How to raise an investment round: step-by-step guide with tips for investors

What is an investment round and why is it important for your startup?

An investment round is the process by which a startup obtains external funding in exchange for offering investors a percentage of ownership in the company.

This process allows the company to obtain the necessary resources to grow, develop its product, and expand its team.

Providing external capital gives the possibility of accessing a broader market, accelerating growth, and reaching goals that would be difficult to achieve without significant initial investment.

When to raise an investment round?

The right time to raise an investment round is marked by your startup’s growth and its demand for resources. Some signs that it’s the moment include having reached a point of business model validation, having recurring customers, and needing capital to accelerate expansion.

Another indicator may be being unable to cover necessary operations or launch new key functionalities due to lack of funding. If your team has already reached its limit in what it can achieve without external capital, it’s time to seriously consider it.

How much capital do you need for each stage?

Determining how much capital you need will depend on the stage your startup is in.

In the seed round, it can be between €50,000 and €500,000 depending on the industry, while in a Series A, amounts usually range between one and several million euros.

The key is to have a financial plan that demonstrates exactly how you are going to use the funds and the necessary spending on aspects like marketing, technology, personnel, or international expansion.

Financial and legal preparation for your investment round

Raising an investment round requires time, effort, and solid preparation. Having an appropriate strategy is key to optimizing capital raising and closing deals with investors efficiently.

It involves financial, legal, and strategic aspects. You must develop a clear value proposition that resonates with potential investors.

The aim is to prepare a key presentation so that investors consider the project robust and well-organized. Among the essential elements are a solid financial plan and a valuation of your startup that reflects its growth potential.

Convertibles and participating loans: Key financing mechanisms

Convertible notes are financial instruments used by startups to secure funding in their early stages.

They consist of loans that, under certain conditions, are converted into company shares or equity. This allows startups to raise capital without the need for an immediate valuation, postponing the founders’ dilution until a future investment round.

Advantages of convertible notes:

• Speed and simplicity: facilitate quicker negotiations by avoiding the need for immediate company valuation.
• Reduced costs: lower legal and administrative expenses compared to a traditional financing round.
• Flexibility: allow startups to raise funds without requiring an immediate valuation, which is useful in early stages.

Disadvantages of convertible notes:

• Dilution uncertainty: the lack of an initial valuation can cause uncertainty about the percentage of ownership that investors will obtain upon conversion.
• Risk of diverging interests: investors with convertible notes may prefer lower valuations in future rounds to maximize their ownership, which may not align with founders’ interests.

Example

An investor decides to support a startup with a €200,000 loan via a convertible note. This note includes:

• An annual interest of 8%.
• A 25% discount on the future valuation (if converted).
• A maximum valuation cap (“cap”) of €1,000,000.

After one year, the startup completes an investment round in which the company is valued at €1,200,000. At this point, the investor may convert their loan (plus accrued interest) into shares.

1. Calculation of accrued interest
   • Initial amount: €200,000
   • Annual interest (8%): €200,000 × 0.08 = €16,000
   • Total to convert after one year: €200,000 + €16,000 = €216,000
2. Applying the valuation cap (“cap”)
   • The actual round valuation is €1,200,000, but the convertible note’s “cap” sets a maximum of €1,000,000 for conversion purposes.
   • Therefore, the investor is not disadvantaged by the higher €1,200,000 valuation, but may convert using the “cap” valuation of €1,000,000.
3. Applying the agreed discount (25%)
   • If the 25% discount were applied directly to the €1,200,000 valuation, we would get an effective valuation of €900,000. However, the investor may also use the “cap” of €1,000,000 and will compare which of the two options (cap or discount) gives better conditions.
   – Discount on real valuation (€1,200,000 → €900,000).
   – “Cap” valuation (€1,000,000). From these two values (€900,000 and €1,000,000), the investor may select the most favorable option, which in this case would be €900,000 (because it is lower).
4. Result of the conversion
   • The investor converts their €216,000 (loan + interest) at a valuation of €900,000 (thanks to the discount on the actual valuation). Thus, the resulting investor’s stake would be: €216,000/€900,000 = 24%
   The investor thus acquires approximately 24% of the company, a clearly advantageous percentage compared to new investors entering the round on the nominal valuation of €1,200,000.

It is essential to have legal counsel when using convertible notes, as their proper structuring and understanding of their tax and legal implications are essential to avoid future conflicts and ensure that terms are favorable and clear for all parties involved.

