Milestone-Based Financing in Dutch VC Transactions

When tranche funding, milestones and waiver rights shape the real economics of a Dutch BV financing

Milestone-based financing is a VC investment structure in which the investor does not fund the full investment amount at closing, but provides capital in tranches linked to agreed commercial, operational, technical or financing milestones.

In Dutch VC transactions, milestone-based financing can be useful when founders and investors agree on the company’s potential but disagree on timing, execution risk or valuation. The investor is willing to commit capital, but not all at once. The company receives funding, but only if agreed conditions are met. That can help bridge a valuation gap, extend runway and reduce investor risk.

The structure can also create pressure. If milestones are unclear, too investor-controlled or linked to external events outside the founders’ control, the company may find itself underfunded at exactly the wrong moment. For investors, the risk is the opposite: funding obligations may become due even though the company has not delivered the value drivers that justified the valuation.

This article is part of the Venture Capital Insights series on Dutch BV financing, investor rights and growth company governance and is relevant for founders, VC funds, growth investors and international counsel working on Dutch investment rounds.

Why milestone-based financing is used

Milestone financing is often used when a company is promising but not yet sufficiently de-risked. The business may need to complete a product build, reach regulatory clearance, sign key customers, hit revenue targets, close a strategic partnership, complete technical validation or raise a matching financing round.

Rather than pricing the full risk at closing, the investor funds part of the round immediately and commits to further funding if the milestones are achieved. This can help founders avoid excessive dilution at a lower valuation, while giving the investor protection against execution risk.

In practice, milestone funding is most useful when the milestones genuinely reflect value creation. It is less useful when milestones become a proxy for investor hesitation or a way to keep the company dependent without giving it enough capital to reach the next stage.

Milestone conditions must be precise

The most important drafting issue is the milestone itself. A milestone should not be a vague aspiration. It should be objectively testable.

A revenue milestone should specify the measurement period, accounting basis, treatment of recurring revenue, churn, deferred revenue, discounts and related-party revenue. A commercial milestone should define what counts as a signed customer contract, whether minimum contract value applies and whether the customer must have paid. A technical milestone should specify who determines completion and what documentation or testing evidence is required.

Founders should avoid milestones that depend heavily on investor discretion. Investors should avoid milestones that are so soft that tranche funding becomes automatic. Both sides benefit from clarity, because uncertainty around milestone achievement can become a governance dispute at the moment the company needs capital.

Valuation and tranche economics

Milestone-based financing can be structured in different ways. The investor may subscribe for all shares at closing but pay in tranches. More commonly, the investor subscribes for an initial tranche and receives the right or obligation to subscribe for additional shares later if milestones are met.

The valuation mechanics must be clear. Are later tranches issued at the same valuation as the first tranche, at a pre-agreed step-up valuation, at a discount, or at the valuation of a future financing round? Does failure to meet a milestone change the price, cancel the tranche, or trigger renegotiation?

For founders, the key issue is dilution. A staged investment may look attractive, but if later tranches are priced too favourably for the investor, the founder dilution may be greater than expected. For investors, the key issue is commitment. If later funding is optional, the company may not be able to rely on the capital. If it is mandatory, the investor needs comfort that the milestone is meaningful.

Conditions, waivers and investor discretion

The investment documents should explain who determines whether a milestone has been achieved and what happens if there is disagreement.

Sometimes achievement is certified by the board. Sometimes it requires investor consent. Sometimes objective evidence is sufficient. In more complex cases, an external expert, auditor or technical adviser may be involved.

Waiver mechanics are equally important. Can the investor waive a milestone and still fund the tranche? Can the company request a waiver? Is waiver approval given by all investors, an investor majority or a lead investor? If multiple investors participate in the round, can one investor fund and another decline?

These mechanics matter because companies rarely develop exactly according to plan. A milestone may be substantially achieved but not technically satisfied. A commercial target may be delayed for reasons outside the company’s control. The documentation should leave enough flexibility without giving one party uncontrolled leverage.

Founder risk: underfunding and loss of momentum

For founders, the main risk is accepting a financing that appears sufficient on paper but does not provide enough committed capital to reach the next financing or commercial stage.

