The Keys to Successful Fundraising in France

Preparing and Legally Securing the Transaction for Founders and Investors

Fundraising for a French company always takes place within a structured legal framework: organizing capital, choosing financial instruments, preparing a credible business plan, and then negotiating with investors (funds, business angels, corporations, etc.).

In concrete terms, fundraising involves:

1. Preparing comprehensive documentation on the company, subsidiaries, assets, results, and prospects (presentation file, credible and well-argued business plan, and audits);
2. Defining a valuation and investment structure that is compatible with the founders’ objectives and investors’ constraints (choosing the right financial instruments);
3. Negotiating with investors (funds, business angels, corporate investors, family offices, etc.);
4. Implementing and negotiating a shareholders’ agreement, which will organize financial rights, control powers, exit clauses, and post-transaction governance;
5. Ensuring compliance with mandatory corporate law rules (collective decisions, nullity of deliberations, protection of partners) and, where applicable, financial law.

It is important to keep in mind that a judge may enforce the provisions of the agreement in the event of disputes between partners (enforcement of a promise to sell or purchase securities). This underscores the importance of anticipating conflict and exit scenarios from the outset of the first round of fundraising.

There are two challenges:

1. To legally secure the transaction (avoid nullities, disputes over governance, or the value of securities)
2. To make the company transparent and attractive to current and future investors.

For management, this typically raises three questions:

• What happens if we no longer see eye to eye?
• How can a partner be forced to leave?
• How can we prevent the next round of fundraising from completely diluting the founders’ holdings?

The purpose of this article is to present, in a practical manner, the main legal points to consider when raising funds under French law.

1. Preparing for fundraising: information, business plan, and structuring

1.1  Anticipating the capital impact of fundraising

This includes:

• verifying the existence of preemptive rights, approval clauses, non-transferability clauses, or exclusion clauses that may condition the entry of new investors;
• measuring the potential dilution of current shareholders based on the amounts sought and the valuations discussed;
• identifying any extra-statutory commitments (agreements, cross-promises, buyback or sale options) that could be affected by the transaction.

In practice, a pre/post-fundraising capitalization table (“cap table”), including instruments already issued or promised (BSPCE, BSA, convertible bonds, management packages, etc.), is the basic tool for visualizing who controls what and what happens in the event of an exit or liquidation.

1.2.  Organize a “self due diligence”

Most serious fundraising involves due diligence conducted by investors (legal, tax, social, financial, information systems, ESG risks, sometimes environmental).

To prepare for this phase, it is in the company’s best interest to organize a “self-due diligence” or target due diligence upstream:

• review of the main contracts (customers, suppliers, financing, leases, licenses, intellectual property);
• verification of the regularity of past corporate decisions and annual accounts (meetings, articles of association, securities transaction registers);
• identifying legal risks (ongoing litigation, non-compliance, critical dependencies).

This preparation makes it possible to:

• identify risks that could affect valuation (litigation, off-balance sheet commitments, defects in title to strategic assets, dependence on a customer or supplier);
• update documentation (articles of association, securities transaction registers, intra-group agreements, key employment contracts);
• anticipate guarantees or price adjustments that may be required during negotiations;
• correct certain irregularities in advance (updating registers, ratifying decisions);
• structure a transparent message to investors;
• limit the number and complexity of conditions precedent and liability guarantees.

A well-executed self-due diligence also allows management to maintain control of the timeline: fewer late “discoveries” mean fewer last-minute downward renegotiations.

At the same time, preparing a solid business plan allows you to present a projected operating account with realistic growth assumptions.

Investors will scrutinize:

1. the credibility of revenue assumptions,
2. the margins and EBITDA targets,
3. working capital requirements,
4. the company’s ability to meet its debts.

Increasingly, they are also looking at non-financial indicators (environmental, social, and governance impact) that may determine access to certain “green” funds or financing.

2. Structuring capital before investors come on board and choosing investment instruments

2.1  Clarify the rights attached to securities

A clear structure of the capital and the rights attached to the securities is crucial:

• distinguishing between common shares and, where applicable, preferred shares, and understanding the impact of the latter on financial and voting rights;
• anticipate the effect of any future issues (convertible bonds, convertible preferred shares, warrants, management packages) on the distribution of power and economic rights.

