Probably a lot of entrepreneurs developing their startups in Chile have heard of this type of Company. Is also probable that these entrepreneurs have been told that this is the most suitable type of company if you are thinking to incorporate your Startup. But what are really the advantages of the SpA over other kind of company types.
To fully understand we must briefly revise what we understand for Startup and the way this projects will develop in an ideal scenario.
Startups are companies that has a high potential for accelerated growth, that will have the chance of develop their operations globally (because the solve global needs) and that are capable to expand benefits without reinvesting on infrastructure to the same level that the profits grow.
In a numeric example, these are companies that must invest 100 to sell 200, and then invest 5 or 10 (instead of 100), to sell another 200.
Common examples of this kind of businesses are those providing services based on software, where after the initial investment on the development, they just need to sell, sell, adapt the software and keep selling. Some other examples are technological applications o reinvention of processes applicable worldwide.
I don’t mean to tell that this is something easy to pull of, but rather to simply describe, in a few words, what is behind this kind of scalable models.
Today, every entrepreneur knows that the founder team is one of the keys to success, and as we have seen, to have equity in the business is one of the main incentives that startups have to attract and retain talents. In this context, being able to trade with equity is a necessity.
Also, this kind of projects are evaluated, in general, over 4 year horizons, time in which founders must work overtime to accomplish several things: obtain funding (Angel Investment o Public Funds) to generate a prototype or an minimum viable product (MVP), then traction, revenues and possibly more investment to fund the scaling process.
What does this mean from the legal point of view? That it will be necessary to have a structure that allows maximum flexibility. The only type of company that gives this flexibility in Chile is Sociedad por Acciones or SpA, for the following reasons:
As the names implies (Company by Shares in literal translation), this kind of companies divide the equity by shares: This allows founders to compromise their efforts on the development of the business on exchange of shares of the company. And then, allows to create incentives for the permanence of the founders or other partners, (or remedies to reduce the damage caused by the departure of a partner), by Vesting schedules. In this same way, this kind of companies are able to attract and retain talents by giving them stock options to executives, mentors, advisors, or collaborators of the startup.
Shareholders can freely choose the managing structure: One of the main characteristics of a Startup, at least at the beginning, is agility. This agility can be achieved by establishing a lean management structure (one manager with full power of administration, or two managers who divide their functions, but that don’t need to act jointly). Of course this could change during the life of the startup, and most probably at the time of receiving investment, because the investors will want to have a voice in the administration. This is why they will commonly demand the creation of a Board of Directors.
Easy to reform the bylaws: The SpA was created by the so-called Stock Market Law II, which among other things, introduce reforms to the Commerce Code in the year 2007. One of the novelties in the creation of this type of companies is that the law allows obviating a lot of the formalities in comparison with the other type of companies at the time of reforming or modifying the bylaws. This give founders and partners incorporated afterwards, the possibility to implement changes to the bylaws very easily.
Santiago Henríquez C., Abogado.
Picture: Joseph Barrientos (CC0)