Everything you need to know about closing: the main steps
The closing of the investment is an essential and strategic step in the financing process of a start-up. But many do not use this term in the same way... We explain everything in this article !
Closing is often perceived as a simple formality of transferring funds, but it is actually a complex process that requires rigorous coordination between the different parties involved. During this phase, investors and founders must ensure that all the terms of the agreement are met, whether they are financial clauses, governance rights or specific legal conditions. A well-prepared closing helps to avoid last-minute unforeseen events, thus providing legal and financial security for both parties.
For experienced entrepreneurs and hardened investors, mastering the intricacies and stages of closing is crucial to ensuring a successful financial partnership. This complex process marks the finalization of the agreement between the parties, establishing the necessary conditions for the transfer of funds and the entry of investors into the company's capital.
Preparation and negotiation of terms
Prior to a closing, the stakeholders prepare and negotiate the terms of the investment. This phase is essential to define the expectations and responsibilities of each party and ensure that the agreement meets the strategic objectives of the investors and the start-up.
Term sheet (TS): The process usually begins with the signing of a term sheet, a non-binding document that summarizes the key terms of the investment. For example, a term sheet may stipulate a valuation of €5 million for a 15% stake by the investor, with specific clauses concerning liquidation rights and preferential rights, the governance framework, information rights, etc.
Negotiations: The parties discuss and negotiate the detailed terms of the agreement, such as voting rights, protection clauses, exit terms, and reporting obligations. These negotiations can involve complex scenarios, such as the inclusion of anti-dilution "ratchet" clauses, which protect investors in the event of future fundraising at a lower valuation.
Due diligence
Due diligence is an in-depth investigation phase that precedes the closing of an investment and where investors carefully examine the financial, legal, and operational aspects of the start-up. For experienced investors, this step is crucial to validate the viability of the investment and identify potential risks.
Financial audit: Investors review financial statements, revenue forecasts, liabilities, and tax liabilities. For example, they can analyze the startup's burn rate and runway, ensuring that the company has enough cash to meet its next milestones without the risk of default.
Legal review: This step involves checking legal documents, contracts, patents, and potential litigation. Investors are looking for assurances that intellectual property is protected and that the company does not face any legal disputes that could jeopardize its stability.
Operational evaluation: Investors evaluate the start-up's operations, including the management team, business model, target market, and competition. They seek to understand how the start-up stacks up against its competitors and ensure that the founding team has the experience and skills to execute the business plan.
Legal and administrative formalities
Once the due diligence is completed, the parties work on the legal documentation necessary to finalize the investment, this is the beginning of closing. This step formalizes the terms of the agreement and ensures that all parties are legally protected (see phase 1 of the collaboration below).
The term sheet may be replaced by an investment contract or protocol: this document details and freezes the terms and conditions of the investment, including the rights and obligations of the investors and the start-up. In the start-up stage, this step is generally by-passed by the direct transposition of the TS or LOI to the shareholders' agreement (if existing) or the drafting of a shareholders' agreement in accordance with the TS or LOI. For example, an investment contract may include liquidation preference clauses, ensuring that investors recover their invested capital before ordinary shareholders in the event of a sale or liquidation of the company.
Amended Articles of Association: If the investment involves an equity stake, the company's articles of association may need to be amended to reflect the new ownership structures and shareholder rights. This may include changes to the composition of the board of directors and decision-making procedures.
Side Agreements: Additional agreements, non-compete agreements, BSA or BSPCE contracts, may also be required to protect the interests of investors and key persons/managers.
This phase consists of the legal and administrative formalization of the investment. It is composed of several key steps:
Extraordinary General Meeting (EGM) | The president or CEO of the start-up convenes an EGM with an agenda specifying the resolutions to be adopted for the fundraising. The shareholders then vote on the resolutions necessary to carry out the capital increase. This may include delegating authority to the board of directors to decide on the terms of the transaction |
Unilateral capital increase document (DUA) | This is a document drawn up by the company, often with the help of its legal counsel, which describes the precise terms of the capital increase (number of new shares, issue price, etc.). It is then signed by the company's legal representatives and investors |
Minutes of the General Assembly | The minutes (minutes) of the EGM are drawn up, recording the adoption of the resolutions relating to the capital increase and then registered in the company's register of deliberations |
Subscription and payment of shares | Investors subscribe for the shares by paying the funds to the company and the capital increase is then effective only when the funds are received |
Red tape | The deed of recognition of the capital increase (generally the minutes of the EGM and the DUA) is filed with the clerk of the commercial court. The company's articles of association are then amended and filed with the registry, and a notice of capital increase is published |
Updating the register of shareholders | The new shares are registered in the company's register of shareholders and each investor receives a subscription form confirming the number of shares subscribed |
Post closing | Update of the Kbis : following the capital increase, an updated Kbis extract is obtained to reflect the changes. The fundraising can then be announced publicly (often with a press release) |
These steps ensure that the fundraising complies with the relevant regulations and that all legal and administrative aspects are properly handled, ensuring the safety of investors and the company.
Closing is a complex but crucial step in the investment process, requiring careful preparation and close collaboration between investors and the start-up. For entrepreneurs and investors, mastering the closing stages ensures a smooth transition to a solid and prosperous business relationship. By ensuring that every aspect of the deal is carefully considered and implemented, the closing establishes a solid foundation for the future development of the start-up.
