Capital increases: a growth driver that can be managed with precision
A capital increase is an operation by which a company issues new units or shares to strengthen its equity. It can meet various objectives: financing growth or a strategic investment, welcoming a new partner or investor, strengthening the financial credibility of the company with banks, or even integrating a key employee into the capital.
But the capital increase has an unavoidable counterpart: the dilution of existing partners. Each new shareholder or partner who enters the capital automatically reduces the founders' share, unless the founders participate in the increase proportionately. This dilution is not only economic — it can also affect the balance of voting rights and, ultimately, the control of society.
Valuation: the central element of any negotiation
The valuation of the company at the time of the capital increase is the parameter that directly determines the level of dilution of the founders. The higher the valuation, the fewer shares new investors get for a given amount — and the fewer the founders dilute themselves.
Several valuation methods coexist in practice:
- The Comparable method, which evaluates the company in comparison with similar listed or recently sold businesses;
- The discounted cash flow method (DCF), which projects the company's future flows and updates them at a rate that reflects risk;
- The Patrimonial method, based on the net value of the company's assets, often more suitable for capital-intensive companies;
- for start-ups in the early stages, the valuation is often more qualitative, based on market potential, the quality of the team and the progress of the product.
Valuation is the result of a negotiation. There is no single or universally recognized method, and professional investors (venture capital funds, business angels) have their own analysis grids. Mastering valuation methods is essential to negotiate from a position of strength.
Valuation is not an objective number. It is the result of a negotiation, and it directly determines how much of your company you are giving away at each round of funding.
Preferred subscription rights
In joint stock companies (SA, SAS), the partners generally benefit from a preferential subscription right (DPS) allowing them to participate in the capital increase up to their current participation and thus preserve their share. This right may be abolished or reduced by decision of the extraordinary meeting, in particular to allow the entry of a third party investor under negotiated conditions.
In LLCs, new shares should in principle be offered in priority to existing partners. The removal of this priority requires a specific decision by the Assembly.
The mechanisms to protect against dilution
As part of a fundraiser, founders can negotiate contractual mechanisms to protect them against excessive future dilution.
Anti-dilution clauses
Les anti-dilution clauses are included in shareholders' agreements. They allow the investor to recover additional shares if a subsequent capital increase is carried out at a lower price than he paid (down round). These clauses protect the investor, but they can backfire on the founders in the event of financial difficulty.
BSPCE and BSA
Les Business creator share subscription warrants (BSPCE) allow employees and managers to be granted the right to subscribe for shares at a price fixed in advance, generally lower than the future market price. They allow teams to be interested in the success of the company without immediate dilution, while benefiting from a favorable tax regime.
Les stock warrants (BSAs) operate in a similar way but can be attributed to third parties (advisers, investors), and do not benefit from the specific tax regime of BSPCEs.
The founding ratchet
In some advanced negotiations, founders may obtain a mechanism for Ratchet allowing them to recover additional actions if performance objectives are met. This system, which is symmetric with anti-dilution investor clauses, makes it possible to reward founders in case of success.
The legal structure of the transaction
The capital increase requires the respect of a precise formalism, which varies according to the social form:
- convening of the extraordinary general meeting and adoption of capital increase resolutions;
- drafting of issuance documents (subscription form, meeting minutes);
- updating the articles of association to reflect the new capital;
- filing at the registry of the commercial court and publication of legal announcements in a newspaper;
- negotiation and signing of the shareholders' agreement, which organizes the rights and obligations of the parties beyond the articles of association.
A capital increase is not just a financial transaction. It is a step that redefines the balance of power in society. The shareholders' agreement is often more important than the articles of association themselves.
The firm Aknin Associés assists founders and investors in the legal structuring of their fundraising operations: valuation, negotiation of terms, drafting of shareholders' agreements and implementation formalities.
