Open your share capital to investors

Why open your share capital?

Investors (business angels, venture capital funds, etc.), through their contributions of new financial resources through equity (in the form of an equity stake in the company) or quasi-equity in a company (in the form of the issue of bonds by the company), enable entrepreneurs to create, develop, transfer or turn around their business, and therefore to develop their turnover and create jobs.

In addition to the capital contribution, investors, through investment capital, can support companies with their know-how and experience.

Numerous studies show that the average annual growth of a company supported by investment capital is faster, compared to companies not supported by investors, in France.

In all hypotheses, opening the share capital to investors makes it possible to consolidate the company’s equity and to have the necessary resources to:

• financing research and development expenses for a new product or service;
• financing the company’s commercial development;
• making investments;
• development on a national or international scale.

In what cases should you open your business to investors?

Investors can intervene at different stages of the life of the company, namely at the creation stage of the company when the project leader is just starting its activity, during the life of the company, particularly for very young companies with high potential, or as part of the development of innovative structures. Investors can also intervene to support companies in economic difficulty, or as part of the transfer of the company.

Thus, depending on the stage of intervention, the different investment possibilities are as follows:

• Venture Capital which intervenes during the creation and development of companies:

  It can be difficult for a young company to start its activity with the project leader’s own funds alone.

  Investors thus allow business creators to increase their equity and develop growth potential, at a stage in the life of the company where obtaining a bank loan can prove difficult or is conditional on multiple personal guarantees from the manager.

  Thus, the increase in equity by the investor allows financial consolidation of the company, while avoiding its debt and the correlative risk of the assets of the project leader.

• Development Capital whose objective is to support the growth of the company with a view to achieving a new stage by the latter:

  Indeed, by providing equity in “mature” companies, investors contribute to making a new phase of their expansion feasible.

• Capital reversal, which intervenes when the company encounters financial difficulties, the investing capital becoming involved in the decision-making process and in the governance of the company with a view to its recovery.

  In this scenario, the investor provides funds to consolidate the capital of a company experiencing economic difficulties. This solution makes it possible to avoid the implementation of collective procedures, including judicial liquidation.

• Transmission Capital, in the event that it is planned to transfer the company.

  The investor will take a minority stake in the capital of the company, alongside other initial shareholders, or through quasi-equity, for example in the form of bonds convertible into shares.

A new form of fashionable investment!

Indeed “impact investing” is developing, supported by committed investor capital.

This is an investment made with the intention of generating a positive return, having a measurable social and environmental impact, in addition to financial return.

For example, the objective of impact investment is to limit global warming, to create employment in difficult areas, or to provide access to essential services for low-income populations (access to education, health, electricity).

And, concretely, how does it work?

Investment capital, whatever its form, is carried out by taking a stake by one or more investors in the capital of a company.

This participation of the investor(s) is mainly minority.

The preliminary phase (study by the investor of the company’s business plan, its objectives and return on investment forecasts), as well as the conclusion of certain acts (confidentiality commitment, letter of intent, exclusivity), are necessary preliminary stages, so that the business manager and the investor(s) build a project together and in trust.

Depending on the objectives set, several methods of integrating investors are possible, including in particular the purchase of social rights or subscription to a capital increase.

Indeed, existing shareholders can decide to sell their corporate shares for a price freely determined with the investor(s).

The capital increase is, however, the most frequently used route since the entry of the investor is often linked to a business project which requires new capital.

It consists of issuing new securities (ordinary shares or preferred shares) which will be subscribed to by investors. It presupposes that the initial capital of the company is fully paid up.

The financing of the company can also be done through a current account advance, by the investor who will also have the status of shareholder. Thus, the investor will contribute a sum of money which will be recorded in a partner current account on the liability side of the company’s balance sheet.

The investor-partner will have a claim on the company which will be repayable according to the conditions agreed within the framework of the current account agreement and remunerated according to a predefined interest rate.

The reimbursement of an associate’s current account can take place at any time, at the request of the investor, it is therefore advisable to provide in the current account agreement for a minimum period of blocking of the current account or to respect a notice period for any reimbursement request.

Otherwise, this would present a risk to the financial stability of the company.

However, the investor’s entry into the capital can be avoided.

Indeed, companies can opt to issue bonds.

This is a loan issued by a company in the form of simple or complex bonds.

Bonds provide their holder with certain remuneration, which consists of, on the one hand, the receipt of interest determined in advance and, on the other hand, the reimbursement of the nominal amount of the bond.

Nevertheless, this operation can prove to be legally cumbersome, since it presupposes the existence of two regularly approved balance sheets, or failing that, a verification of the assets and liabilities of the issuing company by a court-appointed commissioner, but also, the full release of the share capital, the meeting of the body empowered to decide on the creation of bonds, the drafting of subscription contracts and subscription forms.

That being said, certain bonds can also grant the investor access rights to capital. In this scenario, the company ensures an immediate inflow of funds in the form of a loan, repayment of which will only be required if the subscriber decides not to convert the bond. The conversion gives the company the benefit of a deferred capital increase at the time of maturity and the investor who becomes a partner, real political and financial rights.

How to regulate the entry of investors? How do I protect myself from a takeover?

The main disadvantage of opening the share capital to investors consists of the dilution of the company’s share capital.

It appears from the testimonies of many managers that they would hesitate to implement such an operation, given the risk of dilution, loss of control over the management of the company, financial reporting, or even uncertainty over the exit conditions.

However, different legal instruments can be used depending on the type of financing, and be offered to you in order to secure the entry of investors.

Indeed, it is possible to regulate the entry of investors, within the framework of the drafting of the statutes of the target company, but also of the shareholders’ agreement between the initial shareholders and the investor(s), in order to maintain control of your company.

These acts must necessarily include so-called clauses “capital control ” and protection of governance, including in particular the clauses of approval, pre-emption, non-dilution of the participation, pari passu, on the general management of the company, or even priority of subscription to any financial transaction aimed at strengthening the company’s equity.

Investors will request a reinforced right of information on the company’s activity through regular reporting, but also a right to receive dividends as a priority, as soon as a distributable profit is recorded.

The consequences of this type of clause can also be controlled and secured through the sound advice and editorial support of your lawyer.

What about the exit of investors?

At the end of a more or less long period, the investor is intended to sell his participation to realize added value, which is the essence of his project.

A certain number of divergences of interests may arise when this sale process occurs, with investors looking for high profitability.

The latter will already wish to set, upon their entry into the company’s capital, the objective events leading to their withdrawal from the company, but also the duration of holding of the equity securities, as well as the repurchase valuation of the securities.

The exit of investors could notably be done through the repurchase of the securities by the initial partners at an agreed price, the resale of the securities to a third party, or even the reduction of the share capital.

It is therefore appropriate, from the outset of the transaction and, with the help of your lawyer, to contractualize not only the terms of implementation of this transfer transaction, but also the respective rights of the parties at the end of this process.

In any case, the LEGALPROTECH-AVOCATS firm advises and supports you during the entry of investors into the share capital of your company, but also during their exit.

Don’t wait any longer to promote the development of your business and increase your equity!