How to raise funds for your business

For every company director, financing is a permanent challenge. Whether to launch an activity, to accelerate growth or to get through a difficult period, raising funds requires rigorous preparation and a precise knowledge of the different legal mechanisms available. This guide sets out the practical steps and legal obligations involved in a successful fundraising, from the first steps through to the signing of the definitive agreements.

Identifying financing needs and choosing the appropriate legal structure

Before taking any step, the entrepreneur must quantify financial needs precisely and check that the legal structure is able to accommodate investors. This stage determines all the financing options available.

Analysing the financing need

The preliminary financial analysis determines the success of the fundraising. It includes drawing up a detailed business plan covering three to five years, with a monthly cash flow forecast for the first two years. This projection must distinguish working capital requirements from investment in fixed assets.

For a business being set up, the initial financing plan identifies the contributions needed to start: formation costs, first stock, equipment, start-up cash. For an existing business, the analysis concerns growth or restructuring needs.

Checking the compatibility of the corporate form

Not all legal forms can easily accommodate external investors. The simplified joint-stock company (société par actions simplifiée, SAS) offers the greatest flexibility for organising the entry of investors thanks to the freedom it allows in the articles of association. The articles may provide for preference shares, special voting rights or specific exit clauses.

The public limited company (société anonyme, SA) is also suitable, in particular for large-scale projects contemplating a stock exchange listing. By contrast, company forms such as the EURL (single-member limited liability company) or the SARL (private limited liability company) limit the scope for changes to the capital and complicate the entry of multiple investors. The differences in governance and tax regime between these two forms are compared in our guide on choosing between an SAS and a SARL.

Preparing the conversion if necessary

If the current legal form does not allow investors to be accommodated on good terms, a conversion is required. The conversion of a SARL into an SAS, for example, requires a unanimous decision of the partners and the involvement of a conversion auditor (commissaire à la transformation) to certify that the company's equity covers at least the share capital.

This conversion generates costs (legal fees, formalities, statutory publicity) but greatly facilitates later negotiations with investors.

Mastering the different types of financing

The business financing landscape has diversified considerably. Each type of financing meets specific needs and involves distinct legal obligations. On the types of investor and how they invest, see our analysis of the legal and financial mechanisms of fundraising.

Capital increase by cash contribution

A capital increase remains the preferred method of financing for growing businesses. It consists in creating new shares or company units in return for cash contributions. This transaction dilutes the holding of existing partners in favour of the new investors.

The procedure requires respect for the pre-emption right of existing shareholders or partners, unless expressly waived or removed by decision of the extraordinary general meeting. For an SAS, the articles of association may organise these arrangements freely.

A capital increase requires the involvement of a contribution auditor (commissaire aux apports) to certify the value of any contributions in kind and to check that the increase does not harm the company's interests.

Issue of convertible bonds

Convertible bonds (obligations convertibles, OC) make it possible to raise funds without immediate dilution of the capital. The investor acquires a claim against the company, together with a right to convert into shares on predetermined terms.

This formula appeals to investors because it combines the security of a debt claim with the capital-gain potential of an equity stake. For the company, it defers dilution and generally offers more advantageous financial terms than a conventional loan.

The issue of convertible bonds falls within the competence of the extraordinary general meeting and must comply with the publicity rules applicable to capital increases.

Share subscription warrants

Share subscription warrants (bons de souscription d'actions, BSA) are financial instruments giving the right to subscribe for future shares at a set price and within a set period. They are often issued in addition to a main transaction in order to incentivise investors.

BSAs allow investors to benefit from the company's future growth without immediately tying up large amounts of capital. For the company, they represent potential deferred financing.

Crowdfunding

Crowdfunding (financement participatif) has had a legal framework since the Ordinance of 30 May 2014. Three forms coexist: donations, loans and equity investment.

Equity crowdfunding makes it possible to raise funds from the general public through platforms approved by the Autorité des marchés financiers (AMF, the French financial markets authority). The platforms must comply with strict obligations of information and protection of retail investors.

This method is particularly suitable for young innovative companies seeking to raise limited amounts while building their profile.

Structuring the fundraising legally

The success of a fundraising rests on a rigorous legal structure that protects the interests of all parties and facilitates negotiations.

