Investments are essential for developing and accelerating the growth of a startup or scaleup.

Are you an entrepreneur with a product idea and need money to implement it? Or do you already have a company and want to grow it?

Or do you want to invest in a startup or scaleup?

This article helps you understand the main steps in an equity investment process (where the investor acquires shares) - all from a legal perspective.

1. TERMSHEET

An investment usually starts with negotiating and signing a termsheet. This is the initial document in the process and contains the main conditions and terms of the proposed investment.

Basically, the most important aspects of a termsheet are:

• the financial part of the investment (valuation of the company, invested amount and percentage in the company received by the investor(s));
• control of the company (mechanisms by which investors ensure that they can control the management of the company and/or have a veto power in important decisions).

In addition to the financial and control side, a termsheet contains other clauses that do not have such a big impact on the investment but are nevertheless important. This category includes clauses such as confidentiality, no-shop (exclusivity), lock-up period, etc.

Do you want to know more about the termsheet? You can read our extensive article here .

2. DUE DILLIGENCE

Once you have signed the termsheet, the due diligence stage follows, where a thorough analysis of the company is carried out.

This process aims to identify and assess legal, financial, and operational risks. During the legal due diligence, a wide range of legal issues are analysed:

• company structure and documents (articles of association in all versions from incorporation to date; GMS (general meeting of shareholders) resolutions; previous investment documents / previous assignments, etc.);
• intellectual property (trademarks, patents, copyright);
• data protection (privacy and cookie policies, information notices, data processing agreements, internal GDPR policies and procedures);
• contracts and agreements (contracts with suppliers, customers, partners and employees);
• litigation (legal disputes involving the company);
• labour and human resources issues (employment contracts, internal rules);
• property rights (ownership rights over the tangible assets of the company);
• debts (loans, credits or other company debts).

The due diligence process ends with a report that shows investors all the issues identified about the company. The results of the due diligence can influence the negotiations and terms of the investment agreement. Even when there is a signed termsheet, depending on the issues and risks identified during the due diligence, several scenarios can occur, ranging from making the investment conditional on the founders taking certain actions (e.g., IP assignment agreements) to not making the investment.

3. INVESTMENT AGREEMENT

Once the due diligence process is completed, the next step is to negotiate and draft the investment agreement - or legally speaking, the Subscription and Shareholders Agreement (SSHA).

The SSHA is a contract between founders, investors and the company and details the terms and conditions of the investment, as well as the rights and obligations of founders, investors and the company.

Usually, the SSHA includes and details the clauses agreed in the termsheet.

Among the most important aspects of an SSHA are:

• establishing the rights and obligations of the members (voting rights, dividend rights, rights in the event of a potential exit from the company, etc.);
• protecting investor interests (voting mechanisms for certain decisions that cannot be taken without the investor’s vote, anti-dilution clauses, etc.);
• regulation of the transfer of shares (pre-emption rights, drag along, tag along, call option, put option, etc.);
• settling conflicts between members (buy-out mechanisms, bad-leaver or good-leaver mechanisms, etc.);
• create an option-pool for employees.

Do you want to know more about the investment agreement and the specific mechanisms? Read our extensive article here .

4. FORMALITIES FOR REGISTRATION WITH THE TRADE REGISTER

Once the investment agreement has been negotiated and signed, the operation must be registered with the Trade Register. This process involves drafting the company documents, such as the updated articles of association, declarations of new foreign shareholders, etc.

What is a share capital increase with share premium?

It is a mechanism that allows an investment to be made without increasing the share capital by the full amount received. This mechanism is very useful, as a smaller share capital provides greater flexibility in operations that change the share capital structure.

There are situations where, in an investment, the founders participate in the increase only to maintain a certain percentage of the share capital (e.g., participation is necessary to reach a certain share capital structure). In these situations, a high share capital would make the operations more difficult, as the founders would have to participate in the increase with larger amounts of money (perhaps thousands or tens of thousands of EUR).

Example: If a company has a share capital of RON 200 and the investment is EUR 100,000, the share capital can be increased by a smaller amount, such as RON 100, and the difference up to EUR 100,000 will be considered as share premium. In this way, although the company receives EUR 100,000, the increased share capital will be RON 300.

5. POST INVESTMENT

Once the investment has been received and all the formalities have been completed, the implementation phase follows, with consequences on several levels:

• compliance with the investment agreement: this may include various obligations or objectives for the company (e.g., obligations to inform the investor regularly, mechanisms for taking certain decisions with the investor’s consent, etc.);
• resolving issues identified in the due diligence process: the company will have to remedy issues identified during the due diligence and to which it has committed itself in the investment agreement (e.g., to implement GDPR; to conclude various addenda with employees; to update or draft various corporate documents, etc.).

Investing in a startup or scaleup is a complex process with multiple consequences and risks for founders, investors, and the company. It is essential that you are assisted throughout the process by an investment lawyer to protect you from risks and help you make informed decisions.