The first investment round often determines the company's future structure. The choice of instrument affects control, founder dilution and the terms of subsequent rounds. Here is a brief overview of the options most commonly used in Bulgarian practice.
Direct equity investment
The investor acquires shares in exchange for a cash contribution and the company's capital is increased. The advantages are clarity and the immediate acquisition of shareholder rights. The drawbacks are the need to value the company at an early stage and a heavier process — a shareholders' resolution, amendment of the articles and registration with the Commercial Register.
Convertible loan
The investor provides a loan which, upon a defined event — usually the next funding round — converts into shares at a discount or subject to a valuation cap. The instrument defers the valuation question and speeds up the deal. When structuring it, it is important to address the conversion mechanism, shareholder consent to the future capital increase and the consequences if the round never happens.
SAFE-type agreements
The SAFE model, popular in the US, is not a loan and carries no interest or maturity. Its economic logic can be achieved in Bulgaria, but the agreement must be adapted to national rules on capital increases. Mechanically applying foreign templates risks unenforceable provisions.
Variable capital company
The variable capital company introduced into the Bulgarian Commerce Act offers greater flexibility in admitting new shareholders and issuing different classes of shares. For certain start-ups it can be a good alternative to the classic limited liability company, especially where an employee option plan is planned.
What founders should watch
- Liquidation preference and its type — participating or non-participating;
- Veto rights and the composition of management bodies;
- Anti-dilution protection and its mechanism;
- Founder vesting and leaver provisions (good/bad leaver);
- Tag-along and drag-along rights.
SM Legal advises both founders and investors and helps build a balanced structure that works under Bulgarian law and is understandable to international investors.
This publication is for information purposes only and does not constitute legal advice. For advice on a specific matter, please contact us.
Sylvia Marushkina — Attorney-at-law, Founder of SM Legal