If the first tranche is too small and the second tranche depends on ambitious milestones, the company may be forced into a weak negotiating position. It may need bridge financing, founder loans, cost cuts or a down round if milestone funding is delayed.

Founders should therefore model the downside case. What happens if the milestone is missed by three months? What happens if customer signing is delayed? What happens if the investor refuses to waive? Does the company have enough runway to continue?

A milestone structure should finance the plan. It should not merely postpone a funding gap.

Investor risk: funding without real de-risking

Investors face a different risk. If milestone conditions are too vague or too easily waived, the investor may be required to fund further capital without the expected value creation.

This is especially relevant in companies where valuation depends on technical progress, regulatory milestones, key customer conversion, AI performance, data access, clinical validation, hardware development or platform scalability. The investor should define the milestone around the actual risk being underwritten.

If the milestone is about revenue, it should measure quality of revenue, not only headline revenue. If it is about product readiness, it should test functional readiness, customer deployment or technical validation. If it is about a future financing, it should specify what counts as a qualified financing.

Dutch BV implementation

In a Dutch BV, milestone-based financing must align with the articles of association, investment agreement, shareholders’ agreement and notarial share issuance mechanics.

If later tranches involve new share issuances, the company may need shareholder resolutions, waiver or exclusion of pre-emption rights and Dutch notarial execution. If the investor receives preferred shares, anti-dilution rights or class rights, the articles may need to support the structure. If milestone funding affects reserved matters or information rights, the shareholders’ agreement should be aligned.

The Dutch implementation should be planned at signing. If the parties wait until the second tranche, they may discover that approvals, waivers or notarial steps are missing.

Interaction with governance and information rights

Milestone financing often gives investors stronger information needs. They want to monitor progress toward the milestone and assess whether funding conditions are likely to be met.

That can justify periodic reporting, milestone updates, budget tracking, customer pipeline reports or technical development updates. But the reporting burden should remain proportionate. A startup should not become operationally paralysed by investor monitoring.

Reserved matters may also be relevant. The company may need investor consent for changes to budget, product roadmap, senior hires, major customer contracts or new financing if those matters affect milestone achievement.

Practical conclusion

Milestone-based financing can be a useful tool in Dutch VC transactions, but only if the milestones, tranche mechanics and waiver rights are drafted with discipline.

For founders, the structure should provide enough committed capital to reach the next real value inflection point. For investors, it should link additional funding to measurable de-risking. For both sides, the Dutch BV implementation must be aligned with the articles, shareholder approvals, notarial mechanics and investment documentation.

A good milestone structure reduces valuation friction. A bad one creates funding uncertainty, governance tension and leverage at the wrong moment.

FAQ

What is milestone-based financing in a VC round?

Milestone-based financing is a structure where investment is provided in tranches, with later funding linked to agreed milestones such as revenue, product development, regulatory clearance, customer contracts or future financing.

Are milestone tranches mandatory or optional?

They can be either. The investment documents should clearly state whether the investor is obliged to fund once milestones are achieved or whether funding remains discretionary.

What makes a good milestone?

A good milestone is objective, measurable and linked to real value creation. It should not depend entirely on investor discretion or vague business expectations.

Can milestone funding be used in a Dutch BV?

Yes, but the structure must align with Dutch BV share issuance mechanics, shareholder approvals, pre-emption rights, the articles of association and the investment agreement.

What is the main founder risk?

The main founder risk is underfunding: accepting a staged financing that does not provide enough committed capital to reach the next financing or commercial milestone.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and venture capital lawyer, partner at Venture Lawyers in Amsterdam, and advises founders, startups, scale-ups, VC investors and international counsel on Dutch BV financing rounds, investment agreements, shareholders’ agreements, investor rights and governance.

Structuring milestone-based financing in a Dutch VC round?

Milestone-based financing can help bridge valuation and execution risk, but only if the conditions, tranche mechanics, waiver rights, governance and Dutch BV implementation are clearly documented before signing.

Dirk de Waard advises founders and investors on Dutch VC financing structures, investment documentation and shareholder governance. Contact Dirk de Waard at dirk.dewaard@viottalaw.com to structure milestone-based financing before tranche conditions become a funding or governance issue.