Sara Barona is a lawyer specialized in Corporate Law, with experience in corporate transactions, including mergers and acquisitions, corporate restructuring, and investment rounds, as well as in drafting and negotiating commercial contracts. She graduated with a double degree in Law and Business Administration at the Autonomous University of Barcelona in 2007. She started her professional career in Garrigues Abogados in 2007 and she joined the Barcelona office of Osborne Clarke Spain in June 2012.
Can you briefly describe what the training you provide for entrepreneurs who follow Cleantech Camp consists of?
It consists of a technical training session on the most relevant legal aspects that need to be considered during the investment process in a start-up. The objective is to walk the participants through an investment process from a legal perspective. From the beginning of the project, the incorporation of the company, the need for a shareholders’ agreement and the moment when the financing is obtained, seeing in each case the possibilities that the Law includes, as well as the different scenarios that corporate lawyers have to deal with in our day-to-day.
What steps should any entrepreneur follow to attract investment?
It depends on the type of investor but, in general, we can divide them into four stages:
1. Analyze the company’s real funding needs to determine the adequate amount and type of funding. Therefore, the company must prepare a business plan and know how it can access the market (route to market) as well as which are its competitors. In this stage, it is also essential to define/appoint the team that will be part of the project.
2. Determine in advance how much money the company is going to raise and what percentage of capital are you as a founder willing to give in exchange for the investment.
3. Prepare and address the project presentation (pitching). You should have a minimum viable product (MPV), as well as a visual presentation of the company to expose customers. At this stage, it is also important for technological start-ups to publicize the maturity level of their technology (TRL).
4. Analyze potential investors interested in the project. If we are fortunate enough to have several investors interested in our project, we need to know their investment record, their sectors of experience, their relationship with other entrepreneurs, and their objectives when investing, among others. The investor’s and the entrepreneur’s visions regarding the project must be aligned at least in their main aspects. It is also desirable that both the investor’s and entrepreneur’s phases (timing) match. For example, a very early stage project would hardly fit in with a fund that is close to its liquidation phase.
When is the right time, in your project development phase, to launch the investment quest?
During the training sessions, we never get tired of repeating a basic recommendation for entrepreneurs: you should never wait for the company to need the money to begin contacts with potential investors. The best thing is to make yourself known and start networking as soon as possible, to give visibility to your project from the very beginning, and take advantage of any opportunity to grow your contacts and participate in events and talks focused on entrepreneurs. If the type of project allows it, the best thing is to start by developing the business with your own resources: request financing from Friends & Family (people close to the entrepreneur who trust the project and are willing to risk their money) or opt for public grants. At a later stage, once the project is already generating value and the business model has been validated with sales, it is when the search for financing by more professional investors is advised (typically through Business Angels or venture capital funds, depending on the size of the investment required).
What are the most important aspects that an entrepreneur should consider when sitting at a negotiating table with investors?
The first essential aspect to negotiate between entrepreneur and investor would be the amount of the financing and its consideration (usually, the percentage of the company that the entrepreneur is willing to offer in exchange). To do this, both parties must first reach an agreement on a key point: how much is the company worth before the investment (that is, the pre-money valuation). That is the moment when the entrepreneur must show the investor a well-prepared business plan in which they clearly justify where and how the money invested will be used. Finally, the meeting should focus on those legal issues related to the investment that will later be included in the investment agreement and in the shareholders’ agreement, which is essentially agreements that regulate the economic and political relations that will govern the entrepreneur and the investors in the company.
When a contract is formalized, what are the agreements/clauses that an entrepreneur must pursue?
The investment agreement will govern some of the rights of the investors and, among others, the right to receive compensation if there is a breach in the representations and warranties granted in the agreement. It is important to limit the liability of both the founders and the company and make sure that the representations and warranties given are correct, intending to avoid any potential claims.
The shareholders’ agreement will govern the relations between the investors and the current shareholders (including the founders) who are the company’s stockholders. In other words, it will set out the political and economic rights of the investors based on their equity interest in the start-up. Among the political rights are those concerning the participation in the company’s governing bodies, the right to receive information about the business, protective provisions, or the right to veto certain reserved matters whose approval could have an impact on the investment. As for economic rights, these will have a financial content and they depend on the development of the project. The type of rights granted to investors will be based on their category and the maturity of the company. Usually, institutional investors (venture capital funds) obtain specific protections on the economic value of their investment: preferential liquidity rights and anti-dilution rights.