Why Finance Lawyers are Crucial to Startup Success

1.- Expertise in Financing:

Lawyers understand the complexities of the funding sources available to startups, such as Business Angels, Venture Capital Funds and crowdfunding.

 2.- Understanding and proper use of the usual “jargon”:

Debt restructuring and refinancing, like any other discipline, has its own jargon. Jargon, anglicisms, specific terms… all constitute barriers to entry. It is impossible to keep up to date. And it is impossible to cover all the terms. We attach in the following link, a dictionary in which Startups can solve some doubts about the usual language, in case they are already in the process of financing.

https://www.ilpabogados.com/diccionario-sobre-restructuracion-yrefinanciacion/

3.- Standard types of startup financing

• Bootstrap financing: In the early stages, founders contribute their own money or that of their immediate environment (FFF) to finance the company. This can include personal savings and assets. Bootstrap comes from the English expression “to pull oneself up by one’s bootstraps”, which means to improve oneself by one’s own efforts without external help.
• Business Angels: Business Angels (or BANs) are financially sound individuals (not corporations) who are able to provide early-stage funding to a company in exchange for an equity stake. They often offer guidance and connections in addition to capital.
• Venture Capital: Venture Capital firms invest in start-ups and growth companies in exchange for a significant equity stake. While Venture Capital invests in companies with high growth potential and high risk-taking, Private Equity seeks more stable investment targets and lower risk-taking for the investor.
• Crowdfunding: Crowdfunding platforms allow companies to raise money from a large number of individual investors online. It can be a source of early stage funding.
• Bank loans: Companies can obtain loans from banks or other financial institutions to finance specific operations or projects. Loans can be secured or unsecured.
• Debt Finance: Bond issues and corporate debt are sources of debt finance used by larger companies to raise large sums of money.
• Private Equity Financing: SOEs can sell shares to institutional and private investors on the stock market through share issues.
• Seed Funding: In the early stages, companies can seek seed funding to validate their ideas and business models.
• Series A, B, C, etc. funding rounds: As the company grows, it may conduct successive rounds of financing, such as Series A, Series B, etc., to raise additional capital.
• Convertible Loan Financing: Convertible loans are loans that can be converted into shares of the company at a later date, often in a subsequent financing round.
• Grants and Government Aid Programmes: Some companies may qualify for grants and government aid programmes designed to encourage innovation and development.
• Corporate Equity Financing: Large companies can invest in startups and acquire them as part of their innovation and growth strategy. This acquisition is usually implemented through processes known as “Build up” or “Add on”.

4.- Syndicated Finance Contracts:

Although this type of contract tends to be more suitable for more established companies, they are sometimes also used to finance start-ups:

Syndicated finance contracts are financial arrangements in which a group of lenders (syndicate) provides funds to a borrowing entity. This type of financing is common in large transactions such as corporate loans, infrastructure projects and major acquisitions. The standard structure of a syndicated finance contract typically includes the following elements:

1. Lead Arranger: One or more banks assume the role of lead arranger and take the lead in organising the syndicate of lenders. The lead arranger is responsible for coordinating the transaction and may be involved in the evaluation of the borrower.
2. Borrower: The entity seeking funding is the borrower. It can be a company, a government entity or a non-profit organisation.
3. Lender syndicate: The lender syndicate is composed of multiple financial institutions that will provide the loan funds. Lenders can be commercial banks, investment funds, insurance companies, among others.
4. Loan Documentation: The syndicated finance contract includes detailed documentation setting out the terms and conditions of the loan. This may include the loan amount, interest rate, repayment terms, collateral, financial restrictions and other clauses.
5. Key dates: The contract sets out key dates, such as the closing date (when funds are disbursed), interest payment dates and the maturity date of the loan.
6. Security and collateral: The borrower may provide security or assets as collateral to secure the loan. This may include stocks, property, accounts receivable or other valuable assets.
7. Interest rate: The interest rate to be applied to the loan is specified. It can be fixed, variable or based on a reference rate, such as LIBOR.
8. Amortisation: The contract defines how the loan will be amortised, i.e. how the borrowed funds will be repaid. This can be through regular principal payments or an instalment repayment at the end of the period.
9. Financial covenants: Covenants are financial restrictions that the borrower must comply with during the life of the loan. They may include borrowing limits, restrictions on dividend distributions and other financial requirements.
10. Lenders’ Commitments: Lenders undertake to provide the financing agreed in the contract and to respect the terms and conditions set out in the contract.
11. Change of Control Provision: In some cases, the contract may include a provision requiring early repayment of the loan if there is a change of control of the borrower.
12. Majority Approval Clause: Major changes to the terms of the contract generally require the approval of a majority of the lenders in the syndicate.
13. Syndication process: The mandated bank coordinates the syndication, which involves finding lenders interested in participating in the loan and allocating their commitments.
14. Collateral and Guarantee Structure: If collateral or guarantees are provided, detail how these assets will be managed and protected for lenders.

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Debt restructuring and refinancing, differences and concepts

The purpose of refinancing is to replace an existing loan with a new loan. Refinancing is carried out to obtain more favourable conditions. Restructuring is usually associated with short-term cash flow stress. The causes may be cyclical or derive from a lack of financing.

5.- Negotiation of Agreements:

They help negotiate investment agreements, including company valuation, investor rights and protection clauses.

6.- Regulatory Compliance:

They ensure that transactions comply with applicable financial and legal regulations, which is essential to avoid legal problems.

7.- Intellectual Property Protection:

They help protect the startup’s intangible assets, such as patents, trademarks and copyrights, which can be valuable in financing rounds.

8.- Advice on Financing Strategy:

They offer strategic guidance on the most appropriate financing structure for the startup’s needs and objectives.

9.- Dispute Resolution:

They are prepared to address potential disputes with investors or other stakeholders in the financing process.

10.- Relations in Industry:

They have connections in the investment community and can help startups connect with key investors and resources.

11.- Management of Legal Documentation:

They are responsible for the preparation and review of all legal documentation related to the financing, including contracts, investment agreements and more.

Collaboration with funding lawyers is essential to ensure that startups obtain the necessary funding in a legal and effective manner, which can be a determining factor in their long-term growth and success.

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