Investment rounds: an extended guide for entrepreneurs
In the first part of this guide, we focused on the basics of the investment rounds process, covering essential considerations for participants when contemplating involvement in such a procedure.
Now, we will chronologically outline the different steps to follow when initiating an investment round for a startup.
Phases of the investment rounds process
For greater clarity, we will divide the process into three main phases:
- Preparatory Phase of the Investment Round: This phase encompasses all activities aimed at securing financing. During this stage, the investor must determine, among other things, the amount of capital required based on their needs, the ideal type of partner, and the type of financing needed. This phase concludes with the creation of a pitch deck and a briefing for potential investors.
- Execution Phase of the Investment Round: In this phase, potential investors will be contacted, meetings will be held where the investor’s pitch will be a fundamental element to demonstrate the company’s projections, its solid foundations, and the quality of its team. With a bit of luck, positive responses from potential investors may be received, possibly in the form of a Letter of Intent (LOI), a Term Sheet outlining essential investment terms, or even a convertible note. These terms will need to be negotiated alongside the shareholders’ agreement to reach a final agreement.
- Post-Closing Activities Phase: This phase involves all activities aimed at completing the necessary formalities to meet legal and tax obligations. This may include registering the capital increase in the corresponding commercial register or updating the partners registry book.
But before delving further into these phases and simplifying matters, it’s important to establish that there are currently two main categories when it comes to financing rounds, which are conducted through:
- Convertible Notes
An investment round through convertible notes is advisable for companies in need of short-term financing, either due to cash flow constraints or the project’s inherent requirements. Through this method, the investor subscribes to a convertible loan, which may also be participative. As it is a loan, the company receives financing directly and does not have to wait for the round to conclude to access the liquidity necessary for day-to-day operations.
Typically, a predetermined timeframe is agreed upon with the investor during which the company can choose to convert the principal of the loan into the company’s equity at a specified valuation, or with a cap and/or floor (i.e., a minimum or maximum conversion value). Alternatively, the company may choose to repay the loan with agreed-upon interest.
It should be noted that initial investors may be offered a discount on the pre-money valuation of the round, which is the value assigned to the company before receiving the investment. Dividing this value by the number of existing shares gives the price per share, which is the value at which each shareholder will capitalize their loan.
In many cases, because the investor has made their contribution in advance, often months before the public offering of the capital increase through credit offsetting, a discount on the pre-money valuation is offered to reward the investor for their trust in the project.
In contrast to this approach, there is the option of a direct equity investment, meaning an investment in the company’s share capital, taking into account the pre-money valuation. Consequently, this makes the investor a full-fledged partner in the company.
If you require more information or expert guidance, please do not hesitate to contact our team of commercial lawyers.
Letslaw es una firma de abogados internacionales especializada en el derecho de los negocios.