Private Equity: Episode 21 – The Different Financial Instruments

In Episode 16, we reviewed the first step to financing a startup, which concluded with the negotiation of the final investment terms. Today, we’ll explore some commonly used financial instruments in both venture capital and private equity. There are two main categories to distinguish:

1. Equity Instruments: These give access to ownership in the company.
2. Non-Equity Instruments: These provide a right to compensation without granting ownership of the company.

Equity Instruments

Equity instruments include ordinary shares and preferred shares.

• Ordinary Shares: These allow shareholders to own a part of the company. They come with voting rights, dividend rights, the right to information, and the ability to sell them.
• Preferred Shares: These come in various forms and aim to give advantages to the investor holding them. They can:
  • Provide superior voting rights.
  • Offer specific financial rights, such as a preferential dividend or a higher dividend per share.
  • Provide a right to preferential repayment of the nominal value.

The structure and options associated with preferred shares can be tailored to different situations, as long as regulatory requirements are respected.

Non-Equity Instruments

These instruments include standard bonds, convertible bonds, and stock subscription warrants (BSA).

• Standard Bonds: These represent debt and allow the holder to earn interest on the sum lent.
• Convertible Bonds: These are classic bonds with an option to convert. The holder can, under certain conditions, convert the bonds into shares and thus gain access to the company’s equity.
• BSA Air (Stock Subscription Warrants with Rapid Investment Agreement): A commonly used instrument for financing very early-stage startups. It gives the holder the right to purchase shares at a future date at a price set in advance. It is triggered by a specific event, such as a fundraising round. For early-stage projects, this tool is advantageous as it can be set up quickly, postponing the complex negotiations of funding terms until later.

This is just a brief overview of the main options available to investors.