The document discusses various aspects of raising funds for startups through private equity investments. It explains that private equity involves investors acquiring preferred stock in startups in return for funding. Key aspects that are discussed include liquidation preferences, which determine how proceeds are distributed in an exit event, and anti-dilution rights, which protect investors' stake from being diluted in future funding rounds. It outlines the roles that legal experts can play in assisting startups with fund raising activities like conducting due diligence, developing legal agreements and documentation, and advising on investment structures and financing arrangements.
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Raising Funds by Startups- Is Your Startup Ready For It?
1. EquiCorp Associates
Advocates & Solicitors
Raising Fund by Startups-
Is your Startup Ready for it?
Raising Fund by Startups-
Is your Startup Ready for it?
www.equicorplegal.com
2. Various Stages of Fund Raising
Private equity (“PE”) is one of the prime mechanism via
funds are raised by a startup from an investor/venture
capital. It commonly refers to any type of equity
investment in a company whose equity is not freely
tradable on a public stock market, Investments are made
in private markets as opposed to the public markets and
the resultant securities are not supposed to be quoted
/listed on any stock market. PE is generally used for
financing medium - long-term projects with a high return
for an equity stake in potentially high growth
unquoted/unlisted companies. The aim for investor is
simply to sell the companies in their portfolio at higher
prices than the price at which they bought. The rewards-if
the deal works out-can be staggering. Investors invest in
companies in its early stages and older in companies that
may be trouble or are undervalued by other investors as
depicted in the chart :
Private equity (“PE”) is one of the prime mechanism via
funds are raised by a startup from an investor/venture
capital. It commonly refers to any type of equity
investment in a company whose equity is not freely
tradable on a public stock market, Investments are made
in private markets as opposed to the public markets and
the resultant securities are not supposed to be quoted
/listed on any stock market. PE is generally used for
financing medium - long-term projects with a high return
for an equity stake in potentially high growth
unquoted/unlisted companies. The aim for investor is
simply to sell the companies in their portfolio at higher
prices than the price at which they bought. The rewards-if
the deal works out-can be staggering. Investors invest in
companies in its early stages and older in companies that
may be trouble or are undervalued by other investors as
depicted in the chart :
Private equity (“PE”) is one of the prime mechanism via
funds are raised by a startup from an investor/venture
capital. It commonly refers to any type of equity
investment in a company whose equity is not freely
tradable on a public stock market, Investments are made
in private markets as opposed to the public markets and
the resultant securities are not supposed to be quoted
/listed on any stock market. PE is generally used for
financing medium - long-term projects with a high return
for an equity stake in potentially high growth
unquoted/unlisted companies. The aim for investor is
simply to sell the companies in their portfolio at higher
prices than the price at which they bought. The rewards-if
the deal works out-can be staggering. Investors invest in
companies in its early stages and older in companies that
may be trouble or are undervalued by other investors as
depicted in the chart :
www.equicorplegal.com
3. Do’s and Don’ts of Fund Raising
Do not negotiate options, negotiate deals. Look at the successful
model as precedent -- negotiate specific performance of the
financing letters. Must be aware of the commercial risks.
Two-tiered termination fees mean nothing. The recent trend is to
have a two-tiered termination fee -- the lower if financing is
unavailable, the higher for a pure breach. Realize that in a
renegotiation, the investor is always going to have a strong case
for the lower one and that it is the starting point and settlement
will only be lower. It is highly unlikely that the fee will ever go
much above the lower one. A two-tiered breakup fee is a
cosmetic.
Avoid complex drafting. If any section of your agreement has
one or more "to the extent applicable", "Notwithstanding", or
otherwise has too many caveats redraft it to make it clearer and
unambiguous. Stay awake the extra two hours to do this.
Choice of Forum clauses matter. Don't give your buyer leverage
for settlement and postponement by being able to litigate in
multiple jurisdictions.
Do not boilerplate deals. For example, Mr. A
using the same structure for X limited they used
in Y limited created. Market forces require a
rethink of how these documents work -- do not
simply use the old ones.
Financing Documents matter. Think about third
party beneficiary clauses in equity commitment
and financing letters.
