by Erwan COATNOAN DE KERDU

Intangible Capital Value

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BSA-AIR to finance startups

Published on: 11/16/2022
By: Erwan Coatnan de Kerdu

Startups that do not want to evaluate their value right away can use BSA-AIR to finance themselves. How does this financing method work?

The principle of BSA-AIR

The BSA-AIR are securities, which give access to the share capital of a company in a deferred way. They have the particularity of valuing the warrants, and not the shares. During the start-up phase, a young start-up which wishes to raise funds without having to carry out the evaluation of the value of the company can have recourse to this principle. It issues with one or several BSA-AIR, which give the right to the purchasers to subscribe to a certain number of shares at their nominal value. All this is related to a future event, such as a new financing or a valuation of the company.
The BSA-AIR are considered as adjustable and flexible legal tools, in relation with the expectations of the investors and the startups. These two parties must therefore find an agreement in terms of the qualification of the event to come, the rate of discount, the duration of the exercise of the BSA-AIR as well as the transferability or not of the BSA-AIR. They must also agree on the setting up of a floor and a cap in order to control the valuation of the start-up.

The advantages of the BSA-AIR

What are the advantages of the BSA-AIR for the startup and for the investors? Why have recourse to this mode of financing?

For the startup

The founders of startups who do not wish to launch themselves into various formalities to develop their activity are numerous to have recourse to BSA-AIR. Thus, they can quickly obtain cash and pursue their projects. The legal documentation relating to the drafting of the shareholders’ agreement and the valuation of the company is postponed until a predefined event.
The conditions of use and exercise of the BSA-AIR are fairly free, and in particular in terms of transferability. The BSA-AIR are securities that it is possible to transfer. Nevertheless, the founders of the startup have the possibility of deciding on the non-transferability of the BSA-AIR by way of the articles of association, notably at the time of their issue. Thus, for the founders, the interest here is to be able to choose the investors, and to avoid seeing the BSA-AIR circulating without having the least control over their beneficiaries.

For the investors

For the startups, the issue of BSA-AIR is not subject to the immediate valuation of the latter. Thus, the parties negotiate much more quickly, which attracts many investors. When the subsequent event occurs, the negotiated discount rate will be applied to the valuation of the company. This enables the entry valuation of the investors in BSA-AIR to be determined with hindsight. The investors can also set up a valuation tunnel to frame the valuation of the startup. And this in order to determine a floor and a ceiling. From then on, the investors can better apprehend the number of shares of which they will be the beneficiaries. And also define the terms of subscription of future shares.

For the investors, the BSA-AIR allow to avoid two types of risk. Firstly, they can anticipate a possible dilution of the shareholding. In particular if the company gains more value than expected, thanks to the cap. In the same logic, it also allows them to cover the risks in case of a too low valuation. In this way, if the subsequent valuation exceeds the established cap, the shareholders take the cap valuation. And if the subsequent valuation is lower than the floor, then they take the floor valuation.
Of course, the legislator provides a mechanism to protect investors. Since they are not yet shareholders of the startup at the time of the purchase of the BSA-AIR.

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