Introducing AIR, the best seed funding tool to invest in France.
Accord d’Investissement Rapide — by TheFamily & SB Avocats
The smartest innovations are the ones that took years to emerge while they seem obvious once they’re explained with just a few words.
In order to get funded in France these days, one inevitably faces excessive red tape:
- Capital increases require the bank and the registry’s intervention
- Convertible bonds require an auditor and an accountant.
The only way to get funding in France is the classic round-table, which means forcing every investor to agree on the same specific terms. This method is profoundly inadequate when seeking seed.
What TheFamily and SB Avocats propose is a simple contract under private seal that allows start-ups to receive investors’ money directly on their current bank account, as and when subscriptions are made, through a legally verified mechanism.
The goal is to build an open-source and stable library, which is continuously revised based on user feedback and allows every entrepreneur in France to easily receive the funding they need.
In french >> http://www.meetair.co/
Y-Combinator is leading the way!
On December 6, the startup accelerator YCombinator introduced “SAFE” (Simple Agreement for Future Equity). This new early-stage investment tool comes up as an alternative to convertible notes which, despite their flexibility, have several drawback, particularly in terms of their duration, their remuneration rates and their accounting treatment. Like convertible notes, “SAFE” allows the investor to provide funding to a start-up in a very short timeframe, by (almost entirely) avoiding the painful debate around the start-up valuation and the investor’s preferential rights (shareholders agreement, ratchet, preferred liquidity, etc.). This funding method whose keywords are speed and flexibility are fulfilling an obvious need for start-ups from all countries: getting quick financial backing without having to mortgage their capital at a stage where their future is still full of uncertainty.
Why a new tool?
The proliferation of “ accelerators “ and the recent initiatives by some business angels bear witness to this trend and of start-ups’ enthusiasm for this kind of funding that is less institutional and more “entrepreneur friendly”. The private equity players in France have often been inspired by their Anglo-Saxon counterparts who have always paid great attention to what the market has to say and to financial and legal innovations. Paradoxically, French Law, which is often criticized, opens (in its nature as ‘written law’) new horizons that have unfortunately not yet been sufficiently explored.
The reason is simple: since legal concepts are essentially defined by the law, there has to be a bias within the court and tax administration’s interpretation. Practitioners are often forced to be overly cautious which makes them lose some of their ability to innovate, which is obviously regrettable.
In the end, is that possible in France?
Our country is full of young and talented entrepreneurs, whose ambition and dynamism have not been eroded by the current gloom. If our country is to stay in the running for start-up funding and innovation, in an increasingly global context in which French entrepreneurs have no boundaries and can live and work anywhere, we have to give them investment tools that are as highly adapted and reliable as those that they can find across the English Channel. SAFE is one of these tools and we are here to show that it is actually possible to make this tool ‘à la française’!
What does “Safe” consist in?
The idea is actually quite simple. Just like in the case of a convertible note emission, the investor doesn’t immediately become a shareholder. His ownership of capital is differed in time until a future event — be it a liquidity solution or a subsequent funding round. The underlying idea is that the company being at too early a stage to be fairly valued, and the level of surety required for an investment being far from attained, these discussions are pushed back to a more relevant time in the company’s life. A “SAFE” suscriber will therefore piggy-back on the investment conditions of an equity investor arriving at a later stage, while most often benefiting from a discount in price compared to this later round’s conditions. The “SAFE” investor is “sucked in” by conditions negotiated in the future and on his behalf by another investor focusing on venture rather than seed investments. “SAFE” is quite flexible, and can be implemented in a number of ways. It is possible to apply a price discount on price per share retained in the subsequent funding round. It is also possible to cap the conversion value. The difference with convertible notes is that “SAFE” is not considered as debt in the company’s balance sheet, and is not treated as such from an accounting point of view, nor does it suffer from its legal constraints (in terms of ratios, time frame, interest rates, etc.). SAFE is neither debt nor equity, but is closer to equity and allows its holder to become a company shareholder at conditions defined in the future.
How to translate “SAFE” in the French legal system ?
Convertible note emission in french law is a well known and used practice, but rarely in the context of a seed investment. The emission by a company which hasn’t had two end of the year statements approved requires the intervention of an accredited auditor, who has to verify the assets and liabilities listed on the balance sheet (Article L. 228-39 of the Code of Commerce). This legal constraints — which induces both structuring costs and lost time and energy in the investment process, is one of the main technical reasons why the use of convertible notes in the context of a startup’s early stage financing is not often used in France (besides the fact that investors are not particularly favorable to it). SAFE is not a bond emission but an intermediary security giving the right to the holder, under certain conditions, to equity shares. And one is perfectly free under French law to emit such instruments. Article L. 228-91 of the Code of Commerce stipulates that “a joint stock company can emit securities giving an access right to the company’s equity, or giving right to the issuance of debt security”. In is under that basis that a number of investment instruments have been created.
Among these, one is of noteworthy interest: the independent share subscription warrants, often denominated by the acronym “BSA” (Bons de Souscription Autonome). The BSA is a tradable security allowing its holder to subscribe to equity shares at a predetermined price. Like any intermediary instrument, the BSA itself can have its own subscription price, often well below the share price of the shares to which it gives access to, and which constitute the underlyer.
In these investment operations, the BSA is often used to organise a ratchet mechanism, allowing the investor protect his investment in case of a subsequent down round. This practice, universally accepted, consists in linking “BSA” warrants to the shares subscribed by the investor, allowing him in the context of a subsequent down round (valuation conditions below the post money valuation of his investment) to subscribe to a number of complementary actions at their nominal price, hence lowering the average price per share of his portfolio.
“BSAs” are also used to guarantee an access to equity to certain associates or employees, when the new business creator share warrants (BSPCE) regime is not accessible to them. But this use case remains very limited, accounting for the fiscal administration’s position who sees in this instrument a potential hidden remuneration mechanism if the BSA access price is too low (a difficulty which doesn’t present itself in the “SAFE” framework as we will see).
- The BSA are the perfect instrument
- They do not constitute a debt security and are therefore concerned by neither the bond emission region, nor by the rules framing the banking monopoly (BSAs are not redeemable in cash);
- They do not give an immediate right to equity and therefore constitute — before their exercise — a quasi-equity instrument;
- They can be created by all joint-stock companies, including simplified stock companies which are — in the very large majority of cases — the legal form of most startups;
- Their creation imply a decision by the shareholders, which can take the form of the simple signature of a private agreement (if the statutes allow it);
- There is no legal limit to theire lifetime ;
- The exercice conditions can be freely determined;
- Contrary to certain securities giving access to capital (such as the BSPCE mentionned above), BSAs are tradable and transferrable;
- BSA holders benefit from a protectiong organized by the lawmaker (article L 228-98 and following of the Code of Commerce).
How does one determine the number of shares to receive by exercising “AIRs” ?
To implement an AIR, a company simply needs to provide to the investor a unique BSA whose subscription price would be equal to the invested amount. This BSA — which we will call “AIR”, will give to its holder the right to subscribe — under certain conditions such as a subsequent funding round or liquidity occurance — at the nominal value to a certain number of shares, number defined by a mathematical formula. By maintaining the share capital very low and the number of shares very high, we are providing the tools needed to reproduce SAFE under French legislation.
