Debt funding vs equity funding

September 8, 2020

Legal entities can be organized in various ways. The capital structure of a company can be arranged in various manners. Arranging the financing of a legal entity can for example be done through debt funding or equity funding.

In the case of debt funding, the shareholder will in most cases grant a loan to the legal entity which will be considered as a liability of the legal entity. Should you choose for the option of a loan, we strongly advise to execute a loan agreement clearly stating the applicable terms and conditions. We can assist you with a tailor-made loan agreement.

In the case of equity funding, this can be arranged through issuances of new shares or through a share premium contribution on existing shares in the legal entity. In the case of an issuance of shares, the articles of incorporation of the legal entity need to be taken into account. The issuance of shares has to be laid down in writing.

Share premium (in Dutch: agio) is considered as the amount paid up on shares exceeding the nominal value of the issued shares. Instead of issuing shares, a shareholder can choose to contribute/capitalize a receivable it holds on the legal entity to shares (or share premium). If the option of share premium is chosen, parties will have to execute a share premium contribution agreement detailing the applicable terms and conditions. We can assist you with a tailor-made share premium contribution agreement.

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