Debt Securities as a Financing Instrument
Financing a startup is not exhausted by growth of capital. Article 34-1 of the Law on Entrepreneurs entitles an entrepreneurial society to issue debt securities. A debt security implies a monetary claim against the society — this instrument gives the investor a creditor's position without participation in the share capital. Such a security may be issued with periodic interest (a coupon) or without one, and it may include other rights, including the right of conversion into shares — it is precisely this hybrid form that makes it one of the most flexible instruments of startup financing, combining risk and income in a single security.
The terms of issuance play the central role here: the terms or the statute may establish individual powers exercised by the assembly of holders of debt securities, including matters connected with the restructuring of the obligation. The terms of issuance must be attached to the emission prospectus or an equivalent document, and by purchasing debt securities a person agrees to those terms. The practical conclusion is that the exact wording of the rules on conversion, coupons and restructuring is the core of negotiations with the investor.
The Issuance of Shares and Authorized Capital
The path of capital growth is regulated by Article 136. A share is considered placed if the limited liability company has issued it to another person for a certain consideration, regardless of whether the company has received that consideration. Issued shares are recorded in the registry and produce no rights and obligations before placement; placement is carried out by the management body of the company.
For future rounds, the institution of the authorized share is particularly important: a share that, in accordance with the partners' decision, may be issued and placed in the future is an authorized share. Its quantity, class, proportion in the capital and nominal value must be reflected in the foundation agreement. A decision on issuance within the authorized shares contains the quantity, nominal value and class of the shares, and may also contain the placement period, the minimum price or other conditions. The statute may provide for the cancellation of unplaced shares, which is reflected in a reduction of the number of issued shares — this mechanism works when a planned investment is cancelled and keeps the capital structure from inflating indefinitely.
Additional Contributions
Article 140 defines mandatory and voluntary additional contributions. Before the placement of shares, the statute or its amendment adopted unanimously by the partners holding the respective share may provide for the partners' obligation to make additional contributions in monetary form; in that case the statute must determine the maximum amount of the additional contribution. Partners make additional contributions proportionally to their shares. A detailed reflection of such obligations creates a disciplined instrument for attracting funds for the company's needs.
At the same time, a partner may, with the consent of the director, make a voluntary additional contribution in non-monetary form as well — with intellectual property, equipment or other property — even where the statute does not provide for such an obligation. In the startup context this means that a founder's new contribution to the company is fixed by an appropriate decision and consent.
Choosing the Financing Instrument
The choice of instrument depends on three factors: the size of the amount needed, the investor's wish — to be a creditor or an owner — and the structural readiness of the company. Debt securities require documented issuance terms; authorized shares require early reflection in the foundation agreement; additional contributions rest on a unanimously adopted statute. Harmonious planning of these three blocks is precisely what a financing advisory must cover: each instrument demands its own documentary basis and procedural deadlines, and their chronological alignment saves both time and cost.
Frequently Asked Questions
What is a debt security?
A monetary claim against the entrepreneurial society; it may carry a coupon or not and may include a conversion right into shares that lets the creditor move towards ownership.
What is an authorized share?
A share that may be issued and placed in the future; its quantity, class and nominal value are fixed in advance in the foundation agreement.
May unplaced shares be cancelled?
Yes, in the case provided by the statute, reflected as a reduction of the number of issued shares.
How is a mandatory additional contribution fixed?
By a unanimously adopted statute that also determines the maximum amount; performance is proportional to the shares.
May a partner make a voluntary non-monetary contribution?
Yes, with the consent of the director — in property or another non-monetary form, even if the statute does not provide for it.
How We Help on Legal.ge
The lawyers of Legal.ge assist startups through the full cycle of a financing plan: choosing the instrument, preparing the issuance terms of debt securities, planning authorized capital and documenting the regime of additional contributions. Contact us on Legal.ge — we will help build the financing of your startup on a legally reliable foundation.