Guarantees matter. If you have a specific
performance model make it clear the guarantee is
unaffected. Read these letters thoroughly and
make sure they interact correctly with the merger
agreement.
Think three steps ahead. Spend an hour talking
through scenarios in light of what happens in the
case if any dispute or litigation arises.
Do not negotiate options, negotiate deals. Look at the successful
model as precedent -- negotiate specific performance of the
financing letters. Must be aware of the commercial risks.
Two-tiered termination fees mean nothing. The recent trend is to
have a two-tiered termination fee -- the lower if financing is
unavailable, the higher for a pure breach. Realize that in a
renegotiation, the investor is always going to have a strong case
for the lower one and that it is the starting point and settlement
will only be lower. It is highly unlikely that the fee will ever go
much above the lower one. A two-tiered breakup fee is a
cosmetic.
Avoid complex drafting. If any section of your agreement has
one or more "to the extent applicable", "Notwithstanding", or
otherwise has too many caveats redraft it to make it clearer and
unambiguous. Stay awake the extra two hours to do this.
Choice of Forum clauses matter. Don't give your buyer leverage
for settlement and postponement by being able to litigate in
multiple jurisdictions.
Do not boilerplate deals. For example, Mr. A
using the same structure for X limited they used
in Y limited created. Market forces require a
rethink of how these documents work -- do not
simply use the old ones.
Financing Documents matter. Think about third
party beneficiary clauses in equity commitment
and financing letters.
Guarantees matter. If you have a specific
performance model make it clear the guarantee is
unaffected. Read these letters thoroughly and
make sure they interact correctly with the merger
agreement.
Think three steps ahead. Spend an hour talking
through scenarios in light of what happens in the
case if any dispute or litigation arises.
Do not negotiate options, negotiate deals. Look at the successful
model as precedent -- negotiate specific performance of the
financing letters. Must be aware of the commercial risks.
Two-tiered termination fees mean nothing. The recent trend is to
have a two-tiered termination fee -- the lower if financing is
unavailable, the higher for a pure breach. Realize that in a
renegotiation, the investor is always going to have a strong case
for the lower one and that it is the starting point and settlement
will only be lower. It is highly unlikely that the fee will ever go
much above the lower one. A two-tiered breakup fee is a
cosmetic.
Avoid complex drafting. If any section of your agreement has
one or more "to the extent applicable", "Notwithstanding", or
otherwise has too many caveats redraft it to make it clearer and
unambiguous. Stay awake the extra two hours to do this.
Choice of Forum clauses matter. Don't give your buyer leverage
for settlement and postponement by being able to litigate in
multiple jurisdictions.
Do not boilerplate deals. For example, Mr. A
using the same structure for X limited they used
in Y limited created. Market forces require a
rethink of how these documents work -- do not
simply use the old ones.
Financing Documents matter. Think about third
party beneficiary clauses in equity commitment
and financing letters.
Guarantees matter. If you have a specific
performance model make it clear the guarantee is
unaffected. Read these letters thoroughly and
make sure they interact correctly with the merger
agreement.
Think three steps ahead. Spend an hour talking
through scenarios in light of what happens in the
case if any dispute or litigation arises.
www.equicorplegal.com
4. When a startup raises capital from an
investor/Venture Capital in lieu of equity, the
investor is issued preferred stock, which is different
from the common stock held by founders and
employees. Preferred stock implies that the investor
has certain rights above and beyond those of
common-stock holders. Primary among these are
liquidation preference and anti-dilution rights and
are the most vital part of any fund raising activities.
When a startup raises capital from an
investor/Venture Capital in lieu of equity, the
investor is issued preferred stock, which is different
from the common stock held by founders and
employees. Preferred stock implies that the investor
has certain rights above and beyond those of
common-stock holders. Primary among these are
liquidation preference and anti-dilution rights and
are the most vital part of any fund raising activities.
When a startup raises capital from an
investor/Venture Capital in lieu of equity, the
investor is issued preferred stock, which is different
from the common stock held by founders and
employees. Preferred stock implies that the investor
has certain rights above and beyond those of
common-stock holders. Primary among these are
liquidation preference and anti-dilution rights and
are the most vital part of any fund raising activities.
www.equicorplegal.com
5. Liquidation Preference
Liquidation preference is of two types: Participating and non-participating.
