Your situation and your risks
You are preparing a first round with business angels (seed) or a more structured round with venture capital funds (Series A). The arrival of these investors changes the split of the share capital and, often, the governance. They generally ask for specific rights, set out in the articles of association or in a shareholders’ agreement. Our fundraising lawyer page presents the whole process.
At seed stage, the transaction often takes the form of a capital increase in ordinary shares or an issue of BSA AIR (share subscription warrants). In a Series A, investors frequently ask for preference shares. Both rounds require a company limited by shares, most often an SAS (simplified joint-stock company). An SARL (French limited liability company) must first convert.
A poorly prepared round exposes the founders to dilution they have not properly measured, to a loss of control or to exit clauses they do not fully understand. The articles of association and the shareholders’ agreement must remain consistent with each other. The employee share plan, for example in BSPCE (founders’ share warrants), must be planned ahead, as it weighs on the capitalisation table.
The legal framework for a seed or Series A round in France
A capital increase falls within the powers of the extraordinary general meeting, which may delegate its authority (Article L. 225-129 of the French Commercial Code (Code de commerce) (in French)). In an SAS, the decision is taken collectively by the shareholders, under the conditions set by the articles of association (Article L. 227-9 (in French)). To reserve the issue for the investors, the meeting cancels the preferential subscription right in their favour. The named beneficiaries do not take part in the vote (Article L. 225-138 (in French)).
Preference shares may be created on incorporation or during the life of the company (Article L. 228-11 of the Commercial Code (in French)). They carry specific rights of any kind, on a temporary or permanent basis, defined by the articles of association. They may be issued with or without voting rights. Preference shares without voting rights may not exceed half of the share capital. This ceiling is one quarter for companies listed on a regulated market.
In an SAS, the articles of association set the conditions under which the company is managed (Article L. 227-5 (in French)). A strategic committee or a board created by the articles can therefore include investor representatives. The articles may also make the shares non-transferable for up to ten years (Article L. 227-13 (in French)) and make any transfer subject to approval (Article L. 227-14 (in French)). Tag-along, drag-along and anti-dilution clauses are generally found in the shareholders’ agreement.
BSPCE are governed by Article 163 bis G of the French Tax Code (Code général des impôts) (in French). Among other conditions, the issuing company must be subject to corporation tax in France and have been registered with the Trade and Companies Register for less than fifteen years. At least 15% of its share capital must be held directly and continuously by individuals. Companies that are themselves at least 75% owned by individuals also count. Certain holdings of investment funds are not taken into account in this calculation. The arrival of investors must therefore be checked against this condition.
How we can help
- Analysing the letter of intent or the term sheet: valuation, amount, rights requested, conditions precedent.
- Preparing the company for the investors’ due diligence: articles of association, registers, key contracts, intellectual property.
- Drafting or negotiating the amended articles of association, the creation of the preference shares and the shareholders’ agreement.
- Preparing the président’s report, the resolutions and the shareholders’ collective decision.
- Checking BSPCE eligibility and structuring the employee share plan.
- Coordinating completion of the transaction: subscriptions, payments, recording of the capital increase, registration of the shares in the share accounts and formalities.
What is at stake for you
A funding round gives you the means to grow, but it redistributes capital and power. Each right granted to investors has a counterpart for the founders: dilution, prior consent on certain decisions, exit constraints. We help you measure these effects before signing, clause by clause.
Consistency between the term sheet, the articles of association and the shareholders’ agreement also shapes the following rounds. Future investors will review the rights already granted. Every situation is different: the right balance depends on your stage of development and on the parties you are dealing with.
Every situation is different: the information on this page is general and does not replace legal advice tailored to your case. The firm makes no promise of outcome; it commits to the means it deploys.
