For some time now, investment rounds have been the most common financial strategy employed by new entrepreneurs to launch their businesses and start-ups. The rise in this way of financing has primarily been driven by the difficulty, especially for start-ups, in obtaining traditional bank financing.
An investment round is a process through which a company secures the necessary funds for its business development, thanks to the participation of private investors who become shareholders in the company.
So, the question arises: How do these private investors become part of a company’s share capital?
This operation is executed by increasing the company’s share capital (usually involving a portion allocated to share capital and another to share premium). Depending on the execution procedure, this can be done through the creation of new shares.
The incorporation of new investors in the company can be facilitated through three types of capital increase: monetary contributions, non-monetary contributions, and credit compensation.
In the first scenario, the capital increase, funded by monetary contributions, is carried out through investments in the company in the form of cash from investors.
On the other hand, the compensation for the capital increase may involve non-monetary contributions. These are contributions that, while not in monetary form, can be evaluated economically. This is a common method for incorporating key employees, for instance, when they contribute new software they have developed for the startup.
Lastly, capital can be increased by offsetting credits. In this case, two common situations arise. In the first scenario, an investor issues a “convertible note” (a not very precise translation from English) and converts it into share capital, thereby becoming a shareholder. This approach is used to consolidate multiple investors in the same investment round when all of them have previously issued convertible notes. In the second situation, a key collaborator in the project has provided services that the startup could not afford. As a result, this collaborator becomes a creditor of the company and converts their credit into shares, joining the project as a shareholder.
If you are an entrepreneur looking for external financing, in the process of an investment round or if you are an investor interested on participating in a startup as a partner, providing either capital or technology (or both), do not hesitate to contact us through info@busquets-abogados.com. We can help you in everything you may need.