The financial plan and correct valuation: Keys to standing out

How to build a solid financial plan

A solid financial plan should include medium- and long-term projections, revenue estimates, operating expenses, and growth. It is also important to include optimistic, realistic, and conservative scenarios to anticipate market variations.

The clarity and realism of the financial plan is one of the most influential factors in investors’ decision making. Be sure to be transparent about planned expenses and forecasts to instill confidence.

Startup valuation: Key factors

The valuation of your startup will depend on a combination of factors such as the stage it’s at, its growth potential, target market, and technology. Achieving a fair valuation is key to not excessively diluting your ownership in initial rounds.

Seeking external advice or using known metrics formulas like market comparables or discounted cash flow models can help you define an appropriate price for the equity stake in your company.

Value creation: Increase your project’s appeal

The metrics investors value the most include monthly user growth (month-over-month growth), customer retention rate, and customer acquisition cost. With this data, you can demonstrate whether the product or service is gaining acceptance.

Another way of creating value is to demonstrate how your startup has had a positive impact on those who have already adopted it—be it with customer testimonials or case studies.

The pitch: How to present your project to investors

Design effective storytelling to capture attention

Effective storytelling should chart the path from identifying the problem to the solution your startup proposes. Start with a story that emotionally connects with investors, showing them how your project helps solve a clear need.

Storytelling should not be limited to data but must provoke interest and empathy from the start. An investor will be more likely to trust their money if at first glance they identify with your startup’s mission.

How to structure a compelling pitch

An effective pitch is clear, concise, and concrete. Structure it in parts: problem, solution, market, business model, team, and financial projections. Each of these components should be well aligned to provide a comprehensive vision of the company’s potential.

Include key metrics but also emphasize the value of the team. Investors look for solid projects, but also for capable people behind them.

Importance of the shareholder agreement

A shareholder agreement is a private and binding agreement among founders and/or investors of a startup, which establishes the internal rules of operation, relationships among shareholders, and the management of potential conflicts. This document complements the company’s articles of association and is essential to ensure the company’s stability and orderly growth.

Key clauses in a shareholder agreement

• Drag along right (drag along): allows, in the event of a purchase offer by a third party, the majority shareholders to compel the minority to sell their shares on the same terms, facilitating the total sale of the company.
• Liquidation preference: gives certain shareholders, generally investors, the right to recover their initial investment (sometimes multiplied by an agreed factor) before the other shareholders receive any amount in the event of liquidation or sale of the company.
• Tag along right (tag along): ensures that if a majority shareholder sells their stake to a third party, the minority shareholders have the option to join the sale on the same terms, protecting their interests.
• Vesting and non-compete clauses: set out commitments by shareholders regarding their dedication to the company and restrictions to prevent them from competing with the startup for a specific period.

Examples of conflicts a well-structured shareholder agreement can prevent

• Unexpected exit of a key partner: without a clear agreement, the departure of a founding partner can destabilize the company. A vesting clause and procedures for the sale of shares mitigate this risk.
• Partial sale of the company: without a drag along right, a minority shareholder could block a sale that benefits the majority.
• Disputes in the distribution of funds after a sale: the liquidation preference ensures that investors recover their investment before profits are distributed, avoiding disagreements.

Identifying ideal investors for your startup

Finding the right investor can be just as important as the capital you receive. Not all investors look for the same thing; each one has their own interests and areas of expertise.

Look for those who have shown interest in your sector and development stage. Beyond capital, a good investor can offer key contacts, experience, and mentorship for the future.

Types of investors: Which is right for your round?

Business angels and venture capital funds

Angel investors, better known as Business angels, are private investors who invest their own money in early-stage startups. They are more flexible than venture capital funds and tend to be personally involved in company development.

On the other hand, venture capital funds invest in mid- or late-stage companies. They seek quick returns and exponential growth, so they expect startups with a validated model, good expansion prospects, and which have already experienced an investment round.

National and international investors

As your startup grows, the attention of international investors may become relevant. This type of investor often has larger resources and global networks that can help take your project international.

National investors, for their part, may be more familiar with the local context of your industry and can also offer you more immediate networks of contacts.

Both types of investors must be assessed according to their potential contribution to your business.

How to build an investor pipeline

A good way to start building your investor pipeline is through your network. Asking other entrepreneurs or mentors can put you directly in touch with interested investors.

You can expand your pipeline with a list of investment funds aligned with your sector, searching in public databases or networks such as Crunchbase, Seedrs or AngelList.

