In Germany, startups usually raise seed capital by way of equity financings or convertible loans. Financing instruments that are comparable to the "Simple Agreements for Future Equity" that are often used in the US and the UK for early-stage financings are only occasionally used in the German market (and are – unfortunately – not so easy to execute as they require notarization in Germany).
Equity financing means that investors provide capital in exchange for the issuance of new (preferred) equity (shares) in the startup to the investors. This is the most straightforward and probably most traditional form of (equity) financing. The company is valued, and the investors capital is then exchanged for a percentage of equity based on this valuation. Investors usually negotiate terms and conditions of the financing itself (e.g., payment terms, representation and warranties, remedies in case of a breach or default) in an investment agreement. Further governance and economic participation rights (e.g., rights such as anti-dilution protection, voting rights, liquidation preference, etc.) are then addressed in a (often separate) shareholders' agreement. The issuance of new shares in the startup and the process associated with the equity financing, however, often takes more time and incurs greater legal costs compared to the use of convertible loan instruments, both of which are in short supply for most startup founders.
Therefore, convertible loans appear to be an important financing tool in startup land, especially in the early stages. A convertible loan is a loan granted by an investor to a startup which, however, generally is not designated to be repaid. Rather, the lender shall at a later stage convert the repayment claim (as well as the claim for payment of accrued interest, if any) into an equity participation in the borrowing startup. Accordingly, convertible loans belong to the group of mezzanine or hybrid financing instruments, i.e., initially they are treated as customary debt financing but, depending on the specifics of the case at hand, can or even shall later on be converted into equity (so called "loan to own"). Due to their flexibility and fast implementation convertible loans usually make a lot of sense for early financings of startups: the startup receives the financing necessary for building a team, acquiring customers, and generally everything the startup needs to get off the ground at the early stages in an expedited manner and the founders can concentrate on the only thing they should care about at this stage: start their business.
No matter what structure a startup uses to raise its seed capital, it is valuable to discuss any issuance of securities with a competent lawyer who can advise as to how the capital raise will affect the startup and the shareholders.