Tax case law reminds us that the issue of preferred shares by a subsidiary must be taken into account when assessing the real value of the common shares sold. This has a direct impact on the valuation discussed during a fundraising exercise.

A complex capital structure (multiple share classes, cascade of holding companies, hybrid instruments) should therefore be anticipated from an economic, tax, and regulatory perspective (beneficial owner, anti-money laundering, foreign investment control, where applicable).

2.2  Choice of investment instruments

2.2.1  Common shares, preferred shares, and convertible instruments

Fundraising can take several legal forms:

• capital increase in cash, through the issuance of common or preferred shares;
• issuance of instruments giving access to capital (stock warrants, stock purchase warrants, convertible bonds);
• use of bond financing or participating loans.

The choice depends on many factors (stage of development, investors’ risk appetite, liquidity horizon, and regulatory constraints).

In practice, a single round of financing may combine:

• a “traditional” capital increase for the main investors;
• BSPCEs to attract and retain key teams;
• bank or bond financing to supplement cash requirements.

Preference shares, for example, can be used to arrange:

• financial rights (dividend preference, priority in the event of liquidation, ratchet mechanisms);
• political rights (veto rights, appointment of members of corporate bodies);
• liquidity rights (joint exit rights, forced exit).

These arrangements must remain compatible with the company’s interests and the mandatory provisions of the Commercial Code.

2.2.2  Loans, quasi-equity, and hybrid instruments

When the entry of a new partner is not desired, or must be limited to preserve control, the company may resort to:

• bank loans (traditional or guaranteed);
• simple or convertible bonds;
• partner current accounts, which may be interest-bearing.

These instruments are subject to specific legal and tax regimes (interest rates, distribution rules, limitations in the event of losses) and may entail regulatory constraints (dividends, bank commitments, regulated agreements).

They must therefore be considered as part of an overall view of the company’s financing structure.

3. Secure governance and establish or negotiate a shareholders’ agreement

3.1.  Comply with the formal requirements of meetings

Regardless of the legal form (LLC, SAS, SA), fundraising often involves:

• an extraordinary general meeting (capital increase, amendment of the articles of association);
• sometimes the creation of preferred shares or the modification of their rights.

Failure to comply with the rules governing the convening of meetings, quorums, and majorities may result in decisions being declared null and void and undermine the investment.

It is therefore essential to:

• verify that the articles of association comply with the Commercial Code, particularly in SAS companies, where considerable freedom is allowed in terms of articles of association;
• comply with the deadlines for convening meetings, the voting procedures (in person, videoconference, or written consultation), and the majority rules.

3.2  Negotiating the shareholders’ agreement

The shareholders’ agreement (or shareholders’ pact) is the preferred instrument for organizing, beyond the articles of association, the relationships between founders, managers, and investors.

It generally covers:

• political rights (composition of corporate bodies, voting rights, veto rights);
• financial rights (dividends, preferential liquidation, ratchet);
• exit clauses (joint exit rights, forced exit, liquidity);
• personal commitments (non-competition, exclusivity, presence, “good/bad leaver” clauses).

Among the clauses that require particular attention during fundraising are:

1. Exit clauses (drag along, tag along, liquidity): balance between investor protection, freedom to sell securities, and the reality of the scenarios envisaged (who triggers it? When? At what price? On what valuation basis? With what recourse to an expert?).
2. Non-competition clauses: limitation in time and space, proportionality, and, when the partner is also an employee, mandatory financial compensation under penalty of nullity.
3. Bad leaver clauses: avoid them turning into prohibited financial penalties if the discount is too high and unrelated to actual damage, particularly for employee-partners or in clauses that are clearly unbalanced. Precisely define cases of “good” and “bad” departure (voluntary resignation, redundancy, serious misconduct, dismissal ad nutum, etc.) and provide for an objective pricing formula (multiple of the entry price, valuation by an expert, etc.).
4. Information and governance clauses (veto rights, committees, reporting): these must remain compatible with the company’s interests and not deprive the corporate bodies of their essential prerogatives.
5. Otherwise, minority shareholders could claim abuse of majority power or harm to the common interest of shareholders, which has been increasingly scrutinized by judges since the Pacte law.