Under participating liquidation preference, also known as “double dip”,
Investors get their money back first in the event of an exit and the remaining
proceeds are divided among all shareholders including the Investors, on a
shareholding basis. Under the non-participating model, Investors can convert
their preferred shares into ordinary shares or exercise liquidation preference,
whichever gives them better returns.
Liquidation preference, as important as valuation for an Investor, ensures the
investor is paid off in the event of liquidation, acquisition, sale of assets or
bankruptcy. As part of the negotiation on liquidation preference, the investor is
entitled to a multiple on their original investment. The market standard is 1x,
meant to protect the investment, but it can go to 2x or two times the investment.
Liquidation preference is of two types: Participating and non-participating.
Under participating liquidation preference, also known as “double dip”,
Investors get their money back first in the event of an exit and the remaining
proceeds are divided among all shareholders including the Investors, on a
shareholding basis. Under the non-participating model, Investors can convert
their preferred shares into ordinary shares or exercise liquidation preference,
whichever gives them better returns.
Liquidation preference, as important as valuation for an Investor, ensures the
investor is paid off in the event of liquidation, acquisition, sale of assets or
bankruptcy. As part of the negotiation on liquidation preference, the investor is
entitled to a multiple on their original investment. The market standard is 1x,
meant to protect the investment, but it can go to 2x or two times the investment.
Liquidation preference is of two types: Participating and non-participating.
Under participating liquidation preference, also known as “double dip”,
Investors get their money back first in the event of an exit and the remaining
proceeds are divided among all shareholders including the Investors, on a
shareholding basis. Under the non-participating model, Investors can convert
their preferred shares into ordinary shares or exercise liquidation preference,
whichever gives them better returns.
Liquidation preference, as important as valuation for an Investor, ensures the
investor is paid off in the event of liquidation, acquisition, sale of assets or
bankruptcy. As part of the negotiation on liquidation preference, the investor is
entitled to a multiple on their original investment. The market standard is 1x,
meant to protect the investment, but it can go to 2x or two times the investment.
www.equicorplegal.com
6.
7. Anti-Dilution Rights
There are two kinds of anti-dilution rights- full ratchet and weighted average:
Full Ratchet Anti-Dilution: Let’s say an investor paid INR 40 per share for a 10%
stake in a company in a Series A funding round. If the company raises capital from new
investors in Series B round at INR 20 per share, the Series A investor holds the right to
convert the value of its shares to INR 20 per share and double its number of shares. A
full ratchet anti-dilution is usually not preferred because founders end up dilution more
than they should have to.
Weighted Average Anti-Dilution: This is arrived at by adding the shares held by the
Series A investor to the shares held by the management and coming up with a weighted
average price per share. This new price per share would be slightly lower than the
price paid by the Series A investor in the first round and allow the company to issue
fewer free shares. It also eases the path for new investors to take stake in the company.
There are two kinds of anti-dilution rights- full ratchet and weighted average:
Full Ratchet Anti-Dilution: Let’s say an investor paid INR 40 per share for a 10%
stake in a company in a Series A funding round. If the company raises capital from new
investors in Series B round at INR 20 per share, the Series A investor holds the right to
convert the value of its shares to INR 20 per share and double its number of shares. A
full ratchet anti-dilution is usually not preferred because founders end up dilution more
than they should have to.
Weighted Average Anti-Dilution: This is arrived at by adding the shares held by the
Series A investor to the shares held by the management and coming up with a weighted
average price per share. This new price per share would be slightly lower than the
price paid by the Series A investor in the first round and allow the company to issue
fewer free shares. It also eases the path for new investors to take stake in the company.
There are two kinds of anti-dilution rights- full ratchet and weighted average:
Full Ratchet Anti-Dilution: Let’s say an investor paid INR 40 per share for a 10%
stake in a company in a Series A funding round. If the company raises capital from new
investors in Series B round at INR 20 per share, the Series A investor holds the right to
convert the value of its shares to INR 20 per share and double its number of shares. A
full ratchet anti-dilution is usually not preferred because founders end up dilution more
than they should have to.
