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Anyone founding a start-up or entering a growth phase is familiar with the dilemma: capital is urgently needed, yet the founders want to retain control over their company. Swiss corporate law offers an interesting instrument in the form of participation capital. This article explains what participation certificates are, what rights their holders have, and what must be observed in subsequent financing rounds.

In the dynamic world of startups, capital is the fuel for massive growth. However, those investing in an early phase (seed phase) face a classic dilemma: How much is the company worth today? A valuation that is too high scares off investors; one that is too low causes founders to lose massive shares before the journey has even truly begun. This is where the Convertible Loan Agreement (CLA) comes into play. It acts as a pragmatic bridge builder between two worlds.

In advisory practice, it is evident time and again that entrepreneurs, investors and private taxpayers seek a high degree of planning certainty. This is entirely understandable, as many of their decisions have direct tax consequences. This is especially true where complex transactions are envisaged or significant financial implications are expected.

Employee participation plans – whether equity-based or virtual – are a popular instrument to motivate employees, retain them in the company and allow them to participate in the economic success of the business. In particular, SMEs and start-ups use such participation plans to retain key talent and management in the long term and to implement succession planning.

A capital loss arises when a company’s equity (share capital plus legal and free reserves) is no longer fully covered by its assets — that is, when accumulated losses have eroded the company’s capital base to such an extent that liabilities exceed or threaten to exceed available equity. Depending on the severity, this may constitute a capital loss (Unterbilanz) or even overindebtedness (Überschuldung) under Swiss law.

Many entrepreneurs wonder whether they should distribute profits each year or rather leave them in the company. From a tax perspective, it can be advantageous to retain profits in the business instead of paying them out regularly and being taxed as income. If the shares of the company are sold later, you realize a tax-free capital gain – and in the best case “sell the full wallet” including retained profits, because the sale proceeds are correspondingly higher. This is precisely where indirect partial liquidation comes into play. This special rule can result in the tax-free capital gain being retroactively reclassified as taxable income. However, those who know the rules can prevent this and make use of the advantage – but must also ensure that the buyer does not drain the company’s cash within the next five years.