FUNDING MANTRA: PRE AND POST INVESTMENT DOCUMENTATION FOR A STARTUP
In this Startups Era, brilliant business ideas enhance value addition to society. It is rightly said the early mover reap good advantage.
Comparing millennial classics in Food tech space i.e., Swiggy & Zomato food delivery made a remarkable contribution. Ideas generated and executed finely is turned out to be a necessity in the lifestyle of New India. Popularly such a startup is termed a Unicorns, which means their valuation has surpassed USD 1 Billion. If they had waited a little longer to execute ideas, their names would not be the talk of the town.
But this is just one part of the story, what makes these companies truly valuable is the value perceived by their Investors because these are unlisted Companies, and the public cannot invest in these startups.
Elite Individuals or firms whom we call Angel Investors, Private Equity, Venture Capital, and Investment bankers pick and choose to invest in such innovative and revolutionizing startups.
Let’s take an example of raised USD 2.2 Billion (till April 2021. Swiggy’s first funding was USD 2 Million (Series A) and now it is in Series J. Every round of funding, the startup had to convince its investor with not only its business plan but also the governance of the company and legal documentation.
In this article we will be discussing various documentation works to be maintained and provided by the startup to its potential investors to crack a deal.
We have segregated the documentation into Pre-Funding and Post Funding. It is mandatory to continue this activity rigorously for the healthy growth of the Startup with all compliance adhered to in regular intervals.
1. REGISTRATION CERTIFICATES
These are the source documents for your company and has to be maintained and updated at all times.
2. SHARE CERTIFICATES
Share Certificates are important documents which entitles ownership of the company to the shareholders or the promoters. Any inconsistency can cost the company additional fees like stamping or franking costs and logistics.
Usual issues are when :-
3. LICENCES, PATENTS AND TRADEMARKS
Every Startup now derives most of its value from intellectual property (IP) that it possesses. To name a few, it can be.:-
It is necessary that the startup protects its IP’s by registering a patent or copyright or trademark with relevant authorities depending on the geography in which they are operating and maintain such certificates.
4. COMPLIANCE FILE
Now that you have all basic registration documentation in hand, next step is the maintain a monthly tracker and compliance file to ensure that all regulatory requirements are taken care and recorded regularly. Any compliance lapse can result in :-
5. FINANCIAL STATEMENTS
Financial Statements are an absolute necessary set of reports which depict the performance of a company. Basic statements included here are.
6. CONFIDENTIALITY AGREEMENTS
Most often startups assume that customer data, formulas, processes and techniques are not critical for making or breaking the venture. However, it is found that these secrets are the reason the startup is successful. So, it is necessary that employees, consultants and prospective investors with whom sensitive data would be shared have to be covered by a well drafted Non-Disclosure Agreement.
Always get NDA Signed before sharing information with investor.
7. BUSINESS PLAN OR PITCH DOCUMENT
Pitch Document is an official presentation about your business to the investors. It can be a simple PPT which defines following aspects of your business.
A pitch document should convince an investor that it is a winning idea and also that you have the best team to execute it.
8. VALUATION REPORTS
As per Companies Act 2013, Enterprise and Share Valuation has to be performed by a registered valuer, approved by IBBI. The Startup can get its company valued which will help it to make a better pitch document and help promoters to decide dilution in shareholdings. Commonly used methods of valuations are.
9. TERM SHEET
Now that you have followed all the steps in getting your company ready, you can now approach a potential investor. Once you have generated enough interest with the investor, the investor will ask you to sign a term sheet to transfer money in tranches. This is like signing a sale agreement while buying a property. A term sheet will basically cover following as aspects (including but not exhaustive)
When you have signed a term sheet, it contains various terms and conditions based on which investor will release funds. Due diligence is one such condition which investors always include
Types of Due- diligence
i. Financial Due Diligence
ii. Legal Due Diligence
11. AUTHORISED CAPITAL INCREASE
Hola! Once the investor has agreed to fund your venture, first step is to approach your Company Secretary to carry out the secretarial compliance process, namely.
12. SHAREHOLDERS DEFINITIVE AGREEMENT
This can be called with different terms like Debenture holders Definitive agreement etc. This agreement will be the most important document binding the investors and the promoters here onwards. Most of the times it will be extension of Term sheet running into several pages and having intricate details. Some points that might be additionally included can be
13. EMPLOYMENT AGREEMENT
Most of the investors demand for a tight employment agreement with the founders in the term sheet. This is to protect the interest of the investors and to get long term commitment from founders. Usual terms that can be included here are
Post Investment/ Funding process
Now that you have raised your first series of funding from investors, you still can’t use the money. As per companies Act 2013, only after allotment of shares or securities, the funds can be utilised by the company, till then it should be kept in the escrow account.
So it is necessary that post investment compliance as per term sheet and the Act are followed.
14. Amendment of AOA and SHARE CERTIFICATES
Now that the legal process is complete, the company secretary has to complete the allotment process, which involves
15. INVESTOR RELATION REPORTS
Now that you have successfully completed the round of funding which might usually take 3 – 9 months to execute, its pertinent to take care of investors by adhering to the conditions mentioned in the definitive agreement and also follow best practices. Providing regular reports on development of the company or project can motivate investors to pump in more. Some of the reports can be
1. Monthly Quarterly performance report
2. Compliance Reports
3. Project report
Disclaimer:“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”
CA. Ankith C Shetty