Weighted Average Anti-Dilution: This is arrived at by adding the shares held by the
Series A investor to the shares held by the management and coming up with a weighted
average price per share. This new price per share would be slightly lower than the
price paid by the Series A investor in the first round and allow the company to issue
fewer free shares. It also eases the path for new investors to take stake in the company.
www.equicorplegal.com
8. Role of ECA in raising fund/capital by
Startups
Assist in legal risk analysis
Assist in due diligence
Develop legal framework and regulatory compliances
Advise on investment structure and prepare necessary
documentation (shareholders agreement etc.)
Advise on financing, including security arrangements, and
prepare necessary financing documentation and exit route
Assist in legal risk analysis
Assist in due diligence
Develop legal framework and regulatory compliances
Advise on investment structure and prepare necessary
documentation (shareholders agreement etc.)
Advise on financing, including security arrangements, and
prepare necessary financing documentation and exit route
Assist in legal risk analysis
Assist in due diligence
Develop legal framework and regulatory compliances
Advise on investment structure and prepare necessary
documentation (shareholders agreement etc.)
Advise on financing, including security arrangements, and
prepare necessary financing documentation and exit route
www.equicorplegal.com
10. Value Addition by ECA
Choice of
Entity
• Assisting startups with choosing the ideal legal
structure for their mission and business modelChoice of
Entity
Formation
• Authoring governing documents and counseling
entrepreneurs through provision selection
Governance
&
Compliance
• Guiding client through the complexities of
ongoing governance and corporate complianceGovernance
&
Compliance
• Guiding client through the complexities of
ongoing governance and corporate compliance
Capitalization
• Ensuring legal compliance throughout capital
raise and secure startup financing
www.equicorplegal.com
11. Exit Routes
Listing of shares: The listing of shares subsequently after public offer, is a
well liked route for exiting, as it enable freely transfer of securities in open
market.
Offer for Sale: The investor may get out off the transaction by offering
their holding to any other interested investor.
Sale to Strategic Investors: The investor, if not restricted by the covenants
of the agreement, may sell their stake to any acquirer, who is interested in
taking over the management of the company.
Tag Along Rights: A contractual obligations used to protect a minority
shareholder. Basically, if a majority shareholder sells their stake, then the
minority shareholder has the right join the transaction and sell their
minority stake in the company.
Listing of shares: The listing of shares subsequently after public offer, is a
well liked route for exiting, as it enable freely transfer of securities in open
market.
Offer for Sale: The investor may get out off the transaction by offering
their holding to any other interested investor.
Sale to Strategic Investors: The investor, if not restricted by the covenants
of the agreement, may sell their stake to any acquirer, who is interested in
taking over the management of the company.
Tag Along Rights: A contractual obligations used to protect a minority
shareholder. Basically, if a majority shareholder sells their stake, then the
minority shareholder has the right join the transaction and sell their
minority stake in the company.
Listing of shares: The listing of shares subsequently after public offer, is a
well liked route for exiting, as it enable freely transfer of securities in open
market.
Offer for Sale: The investor may get out off the transaction by offering
their holding to any other interested investor.
Sale to Strategic Investors: The investor, if not restricted by the covenants
of the agreement, may sell their stake to any acquirer, who is interested in
taking over the management of the company.
Tag Along Rights: A contractual obligations used to protect a minority
shareholder. Basically, if a majority shareholder sells their stake, then the
minority shareholder has the right join the transaction and sell their
minority stake in the company.
www.equicorplegal.com
12. Exit Routes contd.
Management Buy Out: When the managers and/or executives of a company
purchase controlling interest in a company from existing shareholders.
Auction of Shares: The investor may sell their stake in an open market
transaction by way of auction.
Buy Back by Promoters: The holding of outsider investor is being
purchased by the promoters through the buyback complying with the
provisions of the Companies Act, 2013
Merger with listed Companies: The most popular way of exiting is merger
or amalgamation of the Investee Company with another listed Company,
enabling the shareholders to freely transfer the shares in open market.
Management Buy Out: When the managers and/or executives of a company
purchase controlling interest in a company from existing shareholders.
Auction of Shares: The investor may sell their stake in an open market
transaction by way of auction.
