What Are Investment Rounds?
Investment rounds are a corporate funding process through which companies secure capital from investors, whether they are pre-existing shareholders or external parties.
Through this mechanism, the company gains the capital necessary to ensure its growth, while the investor acquires a stake in the company’s share capital. Existing shareholders may increase their stake during the investment round, while new investors acquire a percentage of participation if they did not previously hold shares in the company.
It is worth noting that every investment round involves a capital increase. This is essential to accommodate the nominal value of the investment into the share capital, which can be achieved either through the issuance of new shares or by increasing the nominal value of existing shares.
Negotiation in Investment Rounds
As with any investment or financing process, investment rounds in the corporate field require careful negotiation to balance the interests of both parties:
- Company objective: To secure a capital injection that supports its growth strategy.
- Investor objective: To obtain a defined equity stake in the company.
The type of investor involved will vary depending on the stage of the start-up’s lifecycle:
- Seed or initial stage: Financing tends to follow a more informal structure.
- Growth or later stages: Transactions are typically more structured and sophisticated.
Key Elements to Negotiate in an Investment Round
Anti-dilution mechanisms
These mechanisms include premoney valuation, postmoney valuation, and the establishment of a cap, ensuring that investors maintain their expected equity stake in the company.
Capital increase
A capital increase is required to integrate the investment into the share capital. This process involves determining:
- The portion of the investment to be allocated to the nominal value.
- The portion to be allocated as a share premium.
These allocations depend on the agreements reached concerning the premoney valuation, postmoney valuation, and the possible implementation of a cap.
Impact on Start-up Management and Governance
The entry of new investors into the share capital may alter the company’s internal management dynamics. It is therefore advisable to formalise agreements through a shareholders’ agreement, addressing key aspects such as:
- Conditions for profit distribution.
- The structure of the company’s governance.
- Exit mechanisms for shareholders.
Common Provisions in Shareholders’ Agreements
Typical provisions in these agreements include:
- Drag-along and tag-along rights.
- Lock-up clauses.
- Exclusivity and non-compete clauses.
- Mandatory adherence to the shareholders’ agreement: Ensures that new investors assume the same rights and obligations as existing shareholders.
Conclusion: Essential Factors for a Successful Investment Round
Investment rounds encompass several critical components, including:
- Valuation mechanisms: Anti-dilution provisions such as premoney, postmoney, and caps.
- Capital increase: Terms for incorporating investment into the share capital.
- Corporate governance: Agreements to minimise future disputes and ensure effective management.
A well-structured approach and detailed agreements are pivotal to avoiding conflicts and ensuring the success of the investment process.