Then, design a strategy to contact them in stages, starting with those who seem the best fit for your startup and continuing with those whose interest may grow as you present your project.

Legal aspects for foreign investors

For foreign investors to operate in Spain, it is essential to obtain a Tax Identification Number (NIF) or a Foreigners’ Identification Number (NIE), as applicable.

Procedure for obtaining NIF/NIE:

• NIE (Foreigner Identification Number): this number is assigned to foreign individuals who, because of economic, professional, or social interests, interact with Spain. Applications can be made at Immigration Offices, Spanish police stations, or Spanish consulates in the applicant’s country of residence. Required documents include the official EX-15 form, a valid passport, and proof of payment of the corresponding fee.
• NIF (Tax Identification Number): This number is essential to carry out investments, commercial operations and comply with tax obligations in Spain. For individuals without a NIE, the NIF can be requested with form 030, along with a valid passport and proof of residence in the relevant consular district. For legal entities, form 036 is needed plus documentation certifying the entity’s existence and powers of the legal representative.

Foreign investors may grant powers of attorney to representatives in Spain so they can carry out procedures on their behalf, including obtaining the NIF/NIE and managing investments. These powers must be duly legalized or apostilled under the Hague Convention and, if necessary, translated into Spanish.

There is also an option for those foreign investors not residing in Spain. This is known as NIF M and can be obtained through a notary. The applicant must provide their passport (or ID if from the EU), and furnish data such as name, surname, nationality, and fiscal address in Spain or in their country of residence. However, this NIF M is provisional until the applicant obtains their NIE, and must be reported to the Tax Agency within two months, whereby the notary will require the applicant to sign a responsible declaration indicating this commitment.

Tax and documentation considerations for investments from abroad

• Reporting obligations: Foreign investments in Spain are liberalized, but reporting procedures must be observed, such as completing and submitting specific forms. Royal Decree 571/2023, of July 4 on foreign investments establishes the reporting obligations for foreign investment transactions in Spain.
• Tax implications: Investors must consider the tax obligations stemming from their investments, including possible withholdings, non-resident income taxes, and other applicable charges. It is essential to review the double taxation treaties Spain has with the investor’s country of residence to avoid double taxation.

Importance of having a lawyer to facilitate investment

Given the complexity of Spanish regulations concerning foreign investments, it is highly recommended to seek the advice of a specialized lawyer. A professional can guide the investor in obtaining the NIF/NIE, properly fulfilling tax obligations, preparing the necessary documentation, and complying with current regulations to ensure the investment is made efficiently and legally.

Key strategies for a successful investment round

Once you have the list of potential investors and a solid proposal, the next step is to execute effective negotiation and closing strategies.

Negotiating an investment round isn’t simply taking an offer and accepting it. You must manage investors’ timing and even take advantage of some market psychological games, such as FOMO (fear of missing out).

Tips for negotiating and closing an investment round

Term sheet: Legal and financial aspects to consider

The term sheet is the preliminary document setting out the terms agreed between the startup and the investor. This document is not legally binding, but you need to understand each of its clauses, especially those related to valuation, equity dilution, economic and voting rights.

Common clauses in a Term Sheet and their legal impact

1. Company valuation: establishes the pre-money (before investment) and post-money (after investment) valuation, determining the investors’ equity stake and founders’ dilution. An appropriate valuation is essential to reflect the real value of the startup and attract investors.
2. Liquidation preference rights: grant investors the right to recover their investment before the founders in the event of liquidation or sale of the company. This protects investors, ensuring they are paid back before any distribution to common shareholders.
3. Anti-dilution clauses: protect investors from future financing rounds at lower valuations, adjusting their equity to maintain their ownership stake. These clauses are important for preserving the initial investment’s value in down-round situations.
4. Information and control rights: include the ability to appoint board members and access periodic financial information, allowing investors to oversee company management. This encourages proper governance and ensures investors are informed about the startup’s performance.
5. Exclusivity and confidentiality clauses: prevent the startup from negotiating with other investors for a set period and ensure negotiation confidentiality, protecting both parties’ interests. Such clauses foster trust and commitment during the negotiation process.

How to handle interest from multiple investors

• Assess strategic alignment: Beyond capital, it’s vital to consider the added value each investor brings, such as sector expertise, network, or strategic advice. Selecting investors who share the startup’s vision and objectives is often more beneficial long-term.
• Appoint a lead investor: Designating a lead investor who leads the round makes coordination and negotiation easier, providing a central point of contact. The lead investor usually represents the group’s interests and can give the round more credibility.
• Maintain transparent communication: Clearly inform all interested parties about negotiation progress and timeframes, building trust and avoiding misunderstandings. Transparency is key for managing expectations and building strong relationships with investors.