Buy Back by Promoters: The holding of outsider investor is being
purchased by the promoters through the buyback complying with the
provisions of the Companies Act, 2013
Merger with listed Companies: The most popular way of exiting is merger
or amalgamation of the Investee Company with another listed Company,
enabling the shareholders to freely transfer the shares in open market.
Management Buy Out: When the managers and/or executives of a company
purchase controlling interest in a company from existing shareholders.
Auction of Shares: The investor may sell their stake in an open market
transaction by way of auction.
Buy Back by Promoters: The holding of outsider investor is being
purchased by the promoters through the buyback complying with the
provisions of the Companies Act, 2013
Merger with listed Companies: The most popular way of exiting is merger
or amalgamation of the Investee Company with another listed Company,
enabling the shareholders to freely transfer the shares in open market.
www.equicorplegal.com
14. Consult the Experts-ECA
There can be different structures for raising
funds by a startup, however, a startup should
look into the options which is best suited for
their business.
To know the further details about Raising
Funds by Startups and other legal aspects of
startups, contact us at
admin@equicorplegal.com
There can be different structures for raising
funds by a startup, however, a startup should
look into the options which is best suited for
their business.
To know the further details about Raising
Funds by Startups and other legal aspects of
startups, contact us at
admin@equicorplegal.com
www.equicorplegal.com
15. Equi Corp Associates, Advocates &
Solicitors
“Navigating a complex legal system
takes knowledge, experience &
skill.”
About Us
ECA more than a Law Firm
About Us
Equi Corp Associates (“ECA”) is a multispecialty law firm based in New Delhi,
India started in 2012 for providing affordable access to legal counsel
benefitting start-ups, small and growing businesses, social business enterprises,
impact investors and non-profit organizations. ECA boutique service offerings
are primarily at the intersection of start-up, sustainable development, social
enterprise and investment sectors, advising them about legal aspects involved
in modern markets in order to keep our clients in pace with the dynamic
competitive environment.ECA is instrumental in advising various social
enterprises and start ups in setting up business in India.
ECA not only have some of the best legal minds, but the best business minds
too: lawyers are intimately familiar with the business environment, and know
the emerging risks and opportunities of their industries and practice groups.
ECA is also effective in providing match making partner/locating strategic
alliance, follow up and representation with Government of India or any other
incidental work related to investment or legal guidance in India.
One stop legal boutique with service levels at par
with international law firms. Our respected
clients - from individuals to small businesses to
Fortune 500 companies -- turn to us for trusted
legal counsel.
Full service delivery is achieved by synergies of
subject matter expertise of our in-house Lawyers,
Chartered Accountants & Company Secretaries.
We advise and assist NRI’s/PIO’s, Foreign
Investors and Indian entrepreneurs with legal
services that enables them to compete with best in
world in the modern economy characterised by
technology based, venture capital funded,
futuristic businesses governed by complex and
ever evolving legal and statutory framework.
Equi Corp Associates (“ECA”) is a multispecialty law firm based in New Delhi,
India started in 2012 for providing affordable access to legal counsel
benefitting start-ups, small and growing businesses, social business enterprises,
impact investors and non-profit organizations. ECA boutique service offerings
are primarily at the intersection of start-up, sustainable development, social
enterprise and investment sectors, advising them about legal aspects involved
in modern markets in order to keep our clients in pace with the dynamic
competitive environment.ECA is instrumental in advising various social
enterprises and start ups in setting up business in India.
ECA not only have some of the best legal minds, but the best business minds
too: lawyers are intimately familiar with the business environment, and know
the emerging risks and opportunities of their industries and practice groups.
ECA is also effective in providing match making partner/locating strategic
alliance, follow up and representation with Government of India or any other
incidental work related to investment or legal guidance in India.
One stop legal boutique with service levels at par
with international law firms. Our respected
clients - from individuals to small businesses to
Fortune 500 companies -- turn to us for trusted
legal counsel.
Full service delivery is achieved by synergies of
subject matter expertise of our in-house Lawyers,
Chartered Accountants & Company Secretaries.
