How to conduct an investment round

How to conduct an investment round

In recent years, investment rounds have become one of the main sources of financing for startups and growing companies, establishing themselves as a real alternative to bank financing. It is increasingly common to see projects closing rounds worth millions of euros, with the participation of private or institutional investors betting on their scalability potential.

However, an investment round is not a standardized process; it must adapt to the specific situation and needs of each company. Its success depends as much on financial preparation as on legal and negotiation strategy.

How an investment round works

An investment round is not merely a capital injection, but a complex process in which financial, strategic, and legal interests converge. It begins with a clear premise: the company needs resources to grow and is willing to transfer part of its share capital in exchange for financing. To achieve this, the founders must prepare a clear proposal justifying the entry of new investors, usually in the form of a business plan that outlines the company’s objectives, financial projections, and intended use of funds.

The process starts with the search for investors, which can take place through incubators, accelerators, investment forums, venture capital funds, or direct contacts. Once a potential investor is identified, a preliminary negotiation phase begins, discussing aspects such as the company’s valuation, the amount of capital to be contributed, and the percentage of equity to be acquired. This stage is often formalized in a non-binding document known as a term sheet, which sets out the essential conditions of the investment and serves as the basis for the final documentation.

Steps in the investment round process

Once the term sheet is agreed, the investor carries out a due diligence process. This is a thorough review of the company’s legal, tax, labor, accounting, and financial situation, aimed at verifying that the information provided is accurate and that there are no hidden liabilities that could jeopardize the investment. For this reason, it is crucial that the company approaches this stage with all its documentation in order: updated bylaws, a well-drafted shareholders’ agreement, up-to-date corporate records, properly formalized employment and commercial contracts, and adequate protection of intellectual and industrial property assets.

If due diligence is successfully completed, the investor’s entry is formalized through a capital increase. In this process, the investor subscribes to new shares or quotas issued by the company, usually paying a share premium. This premium reflects the difference between the nominal value of the shares and the economic valuation of the company agreed with the investor (the so-called premoney valuation). Once the capital is paid in, the company obtains a postmoney valuation, which includes both the previous value and the new investment.

The investor’s entry also entails the amendment of the bylaws to reflect the new shareholding structure, and, in parallel, the signing of a shareholders’ agreement. This agreement sets the rules of engagement between founders and investors: voting rights, reserved matters requiring reinforced majorities, mechanisms for share transfers (tag along and drag along), liquidation preference clauses, antidilution rights, and, in many cases, provisions regarding the founders’ commitment to remain in the company (good leaver/bad leaver).

In short, an investment round is an external capital-raising operation that, while aimed at providing resources for growth, also entails a redistribution of power within the company. It is not just a financial transaction but a process that combines economic analysis, business strategy, and legal structuring, and one that must be approached with planning and specialized advice to balance the interests of all parties involved.

Key conditions to negotiate with investors

Negotiation with investors is the core of any financing round. It is not enough to agree on the investment amount and the equity stake to be acquired: it is essential to establish a clear legal framework regulating the future relationship within the company. This framework is mainly reflected in the bylaws and the shareholders’ agreement.

One of the first issues to be negotiated is decision-making. Investors usually demand a say in the company’s strategic decisions, which translates into the establishment of reserved matters that require reinforced majorities for approval. These may include amendments to the bylaws, dividend distribution, approval of significant debt operations, or substantial changes to the business model. The goal is to ensure that investors have mechanisms to safeguard their investment without needing to hold a majority stake.

Share transfer mechanisms are another central aspect. The most common are the drag along right, which allows majority shareholders to compel minority shareholders to sell their shares in the event of a third-party acquisition offer, and the tag along right, which gives minority shareholders the ability to join a sale initiated by a majority shareholder under the same conditions. These mechanisms balance the interests of all shareholders and ensure an orderly exit in the event of a company sale.

Another increasingly common condition is the inclusion of antidilution rights, which protect investors from the risk of future financing rounds being carried out at a lower valuation than the one they paid. These rights adjust their shareholding to preserve the relative value of their investment.

Regarding founders, investors often require specific provisions concerning their commitment to remain in the company, set out in good leaver and bad leaver clauses. These clauses establish the financial and corporate consequences if a founder leaves the company: while a good leaver may sell their shares at market value, a bad leaver is usually required to sell them at a reduced price, often at nominal value, as a penalty for serious breach or unjustified departure.

Finally, confidentiality and non-compete clauses, as well as the proper regulation of the company’s intellectual and industrial property, are essential. Investors want to ensure that intangible assets (technology, software, trademarks, patents) belong to the company itself and not to the founders personally, and that the shareholders cannot launch competing projects that could jeopardize the investment.

Financial and legal preparation

Before launching an investment round, it is crucial that the company enters the process with everything “in order.” From a financial perspective, this means having clear and up-to-date accounting in line with the Spanish Commercial Code and the General Accounting Plan, as well as a realistic business plan with credible projections and verifiable metrics.

In parallel, the company must review its corporate and contractual documentation: bylaws, corporate books, contracts with employees, suppliers, and clients, as well as the ownership of intangible assets such as software, trademarks, or patents. All these elements will be reviewed during the investor’s due diligence process.
Proper preparation of these aspects not only facilitates negotiation but also inspires confidence in investors and speeds up the process, ensuring the round is closed under favorable conditions and without unexpected legal or financial surprises.

Investment rounds represent a strategic opportunity to accelerate company growth but necessarily involve ceding part of the share capital and, therefore, a degree of control. For this reason, beyond financial preparation, it is essential to have specialized legal advice to ensure that the agreed conditions protect both the future viability of the company and the founders’ interests.

At Letslaw, we have extensive experience in structuring investment rounds and negotiating shareholders’ agreements, offering comprehensive advice that combines legal expertise with strategic vision to ensure that investor entry into your company takes place under safe, balanced, and success-oriented conditions.