Funding and financing opportunities for legal tech start-ups

Legal tech is an exciting and fast-growing field offering innovative solutions to the legal industry. However, as with any start-up, funding is a critical success factor. The Legal Tech Market Monitor [Link], which we co-published for the first time in 2024, has also shown that it is often difficult for legal tech start-ups in Germany to raise the necessary capital. In this article, we take a look at the different forms of funding and provide you with information on the best ways to successfully finance your legal tech start-up and what other funding options are available. 

As a non-profit initiative, we offer advice and assistance in networking with potential investors, experts and funding programmes.

1. Bootstrapping + Family & Friends

Many founders choose to bootstrap their business. This means that they finance their start-up from their own savings, from friends and family, or from income from their current business.

However, caution should be exercised when relying on family and friends for funding. In particular, founders often issue too many shares to friends and family without considering that future investment rounds will further reduce their stake in their own company (known as the dilution effect).

If you then seek VC investment at a later stage, this can be a deterrent for future (VC) investors, as it is crucial for them that the founding team is sufficiently motivated to give everything to the company until the time of a possible exit. However, this is no longer the case if the shareholding is too small for the team to play a significant role in an exit.

Moreover: Too many cooks spoil the broth. No professional investor wants to deal with shareholders who are not part of the founding team and, in the case of family and friends, often have no investment experience.  This can also be problematic for the founders themselves, for example if there are conflicts with friends and family that affect the development of the business.

The same principles that apply to friends and family also apply to external advisors, professors and mentors. It is for these reasons that it is also important to us in the selection of our members that the company has a ‘clean’ cap table. In summary, the following things are particularly important to us (and future investors)

• The founders, who are irreplaceable for the success of the business idea, receive the most shares.
• Employees do not receive real shares in the company, but participate via virtual shares, also known as VSIP (Virtual Share Incentive Programme).
• If real shares are to be issued for tax reasons (keyword: §19a EstG), this must be clarified in advance with experts.
• Other forms of financing such as loans, profit participation rights or silent partnerships should generally be avoided.
• Investments by small investors should be kept to a minimum. Their investments should be pooled, which makes administration much easier. Seek legal advice on the details.
• Shareholdings by family and friends should be avoided.
• The shareholder structure avoids creative special solutions that create additional complexity for future investors.

You can also find out more about the optimal cap table for start-ups in the article by ‘top50start-ups’, which has compiled important tips on the subject.

2. Angel Investors

Angel investors are wealthy individuals who invest in promising start-ups. As well as financial support, they often provide valuable advice and contacts. Angel investors are usually entrepreneurs themselves and have successfully founded and exited one or more start-ups. Their experience, network and expertise can therefore be a great asset and can also help with the day-to-day problems of running a business.

The Business Angels Network Germany (BAND) is a good place to start looking for suitable business angels. With a one-pager explaining your business concept, your product, your unique selling proposition, important market information, your team, previous successes and your financing concept, you can apply for a presentation to investors centrally in the network.

Compared to venture capital (see 3.), business angels have the advantage of sometimes taking a higher risk if they believe in an idea or the founders. However, the investment of a business angel is usually smaller than that of a VC fund, so that several business angels often have to come together to achieve the desired financing.

The potential influence on business decisions should also be carefully considered.

This is especially true if the business angel is active in the same or a similar sector. Under German law, shareholders have certain inalienable rights of information and participation which can be used, for example, to gain access to sensitive information or to seriously jeopardise the management of the company by refusing to participate in day-to-day activities.

As with family and friends funding, attention should always be paid to how this affects the cap table. It may be unattractive to later VC investors if the founders’ incentives are no longer sufficiently guaranteed and several business angels are involved.

In addition to BAND, there are other business angel networks. A small selection suitable for legal tech start-ups is listed below. You can also find out about other networks and matching services at BAND or in this article from Top 50 Start-ups.

Good to know: INVEST – Subsidy for venture capital

A special incentive for some business angels to invest is the INVEST funding programme.  Specifically, business angels receive a tax-free refund of 15 per cent of their investment if they invest at least EUR 10,000 in venture capital in start-ups. In addition, there is an exit subsidy, which is a lump sum refund of taxes on profits from investments.

More information can be found here.

3. Venture Capital

Venture capital companies (VCs) invest in start-ups with high growth potential. They provide large sums of money and often help to scale the business. The sums VCs invest in promising start-ups can range from low six-figure sums to multi-million sums.

