Key points
- Careful legal preparation is essential before launching a fundraising round, to maximise the chances of success.
- The strategy rests on the equity story, the capitalisation table (cap table) and the choice between equity and convertible bonds (OCA).
- The road show begins with the signature of an NDA protecting sensitive information before any pitch is shared.
- The letter of intent (LOI) sets the preliminary terms, followed by a due diligence review that confirms the company’s legal health.
- Closing involves an Extraordinary General Meeting, the signature of the subscription forms and of the shareholders’ agreement, and then the release of the funds.
Before launching a fundraising round, careful legal preparation is essential. Entrepreneurs must follow several steps to make the transaction legally sound. Here are the essential legal steps to prepare your startup for fundraising. The simplest option is still to be assisted by a fundraising law firm.
1. Define your fundraising strategy
Equity story
From the incorporation of the company, think about the structure of the share capital. The equity story must clarify the role and respective stakes of the founders, especially if some of them are not operational. This strategic narrative reassures investors about the cohesion and long-term vision of the management team.
Capitalisation table (cap table)
The cap table must reflect a balanced split between founders, key employees and potential investors. Before each transaction on the share capital, anticipate a possible rebalancing to attract investors. This table is crucial to show how risks and rewards are allocated.
Structuring the transaction
Analyse the options between an equity fundraising and financing through bonds convertible into shares (OCA, obligations convertibles en actions). Also consider relution mechanisms (which increase the founders’ stake) such as BSPCE (French start-up share warrants) and free shares to preserve the founders’ interests.
2. Preparing the road show
Non-disclosure agreement (NDA)
Before sharing your pitch with investors, have them sign an NDA to protect your sensitive information. This agreement provides a contractual framework for the confidentiality of discussions and helps protect your company’s core technology. Limit the information disclosed to what is strictly necessary at each stage of the negotiation.
3. Letter of intent and due diligence
Letter of intent (LOI)
The LOI sets the preliminary terms of the investment. It must cover the structure of the transaction, governance and the main terms of the future shareholders’ agreement. This document frames the negotiations and anticipates the key points of the final agreement.
Due diligence
The due diligence phase consists of confirming the legal health of the company: corporate law, employment law, tax, intellectual property and main contracts. Prepare this phase in advance to avoid delays or unpleasant surprises. Make sure your company is in order to make the investors’ assessment easier.
4. Negotiating the financial and legal terms
Shareholders’ agreement
The shareholders’ agreement formalises the relationship between the founders and the new investors. Take the time to understand and negotiate the crucial clauses, such as the liquidation preference clause. A well-structured agreement prevents future disputes and protects the interests of all parties.
Amending the articles of association
The company’s articles of association will probably need to be amended to incorporate the new terms of the investment. Sometimes a complete overhaul of the articles of association is necessary to align governance and shareholders’ rights with the company’s new circumstances.
Warranty and indemnity (garantie d’actif et de passif)
Investors often require a warranty and indemnity to protect themselves against possible unpleasant surprises after the investment. Negotiate this warranty carefully and with the assistance of your legal adviser to minimise the risks for the founders.
5. Completing the transaction (closing)
Extraordinary General Meeting
Hold an Extraordinary General Meeting (AGE) to approve the fundraising. This formal meeting approves the entry of the new investors and the necessary amendments to the articles of association. Holding this meeting marks a key stage in the process.
Signature and release of funds
Complete the transaction by signing the subscription forms and the shareholders’ agreement. The release of the funds by the investors gives legal effect to the transaction. The company’s président or gérant records these acts and updates the company’s articles of association.
Optimising the legal structure of your startup before fundraising makes negotiations easier. Prepare each step carefully to attract investors and protect your long-term interests. Take advantage of advice from a lawyer to navigate this complex and strategic process.
Legal references
Corporate law
- French Commercial Code (Code de commerce) :
- Article L. 225-129 et seq.: Capital increase.
- Article L. 225-197-1 et seq.: Allocation of free shares.
- Article L. 228-1 et seq.: Securities.
Law of obligations
- French Civil Code (Code civil) :
- Article 1101 et seq.: Formation of contracts.
- Article 1240 et seq.: Civil liability.
Intellectual property
- French Intellectual Property Code (Code de la propriété intellectuelle) :
- Article L. 611-1 et seq.: Patents.
- Article L. 711-1 et seq.: Trade marks.
- Article L. 111-1 et seq.: Copyright.
Tax law
- French Tax Code (Code général des impôts) :
- Article 39 et seq.: Deductibility of expenses.
- Article 163 bis G: Tax regime of start-up share warrants (bons de souscription de parts de créateur d’entreprise, BSPCE).
- Employment law
- French Labour Code (Code du travail) :
- Article L. 1221-1 et seq.: Employment contracts.
- Article L. 1231-1 et seq.: Termination of the employment contract.
- Article L. 3312-1 et seq.: Employee profit-sharing (participation and intéressement).
- Investment law
- French Monetary and Financial Code (Code monétaire et financier) :
- Article L. 214-1 et seq.: Regulation of investment funds.
- Article L. 211-1 et seq.: Financial instruments.
- Contract law
- French Civil Code (Code civil) :
- Article 1128: Conditions for the validity of contracts.
- Article 1195: Revision for unforeseen circumstances (imprévision).
- Article 1217 et seq.: Remedies for non-performance of a contract.
- Financial markets regulation
- French Financial Markets Authority (AMF) :
- Règlement général de l’AMF (AMF General Regulation): Provisions applicable to fundraising transactions.
- Recommandation DOC-2012-05: General meetings of shareholders of listed companies.
- Competition law
- French Commercial Code (Code de commerce) :
- Article L. 420-1 et seq.: Anti-competitive practices.
- Article L. 430-1 et seq.: Merger control.
- Corporate governance
- Code de gouvernement d’entreprise (corporate governance code) :
- Code AFEP-MEDEF: Recommendations for listed companies.
- Code Middlenext: Good practice for SMEs and mid-sized companies.
- Accounting law
- French Commercial Code (Code de commerce) :
- Article L. 123-12 et seq.: Accounting obligations of traders and annual accounts.
- Article L. 123-18: Valuation of assets.
- Accounting standards
- Plan comptable général (French general chart of accounts) :
- Règlement ANC n° 2014-03 of 5 June 2014: Plan comptable général (French general chart of accounts).
- Article L. 123-14 of the French Commercial Code (Code de commerce): Annual accounts that are regular, fair and give a true and fair view.
- Data protection
- General Data Protection Regulation (GDPR):