We advise and assist NRI’s/PIO’s, Foreign
Investors and Indian entrepreneurs with legal
services that enables them to compete with best in
world in the modern economy characterised by
technology based, venture capital funded,
futuristic businesses governed by complex and
ever evolving legal and statutory framework.
16. ECA’s Network Presence
Our Practice Areas
Corporate & Commercial
Banking & Finance
Real Estate & Project Finance
Employment & Labour
Litigation & Arbitration
Tax & Consulting
Corporate & Commercial
Banking & Finance
Real Estate & Project Finance
Employment & Labour
Litigation & Arbitration
Tax & Consulting
We specializes in verticals such as Nidhi, Micro-
finance, Energy, Start-ups, Social Sector, PE, Retail
Trade, Education & Investment in India/Abroad
17. Our Commitment
Value
One stop legal boutique where assignments carried out at a fraction of the cost of clients
staff
Reduce client staff management time and overhead costs, and increase clients profitability
Enable clients staff to concentrate on more interesting and value-added work
Service
Robust management and procedures to ensure delivery on time and on budget
Dedicated one-to-one communication with client, to ensure every project is right first time
Full service delivery is achieved by synergies of subject matter expertise of our in-house
Lawyers, Chartered Accountants, Company Secretaries and Tax Consultants
Quality
Two-level file review and signoff by expert Lawyers, even for the smallest assignment
Value
One stop legal boutique where assignments carried out at a fraction of the cost of clients
staff
Reduce client staff management time and overhead costs, and increase clients profitability
Enable clients staff to concentrate on more interesting and value-added work
Service
Robust management and procedures to ensure delivery on time and on budget
Dedicated one-to-one communication with client, to ensure every project is right first time
Full service delivery is achieved by synergies of subject matter expertise of our in-house
Lawyers, Chartered Accountants, Company Secretaries and Tax Consultants
Quality
Two-level file review and signoff by expert Lawyers, even for the smallest assignment
Value
One stop legal boutique where assignments carried out at a fraction of the cost of clients
staff
Reduce client staff management time and overhead costs, and increase clients profitability
Enable clients staff to concentrate on more interesting and value-added work
Service
Robust management and procedures to ensure delivery on time and on budget
Dedicated one-to-one communication with client, to ensure every project is right first time
Full service delivery is achieved by synergies of subject matter expertise of our in-house
Lawyers, Chartered Accountants, Company Secretaries and Tax Consultants
Quality
Two-level file review and signoff by expert Lawyers, even for the smallest assignment
18. Our Core Strengths
Dedicated team of legal professionals with strong deal exposure and knowledge of
regulations /compliances across multi industry sectors.
Proactive and structured approach.
Well defined Project methodology tailored to suit the needs of clients for service
delivery.
Talented team with experience of working with some of the largest companies in India
exposure to leading cross border transactions in India.
Experience & proven capabilities to handle Diversified Multi-national Clients i.e.
Information Technology, Energy, Manufacturing, Consultancy, Oil & Gas Sector,
Retail Trading, Hospitality, and related sectors.
Competitive advantage of costing by virtue of expertise and experienced resources.
Dedicated team of legal professionals with strong deal exposure and knowledge of
regulations /compliances across multi industry sectors.
Proactive and structured approach.
Well defined Project methodology tailored to suit the needs of clients for service
delivery.
Talented team with experience of working with some of the largest companies in India
exposure to leading cross border transactions in India.
Experience & proven capabilities to handle Diversified Multi-national Clients i.e.
Information Technology, Energy, Manufacturing, Consultancy, Oil & Gas Sector,
Retail Trading, Hospitality, and related sectors.
Competitive advantage of costing by virtue of expertise and experienced resources.
Dedicated team of legal professionals with strong deal exposure and knowledge of
regulations /compliances across multi industry sectors.
Proactive and structured approach.
Well defined Project methodology tailored to suit the needs of clients for service
delivery.
Talented team with experience of working with some of the largest companies in India
exposure to leading cross border transactions in India.
Experience & proven capabilities to handle Diversified Multi-national Clients i.e.
Information Technology, Energy, Manufacturing, Consultancy, Oil & Gas Sector,
Retail Trading, Hospitality, and related sectors.
Competitive advantage of costing by virtue of expertise and experienced resources.