VC money can provide a start-up company with a valuable cash injection that enables rapid growth, accelerated market entry or faster and more efficient product development. So if the company’s goal is growth and scalability, VC funding can be particularly useful.

VCs naturally take a high risk and hope for a profitable exit. As a result, they make high demands on the start-ups they invest in. In addition to the equity they receive through the investment, they also demand a say and expect appropriate reporting on decisions and successes or failures. This can put a lot of pressure on the founders and the team, but it can also drive them forward.

The digital sector in particular promises high growth and is therefore a key investment area for VCs. Many VCs have specialised in investing in certain sectors and look specifically for start-ups in these areas. In addition to the team, the scalability of the business model is particularly important to VCs. As a rule of thumb, less than one in ten start-ups that a VC invests in is actually successful. This one success needs to be big enough to compensate for the other nine failed investments.

This scalability is a real challenge in the legal tech sector, as the legal market in Europe is highly fragmented due to language and national laws. 

So if you intend to become a VC case (which you don’t have to be), you need to think carefully about how to scale your business model across as many legal areas and geographic markets as possible.

As mentioned above for angel investors, it is particularly important to present yourself well and professionally to VCs and to have a convincing pitch deck that investors will remember.

The best way to do this is to look at other grown-ups’ pitches for inspiration. For more pitch deck tips, check out YCombinator’ tips.

Of course, we also offer our members support in preparing their pitch decks and training their pitches for investor meetings.

4. Grants and Subsidies

Besides the funding options already mentioned, it is important to find out about other ways to obtain start-up capital, especially in the early stages.

There are many funding programmes and grants specifically designed for start-ups and innovative businesses. These funds generally do not have to be repaid and you do not have to hand over any shares, which makes them particularly attractive.

Despite the sometimes bureaucratic nature of the process, it is an option worth considering. Some of our members have raised up to €300,000 in non-dilutive funding this way.

Below we have listed a selection of different scholarships and grants. You can also search the funding database (Förderdatenbank) for more information. Depending on the state, country or specialisation of your company or team, you will find another overview here.  

As a student start-up team, you may also have the opportunity to apply to your university or to organisations for the promotion of gifted students, etc. for further grants, scholarships or funding through these programmes. If your university has a Business Start-Up Advisory Service, it is worth making an appointment with them. The LTC works closely with the start-up advisors at the TU Munich.

5. Loans

Traditional bank loans or special start-up loans are also a financing option in certain cases. Unlike the grants and subsidies mentioned above, these have to be repaid, but they often offer favourable conditions for founders.

A loan allows you to keep your shares and also gives you a certain degree of planning security thanks to clear conditions. However, it is often difficult to obtain loans from financial institutions in the early stages. As a founder, you usually have to guarantee the loan with your personal assets, which means that you personally bear the financial risk of failure.

6. Incubators and accelerators

In addition to financial support, incubators and accelerators offer mentoring, networks and resources to help you get started. A distinction must be made between commercial and non-commercial players: 

Commercial programmes usually require an equity stake (in the single-digit percentage range) in the business in return for their support. The exact structure varies from provider to provider. Well-known accelerators include Y Combinator, Techstars, Antler, Merantix and EntrepreneurFirst. These are known for their comprehensive and highly specialised support. Typically, you will also be well networked and likely to receive further funding from VC investors if you complete the programme successfully.   

However, there are also programmes that can help you develop your company and refine your business model, completely free of charge and without giving up any equity. In the UnternehmerTUM ecosystem, for example, you can apply for the special Legal Tech places in XPLORE or XPRENEURS. Both programmes are equity-free programmes that support you as part of a scholarship and do not take any company shares or participation fees in return. The Legal Tech Colab works closely with these programmes and Legal Tech participants are also mentored by the LTC.

Essentially, you should explore the different incubation and acceleration programmes depending on the focus of your own business. Depending on the stage of your company, the industry you belong to and your expectations of a funding programme, there are different programmes to choose from worldwide. 

Below is a small selection of programmes suitable for legal tech start-ups.

XPOLRE and XPRENEURS also offer regular online Q&A sessions where you can participate and learn even more about the programmes. Former attendees also share their experiences.  

Conclusion

Choosing the right form of financing depends on many factors, including the company’s objectives, current stage of development and preferences in terms of control and influence. Whichever option you choose, it is important to be well informed and carefully evaluate the various options.

If you, as a member of the LTC, need support or have any questions, we, as a non-profit initiative, are happy to advise you and help you make the right contacts.

Apply now to become a member of the LTC. Once a month we invite promising teams to a pitch to apply for membership. We look forward to receiving your application.

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