For some time now, investment rounds have been the most common economic boost used by new entrepreneurs in their businesses and start-ups. The rise of this form of financing has been largely driven by the difficulty, especially for start-ups, to obtain traditional bank financing.
An investment round is a process by which a company, through the participation of private investors, secures the necessary funds for the development of its business. These investors will become part of the company's share capital, becoming partners in it.
How do these private investors become part of a company's share capital?
The transaction is carried out through an increase in the company's share capital (usually with a portion of the contribution going to share capital and another portion to the subscription premium), which, depending on the execution procedure, may be carried out by creating new equity interests.
The onboarding of the new investors into the company can be carried out through three types of capital increase: via monetary contributions, non-monetary contributions, and debt-to-equity swaps.
Firstly, the capital increase charged against monetary contributions shall be carried out by means of contributions of money to the company's assets by the investors.
Secondly, the consideration for the capital increase may consist of non-monetary contributions. We are referring to all those contributions which, although they do not correspond to monetary values, are capable of being economically valued. It is common for this to be the way to bring on key employees, for example, when they contribute new software that they developed for the startup.
Lastly, capital can be increased by way of a debt-to-equity swap. In this case, we encounter two very common situations. In the first, the investor granted a convertible loan or “convertible note” (a rather imprecise translation from English, which we will write about in the next Startup News), converting it into share capital in order to join the shareholder base. This formula is used to bring together several investors in the same investment round once they have all already granted the convertible note. In the second, a key contributor to the project has provided services that the startup cannot pay for. In this way, the contributor becomes a creditor of the company, converting their debt into shares and joining the project as a shareholder.
If you are an entrepreneur looking for external funding, are in the process of an investment round, or are an investor interested in participating in a startup as a partner by contributing either capital or technology (or both), please do not hesitate to contact us via info@busquets-abogados.com. We can help you with anything you need.