Basic legal aspects to consider when raising capital in a startup
For a startup, one of the main objectives is to consolidate the business model in order to obtain the necessary external financing that will allow it to grow.
This is the moment when different mechanisms to obtain the necessary capital start to be assessed. One of the first options is direct financing, requesting a loan with the corresponding interest. However, this is not usually the option that allows the desired exponential growth.
For this and other reasons, if the project continues to grow, it is likely that the time will come sooner or later for a capital increase.
What is a capital increase?
A capital increase is a type of financial operation that makes it possible to increase the economic resources of a company by issuing shares. It is a mechanism for financing the business project.
Companies are going to increase their resources by issuing new shares to which a value must be assigned to be paid by the investors who wish to be part of the project.
The value to be paid by the investors will be made up of the sum of the total nominal value of each share and an additional value called the share premium. This issue premium is calculated based on the valuation given to the company.
The capital increase is the mechanism par excellence when it comes to obtaining financing in a startup, giving income to new shareholders according to the percentage they contribute to the financing round.
Steps to follow to carry out a capital increase in a startup
Before starting a capital increase, it is usually advisable for the shareholders and investors to reach a series of agreements by signing a shareholders’ agreement.
Within the content of the shareholders’ agreement, it is recommended to regulate the relationships that will arise between the shareholders and the investors, to establish the different obligations of permanence and provision of services that must be fulfilled with the company, the matters that will require special or reinforced majorities and other rights that the parties consider by virtue of the negotiations that they carry out.
It is quite common for the investors to propose a series of minimums that must be accepted by the shareholders in order to be able to carry out the capital increase operation.
Once the relevant aspects have been regulated, the General Meeting of Shareholders is held to approve the capital increase, determining who the new shareholders will be and what contribution they will make, which may be a monetary contribution (this is the most frequent form) or a non-monetary contribution, such as, for example, a set of movable or immovable assets, in which case they must be valued to determine the amount.
It is important to include the point relating to the amendment of the Articles of Association in the content of the General Meeting, specifically, the amendment of the article relating to the capital stock.
At the General Meeting, the Minutes of the Resolutions will be approved. The Administrative Body of the Company must prepare the certification of the Minutes of the Shareholders’ General Meeting in order to proceed with its notarization before a Notary Public and subsequently with its registration in the Mercantile Registry.
It must be kept in mind that, once it is desired to grant public deed of the certification of the agreements of the General Meeting approving the capital increase, it is necessary that the investors have made the income of the total amount (nominal plus issue premium) in the account of the company, obtaining the corresponding receipts of income that will have to be contributed to be able to notarize.
How to increase capital in a startup in the right way? – The assumptions of shareholder dilution
One of the main complications that may be present at the time of a capital increase is related to the rights of the shareholders on the preferential acquisition of the new shares. It is common that, once the capital increase operation is to be carried out, the minority shareholders fear that their percentage of participation in the company will be reduced with the corresponding consequences.
For this reason, it is usually interesting to include in the shareholders’ agreements prior to the enlargement operations a favorable right of the minority shareholders to always maintain the percentage of their shares in the company, serving as a legal protection mechanism so that their power in the company is not diluted.
It is also possible to specifically regulate the different considerations and provisions that the shareholders may wish to take into account in order to safeguard their position in the company.
As regards the majorities required to approve a capital increase, the provisions of the Company’s Bylaws must be followed. In any case, at least a reinforced majority of the votes of the shareholders is required to approve it, i.e., the favorable votes of 51% of the capital stock.
It is important to remember that the shareholders, unless otherwise provided or agreed, have the so-called “pre-emptive subscription right”. This right means that, if one of the other shareholders wishes to sell its shares to a third party or if the company is going to issue new shares, the shareholders may acquire the shares before a third party, if they decide to match the economic offer in question.
In this way, this right seeks to preserve the special relationship of trust of limited liability companies, which is protected by commercial law and especially by the Capital Companies Law.
Therefore, in order to be able to carry out the capital increase operation without any inconvenience, it will be necessary that all the shareholders previously renounce to exercise their preferential subscription right in order to proceed with the capital increase operation.
At LETSLAW we are specialists in the legal advice to carry out financing rounds and, specifically, Capital Increase operations. Our Corporate Law department is specialized in advising emerging companies in a fast and effective way.
Letslaw es una firma de abogados internacionales especializada en el derecho de los negocios.