At least once per year the Commercial Register receives information about your company´s fin
ancial status - it' s the time when you submit your annual report - you might receive a notice from the register that your net equity is below the required level under the Estonian Commercial Code (CC). This means the company's asset value has dropped below its liabilities. This may happen when most of the invested funds come from convertible loans and not equity investments.
What is the required level?
The required level depends on your share capital. In case your share capital is 1 EUR - the net equity requirement is 1 EUR. However, most Estonian OÜ' s (private limited liability company´s) have 2,500 EUR share capital and in that case the net equity required level is 1,250 EUR (section 176 of CC).
How to solve the issue?
Net equity required level can be usually achieved through making profit (yes, that simple:) or paying money into the company' s share capital (increasing share capital with share premium).
Under CC there are also other options, including dissolution, merger, division, transformation, or bankruptcy. However, most companies typically decide to increase their share capital. Another alternative to increasing share capital is creating a voluntary equity reserve.
What is voluntary equity reserve and why its good for you?
If most investments have come into your startup through convertible notes from shareholders, there is an option to convert the loans into equity. If that cannot be done (as the maturity date is still far away) an alternative is for the shareholders can convert shareholder loans into a voluntary equity reserve. This voluntary equity reserve can later be reduced or dissolved, allowing the shareholder loan to be reclaimed by the shareholder.
In summary, navigating the aftermath of losses and negative equity involves careful planning, including possibly increasing the capital reserve. Companies should ensure compliance with legal requirements and consider strategies for financial stability.
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