,
12940, Jakarta Selatan, DKI Jakarta, INDONESIA
Thank you for your attention on behalf of the entire team of:
P.T. Emas Cemerlang Bersama