For some time now, investment rounds have been the most common economic driver used by new entrepreneurs in their businesses and startups. The rise of this form of financing has been largely propitiated by the difficulty, especially for startups, in obtaining traditional bank financing.
An investment round is a process by which a company, thanks to the participation of private investors, obtains the necessary funds for the development of its business. These investors will become part of the company's capital stock, becoming partners in the company.
How do these private investors become part of a company's share capital?
The operation is carried out by means of an increase in the company's capital stock (normally with a portion of the contribution going to capital stock and another portion to a share premium) which, depending on the execution procedure, may be carried out by creating new shares.
The incorporation of new investors in the company can be carried out by means of three types of capital increase: cash contributions, non-cash contributions and offsetting of credits.
Firstly, the capital increase with cash contributions will be carried out by means of cash contributions to the company's equity by the investors.
Secondly, the consideration for the capital increase may consist of non-cash contributions. We refer to all those contributions that, although they do not correspond to monetary values, are susceptible of being economically valued. This is usually the way to incorporate key employees, for example, when they contribute new software that they developed for the startup.
Finally, the capital can be increased by offsetting receivables. In this case, there are two very frequent situations. In the first, the investor granted a convertible loan or "convertible note" (not a very accurate translation and which we will write about in the next Startup News), converting it into equity and thus becoming a shareholder. This formula is used to bring together several investors in the same investment round when all of them have already granted the convertible note. In the second, the key collaborator for the project has provided services that the startup cannot pay for. In this way, the collaborator becomes a creditor of the company that converts its credit into shares, joining the project as a partner.
If you are an entrepreneur looking for external funding, you are in the process of an investment round or you are an investor interested in participating in a startup as a partner, providing either capital or technology (or both), do not hesitate to contact us at info@busquets-abogados.com. We can help you in everything you need.