Practical tips for closing a round successfully

• Thorough preparation: Having all legal and financial documents in order, including an up-to-date data room, streamlines the due diligence process and shows professionalism. Adequate preparation reflects the startup’s seriousness and commitment to the investment process.
• Flexibility in negotiation: Be willing to negotiate key terms, but without compromising on fundamental aspects of vision and company control. Striking a balance between investor demands and startup interests is key to a successful negotiation.
• Specialized legal advice: Working with venture capital-experienced lawyers ensures agreements are properly structured and protects the startup’s interests. The right legal advice can prevent future conflicts and ensure regulatory compliance.

Well-managed negotiation and a clearly defined Term Sheet are crucial for establishing strong investor relationships and ensuring the startup’s long-term success. Understanding the legal implications of each clause and managing multiple investors’ interest effectively can make the difference in the company’s growth and development.

It’s advisable to have both legal and business advice to review every point in the term sheet and ensure both sides agree on the terms and obligations.

Data room: How to prepare information for investors

A data room is a secure space where you store and share critical information about your company with potential investors. It should include financial statements, growth metrics, key contracts, and any other relevant information that an investor wants to review before making a decision.

Essential documents in a data room

1. Investor Deck: Executive summary highlighting the value proposition, business model, target market, and growth strategy.
2. Financial plan: historical financial statements and future forecasts, including income statement, balance sheet, and cash flow.
3. Cap Table (Capitalization table): Details the current equity structure and how it would change after the proposed investment.
4. Legal documents: Incorporation deeds and articles of association, shareholder agreements, employment contracts, and any other relevant legal documents.
5. Intellectual property information: Patents, registered trademarks, and copyrights owned by the company.
6. Key business metrics: Data on customer acquisition, retention, recurring revenue, and other relevant indicators.

Tools and platforms to create a data room

• DocSend: allows you to upload, organize, and securely share documents, offering analytics on how investors interact with your information.
• Carta: provides solutions for managing equity structure and creating data rooms, making information exchange easier during fundraising rounds.
• Google Drive or Dropbox: accessible platforms for early-stage startups, although extra security measures should be implemented to protect confidential information.

How to use the data room to increase investor confidence:

• Transparency: Providing complete and well-organized information demonstrates seriousness and makes it easier for investors to assess your company.
• Constant updates: Keeping documents current shows diligent management and a commitment to information accuracy.
• Security: Using platforms with access controls and data protection guarantees confidentiality of shared information.
• Accessibility: Making necessary information readily available allows investors to perform more efficient due diligence, speeding up the investment process.

A well-structured data room not only facilitates the investment process but also strengthens your relationship with investors by demonstrating transparency, organization, and commitment to your startup’s growth.

How to use FOMO to speed up the investment process

Create urgency in investors through FOMO

FOMO (Fear of Missing Out) is a powerful psychological tool. To manage it, tell investors that there are other interested parties in the round or restrict access temporarily, which creates a sense of urgency to join before the available slots are gone.

Investors won’t want to be left out of an opportunity when other people have already expressed interest or are advancing in negotiations.

Manage interest from several investors at once

When several investors show interest, coordinate discussions to avoid bottlenecks. Maintain ongoing communication and make sure to keep track of where you are with each one in the process.

Generating competition among investors can improve your negotiating position, but be sure to do so tactfully.

Preparing for future investment rounds

Legal preparation is essential for a startup to be ready for future investment rounds. Below are the key aspects to consider:

Updating shareholder agreements

A shareholder agreement is a private agreement regulating relationships between shareholders, establishing rights and obligations. As the startup evolves and prepares for new investment rounds, it is essential to review and update this agreement to reflect new investor entry, changes in the equity structure, and other relevant modifications.

Common reasons for modifying a shareholder agreement include entry or exit of shareholders, changes in the business model, new legislation, or internal reorganization. It’s important to identify the need for change, review the current agreement, consult shareholders, seek legal advice, and formalize the changes properly.

Strategies for maintaining relationships with existing investors

Maintaining strong relationships with current investors is crucial for the startup’s ongoing success. Open and timely communication, sharing regular business updates, financial results, and strategic initiatives, helps build trust and transparency. Also, centralizing communication and providing detailed financial reports are recommended practices for keeping investors informed and engaged.