3.3  Protection of shareholders’ rights and nullity of decisions

The right of all shareholders to participate in collective decisions (Article 1844, paragraph 1, of the Civil Code) is a rule of public policy, the violation of which may result in the nullity of corporate deliberations, including in SAS companies, based on Article L. 235-1 of the Commercial Code.

For fundraising, this implies:

• scrupulously respecting the rights of shareholders to information, notice, and voting;
• not excluding a shareholder through a “bad leaver” clause or forced transfer before the triggering event has been characterized and decided.

In fact, a partner can only be “removed” from the company (e.g., via a “bad leaver” clause, forced buyout, or exclusion) once the situation has been established and formally notified (disciplinary proceedings for an employee, finding of a contractual or statutory breach, regular corporate decision, etc.).

Implementing an exit clause too early (forced transfer, exclusion of the partner from meetings) exposes the company to a chain of nullities: a capital increase or dilution operation voted without this partner may be contested.

Before raising funds or reorganizing the capital, a manager must therefore verify that the relevant partners (founders, key managers) are in place in accordance with the exit clauses and internal procedures, to avoid any subsequent litigation that could call the entire operation into question.

3.4  Securing capital increase decisions

Beyond the issue of the agreement, capital increase decisions are the legal core of fundraising.

They generally involve:

• a decision by the competent body (meeting, board, president, depending on the articles of association);
• sometimes, the involvement of an auditor, a contribution auditor, or a special benefits auditor (when specific rights attached to certain securities or associates are provided for);
• compliance with preferential subscription rights or their removal in accordance with legal requirements.

Where preference shares or special benefits are provided for, the appointment of a special benefits auditor may be necessary to enable the meeting to make an informed decision.

Beyond these formal aspects, decisions to increase or reduce capital are assessed in light of the control of majority abuse.

The courts allow for significant transactions (accordion effect, highly dilutive increases) if they are in the interests of the company and the shareholders (restructuring of equity, necessary refinancing, contribution by all to losses).

In practice, a manager preparing to raise funds must:

• document the economic reasons for the transaction (financial situation, cash flow requirements, alternatives considered);
• clearly inform the shareholders of the dilutive impact (before/after tables, scenarios according to each shareholder’s participation in the round);
• and, as far as possible, provide for anti-dilution or preferential participation mechanisms for the founders in the agreement (right to subscribe on terms similar to those of new investors, dilution caps on one or two rounds, etc.).

A transaction perceived as imposing an unjustified sacrifice on a category of shareholders (particularly those who cannot keep up financially) may be challenged as abusive.

4. Guarantees and liability of the manager

In the context of fundraising, the manager is often required to:

• sign representations and warranties (“reps & warranties”) for the benefit of investors;
• be held civilly liable for their management in the event of misconduct (misleading information, decisions clearly contrary to the company’s interests);
• act as guarantor for certain commitments (bank loans, bonds).

It is advisable to:

• carefully negotiate the scope of the guarantees (trigger thresholds, ceilings, enforcement deadlines);
• ensure the accuracy of the information provided (accounts, forecasts, contracts);
• assess the personal risk taken in relation to any guarantees.

In the most serious cases, certain inaccurate or misleading information may also give rise to criminal liability (misrepresentation of accounts, fraudulent practices).

Conclusion

In summary, successful fundraising depends less on sophisticated structures than on a few straightforward best practices.

Prepare:

• A complete presentation file,
• A rigorous business plan,
• Self-due diligence to address risks before they are discovered by investors.

Anticipate:

• The capital structure (common stock, preferred stock, convertible instruments) and its effects on valuation, control, and beneficial ownership,
• The impact of future fundraising on founder dilution, with reasonable limits, appropriate subscription rights, and, where applicable, anti-dilution clauses.

Secure:

• An enforceable and balanced shareholders’ agreement (exit scenarios, drag/tag along, good/bad leaver, buyback or sale options, prior amicable procedures);
• Compliance with capital increases and post-transaction governance (bodies, committees, role of the auditor).

The more thoroughly a fundraising round is prepared, explained, and documented, the more likely it is to withstand economic uncertainties and the inevitable tensions between partners as the rounds progress.