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Importance of Documentation in Start Up Investing

Pranam

According to INC42 , the Indian start-ups have raised about $42 Billion in 2021 spread over 1584 deals, the same was $25 Billion in 2022 spread over 1517 deals . However, the same between the period I Jan 2023 till 21 March 2023 was $3 Billion spread over 3 deals. As per Tracxn Indian Start-ups raised a mere $5.46 billion in the first SIX months of 2023 as compared to $17.1 billion during the first SIX months of 2022 i.e a substantial decline of 68%.

There are many reasons for this decline , however this post is not for understanding the reasons for such a decline . In this post I will like to highlight the documentations that goes with such Startup Funding Deals.

All said and done, the start-up ecosystem is here to stay as the Government of the day is also promoting the same or atleast that is what is being said. The investors are willing to set aside a part of their corpus to invest in this HIGH RISK asset class. And accelerators and angel funds have made such a investing possible by acting as a medium to invest .It’s also a good news to all founders who want to disrupt the ecosystem. However, it is very important for the investors not let down theirs "guards" to join the bandwagon. So both the investors and the founders should know what they are agreeing to , which becomes all the more critical when one of the parties in more experienced then other .

It starts through a Term Sheet and ends with a definitive Shareholder Agreement.

The early stage investors are seeking higher MOIC (Multiple of Invested Capital) whereas the Founders are seeking patient capital that can help them to create next best product and/or service.

One thing is for sure its all about रोकड़ा , everyone is here to make money. So its better for both the parties to know ATLEAST the following terms while investing and signing the Shareholder Agreement -

  1. Rofo( Right of first offer )
  2. Rofr ( Right of first refusal )
  3. Drag rights
  4. Tag along rights
  5. Liquidation Preference
  6. Affirmative rights
  7. Representation & Warranties
  8. Anti dilution rights

Not knowing about above and more can get you feel cheated and at a loss of capital if you are a investor and growth benefits if you are a founder.

Its like Welcome to Jurassic Park - जुरासित पार्क में आपका स्वागत है 




     

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