French incubator TheFamily has come up with an ‘open source’ equity funding instrument modelled on the US ‘safe’ approach, with a view to simplifying early stage financing procedures for innovative fledgling companies in France.
Crowdfunding is not just a social phenomenon which takes business financing back to the grassroots, it is primarily a way of overcoming some of the obstacles that stand in the way of young companies seeking startup financing. Between the need to produce a valuation of the company on the one hand and offer preferred stock to early investors on the other, young entrepreneurs often see potential sources of capital dry up due to legal and financial complexities. And while issuing convertible notes (a debt instrument which can later be converted into shares in the company) is a solution that offers some important advantages, this route is frequently blocked because of French legal provisions requiring that the assets and liabilities of very young companies be verified before issuance. Now in order to overcome the restrictions that hamper startup companies’ flexibility and room for manoeuvre, an incubator called TheFamily, in partnership with SBAvocats, a legal firm specialising in risk capital founded by Sacha Benichou, has come up with an equity investment package called an AIR, which is inspired by the US safe system. An AIR is an open source tool which its creators hope will attract wide interest and so help to drive the French legal system towards a more innovation-friendly stance.
Towards ‘safe’-equivalent deals in France
Sacha Benichou points out that “in spite of their strong innovation capacity, highly specialised startups, such as those in the biochemical sector, find themselves hampered at the early stage by their very great need for capital.” The mechanisms which currently exist to enable startups to finance themselves early on are expensive and difficult to access. This is mainly to protect investors, who have only the startup’s own projections to go on. So in order to speed up the funding process, TheFamily has drawn up an instrument called an ‘Accord d'Investissement Rapide’ (AIR), which simply means a Fast Investment Agreement, along the lines of the ‘safe’ (‘simple agreement for future equity’) deal that Californian incubator Y-Combinator has designed for its alumni. The AIR approach is based on the issuance of share purchase warrants (known in France as BSA), which offers an investor injecting capital today the right to an equity stake in the company at a below-par price, in proportion to his investment, at a later date when shares are actually issued and the company valued. The main advantage of the AIR instrument lies in postponing the need to make a valuation of the company – and calculate the value of the investor’s stake – while at the same time providing the startup with capital to grow the business right away. As the investment lawyer explains, while the way the instrument has been designed is a novelty in the legal world, “using warrants for this purpose is more a smart way of doing things than a new model, and in practice both parties to the deal already enjoy protection under French law.”
An ‘open source’ solution
The advantage of TheFamily’s initiative is first and foremost the approach rather than the instrument itself. The AIR investment finance model is explained in detail on the MeetAIR website and with just a few clicks you can download the whole legal package in open source. This initiative, explains Sacha Benichou, reflects the incubator’s – and his own – determination to push for changes in the way the French legal system views business innovation. “To make this kind of system work and get it used more widely than just among the group around TheFamily, both parties involved decided to open it up to a much larger investor audience. Only when its use has become more widespread will it be able to create enough momentum to put pressure on the current system.” Although this drive to broaden the popularity of the instrument has only just begun, the innovation ecosystem should not be slow to take on board a tool that can foster the emergence and – most importantly – the business application of innovations.