Hybrid Capital Structures in Dutch Growth Companies

Practical structuring and governance considerations for Dutch BV financings

Hybrid capital structures in Dutch growth companies combine elements of debt, preferred equity, convertibles and investor governance rights in a single financing structure. These transactions are increasingly used where founders and investors want more flexibility than a traditional equity round can offer, particularly in markets where valuation expectations, fundraising timing and downside protection have become more important.

This article forms part of the Hybrid Capital & Dutch Growth Financing Insights series, which focuses on practical Dutch implementation issues in structured growth financing, private credit and cross-border investment transactions.

In practice, hybrid structures are often used to bridge valuation gaps. Founders want to avoid a heavily dilutive equity round, while investors want stronger downside protection and governance rights than ordinary equity would provide. The result is a financing structure that sits somewhere between venture capital, growth equity and private credit.

The commercial logic can be attractive. The legal implementation is where transactions often become more complicated.

Hybrid capital affects governance as much as economics

One of the main mistakes in Dutch growth financings is treating hybrid capital purely as a financial instrument. In reality, these structures often reshape governance inside the company.

An investor providing structured capital will frequently ask for stronger protections than a traditional equity investor. That may include enhanced information rights, veto rights over future financings, board observer rights, consent rights over acquisitions or restrictions on distributions and additional debt.

In Dutch BV structures, these rights cannot simply sit in a financing term sheet. They usually need to be reflected carefully across the investment documentation, shareholders’ agreement and, in some cases, the articles of association.

This is particularly important in founder-led companies where governance dynamics remain sensitive after closing. A financing round that solves a short-term runway problem can create long-term operational friction if the approval structure becomes too restrictive.

Convertible debt and preferred equity solve different problems

Convertible debt and preferred equity are often discussed together, but they address different commercial objectives.

Convertible structures are typically used where the parties want flexibility or speed. They are common where valuation discussions remain unresolved or where the company expects a larger institutional round later. Investors receive downside protection through debt economics, while retaining upside through future conversion rights.

Preferred equity structures are usually more governance-focused. Investors often want stronger control rights, liquidation preference protection and immediate participation in the company’s equity structure.

For Dutch companies, the implementation difference matters. Convertible instruments require careful attention to future conversion mechanics, dilution calculations and shareholder approvals. Preferred equity requires detailed drafting around voting rights, liquidation waterfalls and interaction with existing shareholder arrangements.

US and UK investors often underestimate how important Dutch articles of association become in these structures. Certain rights that appear straightforward in US financing documents may require Dutch corporate implementation before they become practically effective.

Hybrid financing can complicate future fundraising

Hybrid capital often works well at the moment the financing closes. Problems tend to arise later, particularly during a future growth round, refinancing or exit process.

This is especially visible where the structure contains aggressive investor protections, broad veto rights or complicated conversion mechanics. Future investors may view those rights as structurally problematic, particularly if they restrict operational flexibility or distort future economics.

In practice, later-stage investors increasingly focus on whether an earlier hybrid financing has created governance imbalance inside the company. Founders may discover that consent structures have become too restrictive. New investors may push for simplification before investing. Existing investors may disagree about dilution outcomes or conversion calculations.

These issues are rarely caused by one clause alone. They usually arise because the financing documentation was negotiated primarily around immediate capital needs rather than the company’s longer-term financing strategy.

Dutch implementation should be considered early

Many international financing templates assume corporate mechanics that do not map directly onto a Dutch BV. Hybrid financings involving Dutch companies therefore often require more implementation work than foreign investors initially expect.

Depending on the structure, the financing may require:

• amendment of the articles of association;
• notarial share issuances;
• shareholder approvals;
• pre-emption waivers;
• alignment between debt and equity documentation;
• security arrangements;
• revised governance mechanics.

Cross-border investors often focus heavily on economics while underestimating these Dutch implementation requirements. In practice, however, governance alignment and execution mechanics often determine whether the structure remains workable after closing.

That is particularly true in venture-backed and PE-backed growth companies where multiple investor groups, founders and management teams remain involved after the transaction.

Practical conclusion

Hybrid capital structures can be highly effective in Dutch growth companies, especially where founders and investors need flexibility around valuation, dilution and downside protection. But these transactions should not be approached as purely financial engineering exercises.

The key issue is whether the structure remains workable inside the Dutch BV over time. Governance rights, investor protections, conversion mechanics and future financing flexibility all need to operate together coherently.

For international investors, this is often where Dutch implementation becomes more important than the headline economics of the deal itself.

FAQ

What is hybrid capital in a Dutch growth company?

Hybrid capital refers to financing structures combining debt-like and equity-like features, such as convertible debt, preferred equity and enhanced investor governance rights.

Why do Dutch growth companies use hybrid financing?

These structures are often used to bridge valuation gaps, reduce immediate dilution, extend runway or provide downside protection for investors.

Is convertible debt the same as preferred equity?

No. Convertible debt begins as a loan and may convert into shares later. Preferred equity is immediate share capital with negotiated economic and governance rights.

What is the biggest risk in hybrid financings?

The biggest risk is usually governance friction after closing, particularly where investor protections complicate future fundraising, operational flexibility or exit planning.

Practical Dutch implementation of structured growth capital

Hybrid capital structures can be highly effective in Dutch growth companies, but only if the financing terms are aligned with Dutch BV governance, shareholder arrangements and future fundraising strategy.

Dirk de Waard, partner at Venture M&A Lawyers, advises founders, investors, private equity sponsors and management teams on Dutch VC, private equity, M&A and governance matters involving Dutch BV structures and cross-border transactions. Having studied at Cornell Law School, Dirk is familiar with how international investors approach structured capital and private market transactions, while focusing on their practical implementation in the Netherlands.

For support with hybrid financing structures, Dutch growth capital transactions or Dutch BV governance implementation, contact Dirk de Waard.