Although an idea may be the origin of a startup, its economic viability determines its success. From the above analogy, it is fair to say that although it may be convenient to start a venture capital investment, the expansion of the business requires certain capital requirements in addition to the initial seed capital. One of the common ways to inject additional capital into a business is to seek out investment from an external third party through private placement. From a regulatory point of view, it is not so compliant, and such investments are usually made to the company's equity capital through private equity funds or venture capital funds. For the purposes of further discussion, an entity that makes such investments may be referred to as an "investor."
Third-party investment:
Seeking a third-party investment in the business is a viable option for the industry, and there are a number of professionally managed private equity funds and venture capital funds that are willing to fund the business through an investment in the company [the "Company"]. Investments are usually made by subscribing to the company's equity or preferred stock capital, which is usually issued at a premium. Investors are more willing to have certain positive voting rights on the company's board of directors with significant financial and management issues related to the company through their acting directors.
Investment terms:
Regarding the equity holding model, the issue price of shares issued to investors, company control and management, retaining the voting rights of investors [or their representatives], board representatives, etc., in joint ventures and shareholder agreements related to investment ["Investment The file "] is described in detail. While funding provides the necessary fuel for the company's growth and expansion, there are some important terms to be aware of when negotiating for investment, including:
• Affirmative voting rights.
The company should carefully manage the affirmative voting rights exercised by investors. Investors usually need a list of reservations, and no action or decision can be taken at a general meeting or board meeting unless they are positively voted by the investor [or its representative]. It is important to review the list of reservations carefully so that the day-to-day operations and flexibility of the sponsor organization are not hindered in order to make decisions about the company's management and operations. Ideally, only actions such as approving the annual audited financial statements; issuing and transferring shares; changing the memorandum or articles of association or changing the company's objectives; transferring significant assets, etc., should require investors to vote affirmatively.
• Lock the promotion group.
Investors usually require the sponsoring group of the company not to transfer part or all of its equity in the company in any way [whether by selling, pledge, mortgage, etc.]. This restriction may be before the investor's shares are diluted to a specific percentage of the company's issued, subscribed and paid-up share capital, or within a pre-agreed time period ["lock-up period"]. Compliance with this regulation is a prerequisite for any transfer of the sponsor's group shares of the company. After the lock-up period expires, any transfer of shares to a strategic buyer requires a notice of pre-emptive rights to the investor. Typically, investors only impose this obligation on the sponsor group, not on their own, and may retain the right to sell their [investors] own shares to strategic buyers on similar terms and conditions. The obligation of the sponsoring group not to sell its shares to the strategic buyer without the sale of investor rights becomes a heavy obligation and sometimes difficult to implement.
• Exit option.
Issues related to withdrawing from the company are also discussed in the investment documents. All of the above terms and conditions are subject to mutually agreed and agreed terms and conditions. Often, investors will negotiate a combination of multiple alternatives to exit the company, usually one of the following:
• Open for sale.
Investors can seek a company to achieve an open offer and list its shares on any recognized stock exchange in India or abroad, which provides investors with the right and/or ability to divest or sell their shares at maturity. A pre-agreed period from the investment deadline.
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In the case of a public offering, the sponsor generally agrees and undertakes to apply to the "initiator" in accordance with the applicable Indian Securities and Exchange Commission ["SEBI"] guidelines to limit its transfer and to ensure that the shareholder is not subject to any such restrictions. . In the case of a public offering, both parties will need to revise the investment documents to facilitate the public offering and to comply with any SEBI guidelines or applicable law.
• Repurchase shares.
If the company is unable to make a public offering, the investor can negotiate on the option [which will be exercised at its discretion] and ask the company to repurchase any or all of the investor's equity at a price that may be prepaid. - Agree or fair market prices that were popular at the time. Typically, the price negotiated by the investor may be a multiple of the stock subscription price plus all dividends declared or not yet paid or the applicable fair market price, whichever is higher. For foreign investors, the price is also determined according to the calculation method specified by the Reserve Bank of India ["RBI"] from time to time.
• Place options.
If the company is unable to repurchase in the above manner, the investor may require the promoter to obtain shares of all investors, and in exercising such options, the promoter is obliged to purchase and acquire the investor's stock, the price may be based on X% Internal rate of return The total amount of the investor's investment in the subscription/purchasing of the investor's shares or its fair market value [whichever is higher] [depending on the guidance] of the foreign investor's RBI].
• Strategic sales along the right delay.
Investors can also seek to exit by motivating strategic buyers to buy their shares. If the buyer wishes to acquire all [100%] equity capital of the company as part of the same transaction, the investor may negotiate to require the promoter to sell the buyer's rights in relation to such sale, and the number of such shares that the buyer may designate .
• Investors force put options.
If the sponsor fails to purchase all the shares held by the investor, and the company is unable to implement the repurchase option and the investor fails to find a strategic buyer who wishes to obtain the stock. Investors, sometimes investors will negotiate a clause that gives them the right to obtain "investor mandatory put options" and obtain specific performance to fulfill the sponsor's obligations to ensure that investors withdraw. This is an option that companies must avoid because it imposes heavy contractual obligations on the sponsor.
• Clearing/liquidation company.
If the sponsor is unable to provide an exit to the investor as described above, the parties may agree that the company will be wound up immediately, neither party will have any objection to such liquidation, and the liquidation proceeds should be distributed to existing shareholders at the time, including investors. [subject to statutory liability and payment restrictions]. Investors may prioritize the payment of liquidation proceeds prior to receiving any distribution from any other shareholder.
It is clear from the previous discussion that while funding is necessary to raise the franchise business to the next level of growth, any investor funding arrangements should be carefully structured and legally reviewed to ensure that it does not deprive the sponsor. The management power of the group. A strict mandatory exit option is also implemented for the sponsor organization.
Orignal From: Private Equity/Risk Investment Business Funding: Fueling for a Healthy Start and the Challenges It Faces
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