Preparing the legal documentation

Preparing a fundraising begins with a legal audit of the company. This internal due diligence identifies points requiring attention: regularity of meetings, updating of the statutory registers, compliance of commercial contracts, and the employment and tax position.

The company must set up a virtual data room containing all the legal, financial and commercial documents that investors will examine: updated articles of association, minutes of meetings, certified annual accounts, main contracts, and the tax and employment position.

Negotiating the investment clauses

The negotiations cover many legal and financial aspects. The valuation of the company determines the percentage of the capital transferred in return for the investment. This valuation relies on different methods: turnover multiple, discounting of future cash flows, and comparison with recent transactions.

The clauses protecting minority investors are of crucial importance. Information rights guarantee access to the accounts and the strategy. Veto rights protect on important decisions: capital increases, significant borrowing, disposal of assets, and amendment of the articles of association.

Liquidity clauses provide for the terms of the investors' exit. The tag-along right allows minority holders to sell their securities where the majority holders sell. The drag-along right allows the majority holders to compel the minority holders to take part in a sale.

Organising governance

The entry of external investors generally requires the governance to be restructured. In an SAS, the articles of association may create different categories of shares with specific rights: ordinary shares, preference shares, and priority dividend shares.

The composition of the management bodies often changes in order to involve the investors in strategic decisions. A supervisory committee or an enlarged board of directors allows this representation without making the running of the company excessively cumbersome.

Securing the commitments

Shareholders' agreements supplement the articles of association by organising relations between partners. These agreements outside the articles provide for reciprocal commitments: non-competition by the founding directors, an obligation to sell the securities on departure, and valuation mechanisms for internal transfers. The nature and regime of these agreements according to the corporate form are dealt with separately in our article on the shareholders' agreement and the partners' agreement.

The warranties given by the selling directors cover risks predating the investment: legal regularity, accuracy of the accounts, and absence of hidden liabilities. These warranties are generally accompanied by negotiated caps and thresholds.

Complying with regulatory obligations

Every fundraising must comply with a strict regulatory framework that varies according to the amounts, the number of investors and the method of placement.

Checking whether financial markets law applies

The French Monetary and Financial Code defines the conditions of application of the financial markets regulations. A public offer of financial securities is in principle subject to the preparation of a prospectus approved by the AMF, save for specific exemptions.

The following are exempt: offers addressed exclusively to qualified investors, offers of less than €8 million over twelve months, or offers addressed to fewer than 150 natural or legal persons per Member State.

The notion of qualified investor covers credit institutions, investment firms, approved investment funds and natural persons meeting certain criteria of wealth or competence.

Complying with disclosure obligations

Even where a prospectus is not required, the issuer must provide investors with complete and truthful information on the company and the proposed transaction. This disclosure obligation covers the financial position, development prospects, the risks identified and the intended use of the funds raised.

The civil and criminal liability of directors may be engaged in the event of misleading information or fraudulent concealment that influenced the investment decision.

Managing the administrative formalities

A capital increase requires precise formalities to be completed within tight time limits. The decision to increase the capital must be taken by the extraordinary general meeting or by delegation to the board of directors.

The funds must be deposited with an approved depositary (bank, notary, Caisse des dépôts) before the increase is definitively recorded. The statutory auditor, if there is one, prepares a report on the transaction.

Registration with the registry of the commercial court (greffe du tribunal de commerce) within the month following the meeting makes the transaction enforceable against third parties. Failure to register within the time limits exposes the directors to criminal penalties.

Optimising the transaction for tax purposes

The tax structuring of the fundraising significantly influences its cost and its attractiveness to the various parties.

Benefiting from investment support schemes

Several tax schemes encourage investment in unlisted companies. The tax reduction for investment in SMEs (the Madelin scheme) allows individuals to deduct from their income tax 18% of the sums invested in the capital of eligible companies, up to an annual limit of €50,000 for a single person.

The IR-PME scheme, governed by Article 199 terdecies-0 A of the French General Tax Code, offers a tax reduction of 25% of the payments, capped at €50,000 a year for a couple. These benefits can be combined subject to certain conditions.

To benefit from these schemes, the company must meet strict criteria: fewer than 250 employees, turnover of less than €50 million, and the carrying on of a commercial, industrial, craft or professional activity.

