A capital increase is a relatively simple operation from a legal point of view but nevertheless very involving for existing shareholders who accept in fact to share information, power, profits and/or future capital gains.
This is particularly the case for startups dedicated to hypergrowth. When professional investors enter the capital, acceleration and planned disposal are essential: the median exit period for these investors is 6 years, which is twice as short as companies developing purely self-financing (source: Avolta).To analyze a capital increase, it is useful to start from a real case and public data, for example the artificial intelligence startup Mistral AI, created in May 2023 in Paris.
Its statutes indicate that the initial share capital is €15,000 divided into 1.5 million shares with a nominal value of €0.01 95.3% owned in equal shares by the three operational co-founders of the company. The remaining 4.7% is also held equally by four individuals or legal entities who provide expertise in strategy, finance and lobbying. Its co-founders share the entire initial capital.
However, such a company cannot develop purely self-financing: before creation, discussions were undoubtedly already underway with investors. The first fundraising took place less than two months after the incorporation, with a capital increase of 105 M€ on a valuation of 240 M€ “post-money”, which includes the contribution of investors. The value of the founders’ shares is thus 240 – 105 = €135 million “pre-money” in financial jargon. This valuation of €135 million less than two months after the creation of the company is 9000 times higher what the €15,000 initial contribution: a share subscribed for €0.01 upon creation is now worth virtually 90€or a share premium of €89.99 per share with a par value of 0,01€.
With their contribution of €105 million on a “value” of €240 million, the first investors hold 105/240 = 43,8% of capital. The founders are diluted accordingly and increase to 56.2% of the capital. With a share valued at €90 and assuming a total subscription of €105,003,000 to round off our calculations, investors hold 105,003,000 / 90 = 1,166,700 shares, which represents 43.8% of the total. Adding these newly created shares to the original 1.5 million shares, we now have 2,666,700 shares.
Increased dilution but rising valuations… in favorable cases
At the end of this first financial round, two other capital increases took place in fairly short order:
- Funding from 385 M€ in December 2023 on a post-money valuation of 1.86 billion Euros either 20,7% of the capital granted to these new investors and a share value now equal to €553.50, i.e. 6.15 times more than the previous valuation.
- A financing round of 600 M€ in June 2024 on a “valo” of 5.8 billion Euros either 10,3% of the capital granted to these new investors and a share value now equal to €1,550, i.e. 2.8 times more than the previous valuation.
At the end of these fundraising,The founders now control 40% capital and investments control 60%.
The amounts are undoubtedly close to reality but do not include the following operations:
- We have no information on plans for stock-options created to attract and retain talent: these stock options dilute all shareholders but have the merit of reinforcing the value of the startup since the competition for AI talent is raging.
- The financing announced is not necessarily made up of 100% capital but may also include obligations convertibleswhich will be less dilutive if they are repaid and not converted in fine in capital.
- The co-founders have already benefited from “ partial cash out »: these transfers of shares, which reduce their percentage of ownership, allowed them to sell part of their capital for “real cash” in order to not only hold paper.
Work with professionals to focus on the essentials!
The analysis of Mistral AI’s successive capital increases shows that the simplicity mentioned at the beginning of the article is entirely relative and that you will have an interest in working with high-level professionals who will allow you to secure these operations and concentrate on the essentials: teams, customers, products and strategic partners.
Indeed, the creation of new shares is accompanied by an often complex pact which will formalize the relations between the shareholders. Legal tinkering is paid for in cash and can bring founders and managers into a legal no-man’s land from which they will emerge wrung out.
The figures for Mistral AI can be dizzying as they are exceptional in terms of amounts raised so quickly with stratospheric valuations… and yet these figures are little compared to Open AI which announced in October 2024 a fundraising of 6.6 billion dollars (6.3 billion €) on a valuation of 157 billion dollars, or 149 billion €. In short, a financing round ten times higher than Mistral AI and a valuation 27 times higher.
The amounts involved are the (dis)measure of the industrial revolution of which we are both actors and spectators. Even if we can anticipate a significant correction in the valuations of several of several emblematic AI players, the way of producing and trading will be disrupted, which explains the appetite of investors for this very Schumpeterian creative destruction which is taking place. operates on a global scale.