How to prepare your startup for a follow-on

A follow-on refers to an additional investment made by existing investors in subsequent rounds. To prepare your startup:

• Show growth and traction: Present metrics that demonstrate progress and the company’s scalability potential.
• Optimize internal structure: Make sure your internal organization and processes align with growth objectives and are attractive for additional investment.
• Plan the use of funds: Clearly define how the investment will be used to achieve specific milestones and generate value.

Adequate legal preparation and strong investor relationships are essential for success in future funding rounds. Having specialized legal advice and following best practices in communication and financial reporting will strengthen your startup’s position in the eyes of potential investors.

Additional tips for raising an investment round without diluting your ownership

It is possible to fund your startup without diluting your ownership via mechanisms such as private debt or credit lines. A hybrid strategy combining venture capital and debt may be the solution, depending on the level of risk you are willing to take.

These alternatives can be especially profitable if you have a clear vision of how and when you’ll be able to repay those loans or credits with the revenues generated.

Private debt and venture debt: Alternatives to traditional financing

Alternative financing provides startups with options beyond issuing shares to obtain capital. Among these alternatives are private debt and venture debt, each with specific features that may be advantageous depending on your company’s needs and development stage.

What are they and how do they work?

Private debt lets you retain full control over your use of funding but entails additional medium-term repayment obligations. One risk is the monthly financial burden, so be sure your company can generate enough income.

Venture debt is a form of debt designed specifically for startups backed by venture capital, offering more time and flexibility to repay the loan. It acts as a complement to a traditional funding round.

Advantages

• Less equity dilution: founders retain a larger stake in the company by avoiding new share issuance.
• Rapid access to capital: acquiring debt can be faster than seeking equity investors, especially if the company already has venture capital backing.
• Flexibility in fund use: Depending on terms, debt may offer freedom in resource allocation.

Risks

• Risk of insolvency: if the company doesn’t generate expected income, failure to meet debt payments can lead to insolvency or asset loss.
• Repayment obligation: unlike equity, debt must be repaid, meaning regular financial commitments that may strain liquidity.
• Contractual restrictions: debt agreements may include covenants that limit certain company operations, such as taking on new debt or making significant investments.

When to choose debt over equity?

• Extending your financial runway: startups looking to prolong operations ahead of a next funding round can use debt to reach key milestones that boost future valuation.
• Minimizing dilution: choosing debt lets founders keep more of the company, avoiding dilution from issuing new shares.
• Financing specific expenses: debt may be suited to funding capex, acquisitions, or operating expenses that will generate enough revenue for repayment.

Bank financing and public lines for startups

CDTI and other public options

CDTI is a Spanish initiative providing public funding for tech and innovative startups. It offers soft loans, grants, and co-financing for R&D projects, reducing financial risk.

Similar alternatives exist in other countries, with public credit lines focused on the economic development and growth of startups.

How to access bank financing for startups

Accessing bank financing is usually more complex for early-stage startups, as banks tend to see these companies as high-risk. However, if you have a track record and a solid customer base, you may qualify for favorable credit lines.

Preparing a solid financial folder and proving recurring revenue can simplify this process. A positive prior loan history will help build trust.

Conclusion: Successfully close your investment round

Raising an investment round is much more than securing capital. It’s a process that demands preparation, strategy, and above all, sound decisions backed by specialized legal advice.

The complexity of the entrepreneurial ecosystem makes it crucial to have a lawyer experienced with startups, someone who understands venture capital dynamics and can anticipate issues that could compromise your company’s success.

A good legal adviser will help you structure favorable agreements, avoid harmful clauses, and manage critical aspects such as liquidation preference rights, anti-dilution clauses, intellectual property, and shareholder agreements. If poorly designed, these elements can not only generate conflicts but also discourage future investment or put your startup’s most valuable assets at risk.

Choosing the right lawyer means looking for previous experience, specialization in investment rounds, a practical approach to problem solving, and, if possible, a strategic network to help access new partners.

Closing an investment round isn’t just a legal issue; it’s also a crucial moment to evaluate how the funds will contribute to your startup’s growth. This means deciding whether resources will be enough to avoid future rounds or drawing up a clear plan for the next ones. Also, maintaining strong relationships with current investors, sharing progress and results, is critical to building trust and turning them into long-term strategic allies.

With the right mix of preparation, strategy, and expert legal advice, you’ll not only be ready for successful rounds, but also to consolidate your company’s future and market position. The ultimate goal isn’t just to secure funding, but to build relationships that drive your startup’s sustainable growth.