Startups often rely on external financing to develop their activities, especially during their early stages. When this funding doesn’t come from public bodies or banks but from investment funds, for example, it usually takes the form of investment rounds. These rounds are crucial as they enable companies to secure the financial resources needed for expansion, product development, and maintaining robust operations.
The corporate or commercial transactions associated with funding rounds generally take two forms:
Capital increases
Capital increases are at the core of financing rounds. In these transactions, investors become shareholders in the company by participating in one or more capital increases. This is done by issuing new shares, typically through cash payments.
Loans
By providing a loan, the investor injects funds into the company and acquires a credit against the company.
In these transactions, loans are often structured as convertible loans, giving the investor the option to convert the loan into equity later.
Alternatively, the loan may be structured as a participative loan, which entitles the investor to an interest return linked to the company’s performance.
In both cases, the company’s performance directly affects the investor, who, therefore, has an interest in ensuring harmony between himself and the startup.
Moreover, regardless of the type of investment, it is common for some of the following documents to be signed when the investment is formalised:
Letter of intent, also known as a term sheet or non-binding offer
This document outlines the investor’s general terms for the proposed investment. It covers various aspects, including the share price, any necessary corporate changes to the company, the rights the investor seeks to secure, and any obligations imposed on the company.
Due diligence
The investor audits aspects of the target company, focusing primarily on tax, financial, labour, and legal considerations. Depending on the business purpose, environmental impact, industrial and intellectual property, and real estate may also be examined.
Shareholders’ agreement
It is often in the mutual interest of both the investor and the company to formalise certain aspects (such as those outlined in the letter of intent) through shareholders’ agreements. These agreements may include the terms of the investment itself. In this way, all existing shareholders and the new investor explicitly commit to the agreed terms that will govern the partnership throughout the funding round. Shareholder agreements provide security and stability to the startup and enable it to allocate resources efficiently to its business development.
In conclusion, there are many benefits to participating in funding rounds for startups. In addition to securing external financing, they gain advantages such as access to specific expertise, validation of the business model, expansion of the network of contacts, and increased visibility in the marketplace.
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