Structuring capital gains on disposal

Directors who sell part of their securities during the fundraising can optimise the taxation of capital gains. The holding-period allowance progressively reduces the tax on capital gains according to how long the securities have been held.

The business capital gains regime may apply if the directors hold more than 25% of the capital or perform a managerial function. This regime offers specific allowances and conditions for deferral of taxation.

Organising employee share ownership

Involving employees in the capital often facilitates fundraising by showing that the teams support the project. Stock options and free shares are the main incentive tools.

The award of free shares allows directors and employees to acquire securities without any outlay, subject to conditions of continued presence and sometimes of performance. The favourable tax regime for these awards increases their attractiveness.

Anticipating difficulties and securing the transaction

Several pitfalls can jeopardise a fundraising. Anticipating them makes it possible to avoid them effectively.

Managing deadlock situations

Negotiations may founder on differences of valuation or on governance demands that are incompatible with the directors' objectives. Preparing alternatives (bank financing, self-funded development) strengthens the negotiating position.

Mediation by an experienced adviser can unblock tense situations by proposing creative solutions: issuing different categories of shares, phasing the investment, and valuation adjustment clauses.

Securing conditions precedent

Investment undertakings generally contain conditions precedent protecting the investors: absence of a significant adverse event, confirmation of the due diligence findings, and obtaining regulatory authorisations.

Precise drafting of these clauses avoids divergent interpretations capable of calling the transaction into question. A detailed timetable sets the deadlines for satisfaction of the conditions and for definitive completion.

Providing for exit mechanisms

Investors look for visibility on how they will exit their investment. Liquidity clauses provide for different scenarios: stock market flotation, trade sale, and buy-back by the directors.

Valuation mechanisms for internal transfers avoid later deadlock. An adversarial expert valuation or reference to market multiples are the most frequent methods.

Frequently asked questions

How long should be allowed to complete a fundraising?

A fundraising generally takes between six and twelve months depending on the complexity of the project and the maturity of the company. This period includes preparing the documentation (2 to 3 months), the search for investors and negotiations (3 to 6 months), and then legal finalisation (1 to 3 months). Companies that are already structured and have a track record may shorten these periods.

What percentage of the capital can be sold in a first fundraising?

There is no absolute rule, but directors generally retain the majority in the first rounds of financing. The sale ranges between 15% and 40% of the capital depending on the financial needs and the valuation. Beyond 49%, the founders lose control, which complicates later rounds and reduces their long-term motivation.

Are personal guarantees from directors systematic?

Personal guarantees depend on the profile of the investors and the amount raised. Professional investment funds favour guarantees that are limited in time and amount, covering legal regularity and the accuracy of the accounts. Individual investors may demand wider guarantees. In every case, these guarantees are the subject of detailed negotiation.

Can a SARL easily accommodate external investors?

The SARL has significant constraints: mandatory approval for transfers of company units, joint and several liability of partners for the company's debts in the event of mismanagement, and rigid operating rules. Conversion into an SAS greatly facilitates the entry of investors thanks to the freedom in the articles of association and the limited liability of shareholders.

Is it mandatory to use an intermediary to raise funds?

The involvement of a specialist adviser (investment bank, fundraising firm) is not mandatory but is strongly recommended. These professionals bring their contacts, their valuation expertise and their experience of negotiations. Their fees, generally calculated as a percentage of the funds raised, are justified by the improvement in terms and the legal security of the transaction.

Are crowdfunding platforms suitable for every project?

Crowdfunding is particularly suitable for innovative B2C companies able to mobilise a community. The amounts raised generally remain limited (a few hundred thousand euros at most). The regulatory constraints and the disclosure obligations towards many small holders can complicate the later management of the company.

How is a company with no track record of results valued?

For start-ups, the valuation relies on market potential, the management team, the technology developed and the first commercial indicators (letters of intent, prototype, first customers). Methods based on comparison with similar companies or on discounting forecast cash flows remain approximate. Negotiation and the balance of strength between the parties strongly influence the final valuation.

A successful fundraising results from painstaking preparation combining rigorous financial analysis, an appropriate legal structure and a targeted communication strategy. Companies that anticipate these issues and surround themselves with experienced advisers maximise their chances of raising the capital needed for their development on optimal terms. In view of the growing complexity of financial structures, dedicated legal support becomes indispensable to secure the transaction and protect the interests of all those involved.