Events Oct 17, 2017

The search for financing is one of the main challenges faced by many startups and entrepreneurs. It can be a daunting process, particularly the first time. To help you better understand this crucial step, Partech Shaker hosted Arnaud Touati and Harry Allouche, co-partners and co-founders of ALTO AVOCATS, a law firm dedicated to startups.

Public funding
France has a very proactive policy in terms of public funding, giving French startups potential access to a wide range of grants. But obtaining them is not easy as criteria are very specific. It is even more difficult on the European level. The French Investment Bank (BPI) is a key partner for any startup.

What is the BPI? The BPI receives state grants to support innovation in France. It tends to invest in projects with high innovative potential. When dealing with the BPI, you need to keep in mind the following:
- The BPI has more funds available at the beginning of the year than at year-end, so the earlier in the year you contact them, the better.
- As the number of applications in the Ile-de-France region is very high, think about registering in other regions to benefit from local BPI funds. For example, the Rouen BPI recently announced in a press release that they were looking to finance innovative projects, as they had a lot of funds available.
- The BPI doesn’t invest twice in the same sector.
- The BPI intervenes at all phases of the development of your company.
- Beware of temporality: after the reception of your file by a BPI agent (analyst), it will take about one month to study the eligibility of your file and then another month to refer it to a Finance Committee. In all, the process will take between 2 and 3 months.
- The appointment with the BPI agent is decisive: prepare it carefully, alone or with the help of a broker or a consultant (some get paid only if you get a result). If the BPI doesn’t believe in your project, you stand no chance of getting funding. Come to the meeting well-armed with your business plan and some tracking metrics that demonstrate the efficiency of your model to justify your level of valuation (sales, number of customers, competitors, orders...).
- You can also access other public funds such as Research Tax Credit for example, but keep in mind that these all give rise to a tax audit within three years of fundraising.

Private VC or BA funding

Company valuation is a crucial issue. You need to know the value of your company and the level of participation you are willing to sell to an investor.
In general, you give up between a 20% and 30% stake of your capital to an investor entering your company capital. No more, because if you yield too much in the first round, you will be very diluted on a potential second round. No less, because if the valuation is too high compared to the investor participation, then the investor may set very tough targets. If ever you don’t reach your targets, you run the risk of the investor taking back some capital at the nominal value of the units, or that he may require a new round of fundraising.

Which investor is best for you?
On primary investments, you can have access to individuals interested in tax exemption (ISF and IR). To benefit from tax deductions, these small investors invest up to €30/40/50,000 in startups. You can cumulate them and then group them in an investment holding to avoid having a dozen investors in your capital.
For amounts ranging from € 250,000 to € 800,000, there are three types of investors:
- Sleeping partners who invest without interfering in the functioning of your company
- Active investors who interfere in your business
- Investors who, beyond the funds, add value to your business by giving you access to contacts, markets, synergies ...: this is the jackpot but you risk ending up with an investor who will interfere too much in your business!

Where can private investors be found? In investor clubs, investor associations, at events, or via banks and law firms.
Are incubators useful? Yes, if they offer tailor-made support to structure your project at the beginning. Accelerators too are useful for gaining momentum to fundraising. They can help you define the right timing by arriving neither too early or too late and by helping you to gain traction (proof of your concept).

Is fundraising an end in itself?
Absolutely not. Some startups use self-financing or public funding and that's fine too. Timing is fundamental. If you raise funds when you don’t need cash, you could end up with someone you don’t know asking you for accounts and wanting a return on investment. Remember that this money doesn’t go into your pocket but into your company. Today, there is a race to find the biggest fundraiser. You should be aware that fund raising is a capital increase resulting in the issuance of new shares that will dilute your participation. The better your results, the higher your valuation should be. Remember that the logic of an investor is to sell its shares over time. This is even more true with venture capitalists, who will invest over a period of 5 years, which may require you to approach a merchant bank to find an exit.

The importance of the partnership pact

Choosing the right investor is not enough: you also need to find the right balance between capital and power, in other words the right balance between the legitimate interests of the investor and of the project holder. All of these elements should be stated in the Associates Pact. There are an unlimited number of clauses, but you will find below some key clauses to remember.

The redemption clause is a dangerous one! If ever you have over-valued your company, the investor feels that you will not succeed and will hence take a large slice of the power.
Dip or double dip clause: a clause that guarantees the investor against any failure by stipulating that if the company fails, it can put the company into bankruptcy and be in a priority position to recover its funds. An investor who is not prepared to take risks is bad news!
Exclusivity clause: this very important clause stipulates that the project holder must focus on one project and one project only.
Shot gun clause / US Clause: if the partners no longer want to work together after a number of years, but still want the project to continue, this clause obliges one of the partners to exit by agreeing to an offer for his shares at a price that he must accept. Otherwise, he must outbid.

Another useful tip to keep in mind: beware of an investor who lets his lawyer manage everything.


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