Investment Rounds and Shareholder Agreements: Keys to Success

Funding rounds and shareholder agreements are fundamental elements in the growth of startups and emerging companies. Properly structuring these agreements not only ensures the necessary capital acquisition but also establishes the foundations for a balanced relationship between founders and investors.

Types of Investment Rounds: From Seed Capital to Series

The funding path of a startup typically follows a sequence that adapts to its level of maturity:

• Pre-seed and FFF (Family, Friends & Fools): First informal fundraising, usually among people close to the founders and with very early valuations.
• Seed Round: First formal round, aimed at validating the product or service, with typical values between €100,000 and €1 million.
• Series A: Financing for companies that have already validated their business model and are looking to scale, generally with valuations between €2 and €10 million.
• Series B, C and beyond: Targeted at companies in expansion phase, internationalization or preparation for an eventual exit.

Shareholder Agreements: The Private Constitution of the Company

The shareholder agreement is a private contract that regulates the relationships between partners and establishes fundamental rules for the operation and governance of the company. Essential aspects it should include:

1. Corporate governance clauses: Definition of reinforced majorities for key decisions, board composition, veto rights, etc.
2. Permanence and dedication clauses: Obligations of founders regarding their dedication to the project and minimum permanence.
3. Share transfer clauses: Include rights of first refusal, drag-along clauses, tag-along, anti-dilution, etc.
4. Exit and liquidity clauses: Mechanisms for orderly exit in case of deadlock or conflict between partners.
5. Non-competition and confidentiality agreements: Temporal and material limitations to the activity of partners after their departure.

Startup Valuation: Art and Science

Startup valuation is one of the most complex and determining aspects in an investment round. The most commonly used methods include:

• Valuation by comparables: Based on similar operations in the sector.
• Discounted cash flow valuation: Although complex in early startups, it can be relevant in more advanced stages.
• Berkus Method: Assigns monetary values to key elements such as team, technology, commercial traction, etc.
• Scorecard Method: Compares the startup with similar ones, adjusting the value according to various risk factors.

Dilution: The Price of Growth

Dilution is the percentage reduction of existing shareholders' participation after a capital increase. It is inevitable in successive rounds but must be strategically managed:

1. Stock options pool: Reserve a percentage of capital for incentives to key employees.
2. Anti-dilution protections: Mechanisms that protect investors against subsequent rounds at lower valuations.
3. Ratchets: Adjustments to the conversion price of convertible instruments based on company performance.
4. Pay-to-play: Clauses that encourage the participation of existing investors in subsequent rounds.

Practical Advice for Entrepreneurs

Based on our experience advising startups in investment rounds, we recommend:

• Thorough preparation: Impeccable legal and financial documentation, including a clear cap table and preventive due diligence.
• Balance in negotiation: Resist the temptation to accept excessively high valuations that make future rounds difficult.
• Strategic selection of investors: Look for smart money that brings value beyond capital.
• Long-term vision: Plan the financing strategy considering future needs, not just immediate ones.
• Specialized advice: Work with lawyers who have specific experience in venture capital and startups.

A solid legal structure in investment rounds and well-designed shareholder agreements are the basis for sustainable growth of any startup, reducing future conflicts and facilitating capital entry under optimal conditions.