Corporate

Financing round

3min

⚡TL;DR

  • A financing round raises funds for a company's growth, beginning with a term sheet and concluding with legal formalities to implement the capital increase.
  • Key agreements, including the Investment Agreement (IA) and Shareholders' Agreement (SHA), outline the rights and obligations of both parties, ensuring a legally binding commitment.
  • Aligning on the exit strategy is crucial; founders and investors often use clauses like drag along with a valuation threshold or time-bound exit clauses to streamline decisions and ensure shared goals.
  • Book a free call with us.

A financing round is a strategic process designed to raise funds for a company's growth and development. It involves various negotiations and legal procedures, each crucial to the fundraising efforts' success.

Key steps in a financing round:

  1. Term sheet: The financing round typically begins with the negotiation and signing of a term sheet. A term sheet is a (mainly) non-binding document between the company and the investors (or at least with the main investor). This document outlines the key terms and conditions of the investment, providing a preliminary agreement that sets the stage for later negotiations.
  2. Agreements: Following the term sheet, the parties engage in negotiations and finalize two essential documents - the investment agreement (IA) and the shareholders' agreement (SHA) - these agreements determine the legal obligations, rights, and responsibilities of each party. These documents are legally binding.
  3. Actual investment: Once the agreements are in place, investors proceed to make the actual investment. The agreed-on investment amount is transferred to a blocked bank account, securing the financial commitment required for the company's planned initiatives.
  4. Legal formalities: The final steps involve legal formalities. A notarized general assembly is conducted to officially implement the capital increase, solidifying the changes agreed upon in the financing round. After that, an application is submitted to the cantonal commercial register to update the company's new capital structure.

Read the following pages to learn more:

Having a harmonious and mutually beneficial relationship with investors is key to the success of any venture. However, success is not always understood to mean exactly the same thing. A scenario may arise where founders consider a company sale at CHF 10 million as a triumph, whereas investors may deem an exit successful only if it results in a substantial return, such as 100 times profits on their initial investments. These different perspectives can potentially create challenges in decision-making and compromise the overall vision of the company.

Therefore, clarify your respective definitions of success, especially regarding the future exit. In practice, we see two types of clauses to align on a future exit:

  • Incorporating a threshold in the drag along clause: A drag along clause is a contract rule that lets majority shareholders, typically the founders, to force minority shareholders, typically the investors, to go along with a sale or a deal at set price. When we talk about incorporating a threshold in the drag along clause, it means adding a specific condition. In this case, founders can only exercise their right to force the investors to exit if the company's valuation reaches a specific minimum. This added condition ensures that the founders and the investors align their interests more closely, as it establishes a baseline for what is considered a successful exit.
  • Adding an exit clause: An exit clause entails that the company will proactively engage a mergers and acquisitions advisor after a designated time period to explore and facilitate an exit. By introducing a time-bound exit clause, both founders and investors have a structured and predefined mechanism for initiating the process of seeking potential buyers or partners, thereby streamlining the decision-making process surrounding the company's future.

Now, you already have a good understanding of funding rounds! If you're interested in delving deeper, feel free to explore our blog posts on the subject below.

Read more on the LEXR Blog

https://www.lexr.com/en-ch/blog/pre-money-post-money-valuation/

https://www.lexr.com/en-ch/blog/antidilution-protection/

https://www.lexr.com/en-ch/blog/liquidation-preference/

https://www.lexr.com/en-ch/blog/funding-round-term-sheet-transfer-restrictions/

https://www.lexr.com/en-ch/blog/startup-financing-vc/

https://www.lexr.com/en-ch/blog/liquidation-preference-introduction/

https://www.lexr.com/en-ch/blog/liquidation-preference-clause/$

Book a free call with us to discover our financing round package.







Updated 29 Oct 2024
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