Solving doubts about startups and funding

Often, doubts arise regarding the terms used in the day-to-day life of a startup or about financing topics that may be of interest to us. For this reason, at Metricson, we have prepared this document with the most common questions.

What is the best way to attract investors for a project: Capital Increase or Convertible Loan?

The answer depends on various factors, but both options have their advantages.

A capital increase involves the immediate entry of investors into the share capital, usually through monetary contributions, while a convertible note starts as a debt that will later be transformed into equity in the future, normally linked to a subsequent round or a maturity date. Ultimately, both forms can lead to the same result: an increase in the company’s capital. The key lies in choosing the right structure based on the timing and the needs of the project.

What are the penalties for non-compliance with data protection laws?

Penalties for non-compliance with data protection laws can be significant. In the last year, more than 400 sanctions were imposed, with the AENA case being one of the most significant in our country (a 10 million euro fine, a record in Spain). It is essential to comply with data protection regulations to avoid legal and financial consequences.

Is it possible for startups or companies in early stages to be sanctioned for data protection law violations?

Yes, both startups and more established companies have faced sanctions for data protection law violations. Sanctions can arise from inadvertent breaches or claims filed with the Spanish Data Protection Agency (AEPD).

Is it necessary to register an “international trademark” if I want to operate in several countries?

First of all, it should be noted that there is no registration or trademark of an international or “universal” nature that grants global protection to all countries. The protection of intangible assets is subject to the principle of territoriality, which implies that exclusive rights over a trademark are only valid in the countries where it has been effectively registered.

That said, it is advisable to protect your trademark in the countries where you plan to operate. If your business strategy involves operating in various markets, it is essential to implement a phased protection strategy. For this, there are two main routes:

• National Registration: applying for protection directly before the intellectual property offices of each country of interest.
• Madrid System: managed by WIPO, this system allows for the submission of an international application that acts as an “umbrella” to simplify the process in more than 130 member countries. However, the result is not a single trademark, but a bundle of individual national registrations whose granting depends on the legislation of each State.

The international application allows you to extend the protection of your base trademark into territories belonging to the Madrid System.

It is advisable to establish a strategic expansion analysis of your brands where you wish to operate, as we already discussed in our post about the international trademark registration extension procedure.

Is it recommended to create a company in the United States or Dubai to attract foreign investors?

Currently, it is not necessary to incorporate a company outside the home country to attract foreign investors. Many investment operations involve international investors and are structured without the need to move the company to another country. It is crucial to evaluate the specific needs of your business and local regulations before making a decision. The key is not so much the jurisdiction, but the structure and the timing of the project.

What is Venture Debt and how does it work?

It is a form of financing widely used by startups. Unlike venture capital (venture capital), where investors receive shares in exchange for their investment, venture debt consists of loans that must be repaid with interest.

Venture debt is attractive to startups because it allows them to obtain additional capital without diluting the ownership of the founders and existing partners. This type of financing is particularly useful for companies that have already received venture capital investments, have certain commercial traction, but are not yet profitable or wish to retain more control over their company.

Venture debt loans usually have variable terms and rates, and are often backed by company assets such as accounts receivable, inventory, or intellectual property. In short, venture debt is a strategic tool to help emerging companies finance their growth and reach important milestones without significantly diluting share ownership.

Should a shareholders’ agreement be signed privately or before a notary?

A shareholders’ agreement can be signed as a private document between the partners and is fully valid. However, notarizing it (elevating it to a public deed) has several advantages:

• Certain clauses become enforceable against third parties, such as creditors, future investors, or official registries.
• Public deeds have executive status, and executive means that I do not have to prove the date, who signed it, that it exists, or the content of the agreement before a judge, which saves time and money along the way, especially in case of conflict.

It is important to take into account the fundamental aspects of the shareholders’ agreement so that everything is well-defined.

What is a bad leaver and a good leaver?

Both terms define the way a partner exits the company, generally linked to obligations such as non-competition or staying with the company for a certain period.

As we saw in our post on good leaver vs bad leaver:

• A “good leaver” is someone who fulfills their obligations and, upon leaving involuntarily or due to unforeseen circumstances, may retain certain rights over their shares.
• A “bad leaver” fails to fulfill their obligations and may face penalties, such as the forced sale of their shares.

What is considered “good” or “bad” must be clearly established in the shareholders’ agreement to regulate a partner’s departure at any given time.

What is liquidation preference in a shareholders’ agreement and how does it work?

Liquidation preference is a clause that guarantees certain investors receive a preferential return before the rest of the partners.

It usually applies to the last investors to join, who want to protect their investment against risks, ensuring they will recover their contribution (and sometimes a multiple of it) before the other partners receive any money. This tool is common in financing rounds and helps balance risk and return between investors and founders.

What is an anti-dilution clause and why is it key in an investment round?

The anti-dilution clause is a protection mechanism for the investor in the event of a “Downround” (a subsequent financing round with a lower valuation than the current one). Its objective is to adjust the investor’s price per share to mitigate the loss of value of their investment.

Anti-dilution can be a valuable tool for investors, but it can affect the capital structure and founder motivation. For this reason, it is common to negotiate limits or “caps” to ensure that founder dilution does not exceed a certain percentage.

What is a due diligence and when should I conduct it?

Before closing any investment or M&A transaction, you will almost always face a legal and financial audit process. To be prepared, it is vital that you understand what a due diligence is, as it is the exhaustive examination conducted by investors to validate the status of your startup and its risks. Likewise, you must be clear about when it is necessary to perform a due diligence, as anticipating this process will allow you to correct possible contingencies and project an image of greater strength and transparency to third parties.

These questions and answers address various aspects related to finance, entrepreneurship, and legal protection in the business world. It is important to understand these concepts to make informed decisions and mitigate risks in the development and growth of a company.

Do you have any questions that have not been resolved by this document? Do not hesitate to write to us at contacto@metricson.com. We look forward to resolving them!