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The “BSA AIR”, a method of financing start-ups in times of uncertainty.
Created by the North American practice of financing start-ups, the Simple Agreement for Future Equity (SAFE) based warrant, BSA AIR in French (for Bon de Souscription d’Actions fondé sur un Accord d’Investissement Rapide) quickly crossed the Atlantic. Seductive by its ability to attract new money in the company, the tool has some limits.
After the good years came the lean years. The rise in interest rates and the credit crunch put an end to the abundance of capital that has long favored the financing of start-ups. This scarcity, however, should not be understood as a decrease in the money available for each project, but as a sieve filtering the still considerable sums that remain available for the benefit of the best projects. This increased selectivity is at the root of the restlessness of start-ups which, more than ever, need to secure financing for their growth.
In this context, it is tempting to use the BSA AIR by allowing the provision of fresh money under conditions of appreciable speed for companies.
I- The BSA AIR allows accelerated financing.
The investor and the company negotiate a contract for the provision of a sum of money which will subsequently allow access to the company’s capital. If the sum of money is known, its counterpart, the share of the company’s capital, is determinable but not determined. So that the investment does not stumble on the question of the valuation of the company determining the number of securities to be issued, the parties agree on a floor value and a ceiling value of the company and agree to return to more final determination of this value later. This determination of the value will most often take place during a subsequent capital transaction which will serve as a reference for the exercise of the BSA AIR.
The warrant (BSA), which has as its underlying the Accord d’Investissement Rapide (SAFE), materializes the investor’s right to obtain the securities and obliges him to immediately transfer to the company the sums necessary for its financing.
Thus, by having avoided negotiation on the valuation of the company, a systematic stumbling block in capital increases, the company obtains the financing it needs in a short time. The investor for his part secures his future access to capital and allows the company to develop.
II- An investor who is neither a creditor nor a partner.
The sums remitted by the investor on signing the subscription warrant cannot be considered as an ordinary claim. When he divests, the investor has no chance of recovering his contribution in cash and it is already certain that his consideration can only consist of shares. Moreover, he does not receive any interest on the financing granted.
However, he is not yet a shareholder. If the classic use of the ordinary warrants knows this particularity, it is customary, for an ordinary warrant, that the price paid on subscription is modest and that the main part of the amount is paid when converting the warrant into shares.
In terms of BSA AIR it is the opposite. Almost all the financing is granted to the company when subscribing to the BSA AIR. The conversion of the BSA AIR into shares will allow access to capital without significant payment. From then on, the investor disposes of his funds without benefiting from the rights of the creditor and without acquiring either the status of shareholder. The sums paid cannot be entered in the company’s capital account but they have a status of quasi-equity, the investor cannot rank with the unsecured persons of the company.
This disadvantage for the investor is indeed an advantage for the company, which will be able to increase its financial leverage by the same amount by claiming the status of equity or quasi-equity for the sums remitted under the subscription of the BSA AIR. Moreover, as long as the BSA AIR is not exercised, these funds does not have any dilutive effect which allows the founders to retain the same latitude of management as before the financing.
III- The time saved on the negotiation does not exonerate from the respect of the formalism of company law.
The company therefore financed itself by avoiding the delays resulting from the discussions relating to the valuation and does not pay interest. This time saved on negotiation does not mean that you can be exempted from the classic rules of company law.
The rapid investment agreement will require the issuance of a subscription warrant which itself will require a collective decision of the partners with the necessary formalism and protections in this area: report of the president and report of the statutory auditor, or of the ad hoc auditor in his absence.
Thus, it is inaccurate to think that it would suffice to sign on the corner of the table a document entitled SAFE or Accord d’Investissement Rapide and to collect the bet without submitting to the formal process of corporate finance transactions.
But the tool is attractive and when the obstacles (or protections) inherent in company law are overcome, the money is received by the company and the investor, if he is not truly a partner, approaches the circle of founders and his interest in the company, its growth and its success is no less than that of the capital holders since the risk he bears is of the same order.
IV- The moment of truth of the capital conversion and the proper use of the discount.
However, what was not settled when the BSA AIR was subscribed will have to be resolved later when the question arises of the consideration in securities for the sums paid by the investor.
The BSA AIR will define the generating events and the calculation formulas defining an exchange parity allowing the issuance of the securities.
Most frequently, the parties will have agreed that the investor will obtain his shares under the same conditions as other investors accessing the capital on the occasion of an event subsequent to the BSA AIR subscription, minus a discount . Thus the benchmark is often the future capital increase, the IPO or in an unfortunate event, the bankruptcy of the company. These events that freeze the valuation make it possible, through the set of formulas, to determine the number of securities that will fall to the investor.
It is however necessary to consider another case, that on the occasion of which, at the end of a defined period of time, none of the events envisaged has occurred and whereas the conversion into capital must nevertheless occur.
The imagination of the parties when signing the rapid investment agreement, the analysis of the company’s accounts and the negotiation must lead to an agreement.
It is essential to refer to calculation formulas whose components are indisputable accounting aggregates or consensus-based company financial and commercial data so as not to fuel a dispute between the investor and the company.
In any event, the risk taken by the investor will be remunerated by the benefit of a discount on the value of the shares subscribed, enabling him to increase his share of equity securities. The discount usually oscillates between 15 and 30%. It is this discount that pushes an investor to opt for the BSA AIR in the hope of finding himself better treated in terms of equity access as a price for the risks assumed.
V- A risk of crystallization of capital and an absence of certain tax benefits.
In these financing operations where speed seems to prevail, some of the disadvantages resulting from the use of these new securities should not be concealed.
On the company side first, the rapid investment agreement gives the investor a say in subsequent capital operations. The terms of the rapid investment agreement and the articles of the Commercial Code relating to the protection of holders of securities giving access to capital require that the situation of the investor be taken into account in all subsequent capital transactions, on a fully diluted basis, and not to allow the company bound by the BSA AIR to negotiate with other investors more advantageous conditions of access to capital than those granted to the “AIR” investor. Thus, while he is not a party to the shareholders’ agreement, the investor in the context of a Accord d’Investissement Rapide finds himself enjoying a right of veto over the subsequent capital operations of the company in the hypothesis that they would be disadvantageous to him.
Another disadvantage, but on the side of the investor this time, the classic tax benefits expected when investing in young companies are not there. Neither the warrant nor the shares resulting from its exercise can be eligible for the tax exemptions that often motivates Business Angels.
If the flexibility allowed by the use of the BSA AIR explains its success with both investors and companies seeking financing, it is advisable to use this instrument while being fully informed of its advantages and its limits. So that, the duly accepted constraints on both sides, make it possible to serenely apprehend the benefits.