A central, yet often neglected, aspect of start-up management, particularly during negotiations for a new financing round or other transaction, is communication with individual shareholder groups. The principle that "communication is key" applies universally – and thus all the more critically to the management of a start-up.

While a start-up's internal and external communication is not primarily a legal matter, skilful communication can be decisive in overcoming business and legal hurdles during financing or other transactions. Ultimately, corporate management is always shareholder and stakeholder management: the diverse interests of the parties involved must be adeptly reconciled to successfully complete a transaction. Experience repeatedly shows that individuals who feel overlooked at a critical moment can become unexpected stumbling blocks when the support of all shareholders is essential for a transaction.

When a start-up negotiates financing with new investors by issuing new shares and creating new preferential rights, existing shareholders will, conversely, see their rights diluted unless they also participate in the financing. Experience demonstrates that acceptance of such dilution is significantly higher when communication is transparent and balanced. A shareholder who feels taken seriously is more likely to consent to the necessary resolutions for a capital increase or the election of a new board of directors at the general meeting.

By exploring interests at an early stage, the concerns and wishes of individual shareholders can be more easily accommodated. There is no rigid timeline for communication (beyond the statutory deadlines for convening a general meeting), nor is there any prescribed content. A thorough understanding of one's own shareholders is therefore essential for developing a tailored communication strategy. Every start-up typically knows precisely which shareholders are most resistant to change, prefer a personal approach, or, as opinion leaders, can block decisions in critical situations.

Key interest groups using the example of a financing round

There is no such thing as an ideal communication plan for successful stakeholder and shareholder management. However, with good planning and forward-looking, communicative involvement of individual interest groups, unpleasant surprises can be minimized before closing.

New investors

In a new financing round, a start-up's primary focus is naturally on negotiations with new investors. Only once an agreement has been reached with them can the results be communicated to existing shareholders. This communication with new investors often proceeds in stages, as sensitive information is disclosed incrementally.

The communication strategy is therefore an integral part of the negotiation process. Depending on the investor's background, this also entails a certain duty of disclosure on the part of the start-up, particularly if the investor is unfamiliar with the customs of investing in Swiss companies. An early introduction to fundamental concepts—such as (i) each share carries one vote and must be accounted for at the general meeting, and (ii) each shareholder benefits from statutory dilution protection—can be decisive in structuring the financing. This ensures the investor agrees to the deal while upholding all relevant principles of Swiss stock corporation law. 

Effective communication with both new and existing investors participating in the round is therefore central and must be given the highest priority.

Existing investors participating in the round

Other important communication partners are existing investors who may also wish to participate in the new financing. This group of shareholders is often treated similarly to new investors or joins the new investor in negotiations and communications. However, it should be noted that existing investors can participate in new financing and thus secure shares with new preferential rights. At the same time, however, these investors find themselves in a double position, as they have to accept a loss of rights for the shares they already hold.

Early subscription rights offers or general shareholder information can be used to gauge the extent to which existing investors are willing to participate in a new financing round. However, the most committed investors often signal their interest in further participation even before negotiations with a new investor begin. In such cases, it is crucial to bring existing and new investors together. In the best case scenario, this can prevent the various investor groups from working against each other in the negotiations.

Existing investors who are not participating

Existing investors who are not participating in a new financing round should nevertheless be involved in general communication and final negotiations. The more investors have invested in previous rounds, the more emphatically they will demand to comment on the deal, at least in one round of negotiations, and to express their views on the extent of their loss of rights. Investors who do not participate in the new round typically request their own review of the contracts before the negotiations are concluded in order to make any comments, because unlike the investors who continue to participate, they lose their preferential legal status.

Small shareholders (e.g., family and friends, employees, angel investors)

Finally, existing shareholders without preferential rights must be informed and offered subscription rights at the latest before the general meeting that will implement the financing. Their subscription rights must be protected, which requires that these shareholders understand the full scope of the deal. Only then can they make an informed assessment of whether they wish to and are able to exercise their subscription rights.

It is a decisive advantage for a start-up if all shareholders are bound by the same shareholder agreement. Shareholders who cannot grasp the deal and its impact on their personal position will be reluctant to sign a new or amended shareholder agreement. If the shareholder structure is suddenly governed by several shareholder agreements, this can lead to unexpected and obstructive discrepancies, particularly in the event of a sale.

Personal communication can significantly foster the acceptance of new preferential rights and a new shareholders' agreement among small shareholders. Especially in start-ups, where small shareholders constitute a significant group and can decisively influence the success of a financing round through their voting behavior, it is advisable not to send the documents without comment. Instead, small shareholders should be offered appropriate channels for asking questions and voicing concerns. To this end, offering specific meeting times for questions is a proven approach. Particularly after demanding negotiations with an investor, in which the start-up had to make far-reaching concessions, close communication can prevent small shareholders from becoming an obstacle in the final stages.

Take-home message

The board of directors and/or management—depending on who is in charge of communication—should be able to answer the following key questions:

• Who was already involved during the negotiations and who needs to be brought on board now?

• Who are the most important opinion leaders among my shareholders?

• Who is most critical of change?

• What deadlines (legal or negotiated) must be met?

• Are there any opinion leaders whose response times or internal processes could jeopardize timely implementation even if they agree in principle (e.g., investment committees meet only very rarely and must formally approve all changes)?

• Do I have up-to-date contact details for all shareholders (for funds, those of the lead person; for natural persons, their personal details)?

Based on these answers, the start-up can strategically prepare its internal and external communications in parallel with the negotiations for a financing round.

More blogs from the series:

• From Concept to Reality: A Practical Guide for Start-up Founders on In-corporating a Swiss Legal Entity (Nr. 1)
• Successfully growing a Start-up: Stages of Funding (Nr. 2)
• The shareholders' agreement in the Start-up (Nr. 3)
• Best Co-Founders Forever? Anticipating Legal and Tax Considerations for Founders of Swiss Startups (Nr. 4)
• Preferential rights for start-up investors (Nr. 5)
• Transfer restrictions in a shareholder agreement (No. 6)
• Due Diligence: Effective Data Room Design (No. 7)
• Communication with shareholder groups during fundraising (No. 8)

Explore the start-up blog series

Author: Pauline Pfirter