DUE DILIGENCE PROCESS:
- Company shares the pitch deck
- A deep dive call/meeting to understand the business in detail
- To understand whether the opportunity interests us
- To discuss the basic process and fund raise details
- Post the call companies are asked to share :
- Financial model - actuals and projections
- Capitalisation table
- Literature on the industry and market in which business operates
- Reference calls made by the team to customers, advisors and other stakeholders of the business like suppliers, previous investors etc.
- To understand industry dynamics, problem that business solves and value it adds to customers
- To take feedback on the product and management team
- Our team visits company's office to take product demo and meet the entire team
- A term sheet to be drafted and shared with us
- Reiteration of the term-sheet to finalize the clauses as per mutual agreement
- Legal and accounting compliance needs to be completed
- Face to face meeting between investors and promoters
- SHA is circulated and post- execution fund disbursement takes place
Each step should take maximum time of a week assuming all the information is available when required.
Valuation of a start-up:
- We use a dynamic equity evaluation model to make sure our founders are treated fairly.
- Agreeing on a valuation when raising funds is always a huge challenge for the founder. The entrepreneur is over optimistic, and wants his equity to be priced based on the value he is sure he will be able to create in the future, once he gets the funds. Investors are skeptical, because they have burnt their fingers in the past, and they know that the failure rate for startups is very high. Investors want to see some performance before they get comfortable with valuing the company. The founder is in a fix. How can I prove how well I can deliver without getting the funds to implement my ideas?
- One solution is to use a dynamic equity pricing structure . The easiest way to do this is to infuse funds via a CCPS ( compulsorily convertible preference shares), where conversion to equity happens on a pre-defined valuation , which is linked to mutually agreed outcomes. This way the entrepreneur gets to keep as more equity , provided he is able to deliver what he said he would.
- For example, let's assume a company is being financed , and the outcome on which valuation will be based will be the number of paying customers the founder is able to acquire 1 year after funding .The valuation could be ₹ X Crores for 10000 users - and ₹ X+Y Crores for very additional 1000 users. The harder the entrepreneur works , the bigger the share of the company he gets to keep, so that incentives are aligned.
- A limitation of this is that metrics can be gamed to achieve desired outcomes or disagreements can come up post the agreement. For example, should paying users who drop out after a few weeks be included or not? However, if the intent is right – to create win-win outcomes many of these can be addressed before hand. If one is trying to game measurement of outcomes, one has chosen the wrong partner.
Term sheet to cash in bank a/c:
- Sign Term sheet
- Hire a lawyer familiar with company law to draft a Shareholder agreement
- Hiring a CA / CA firm with Company secretary (CS) associates to handle ROC filings to process investment
- Get agreement with investors on Shareholder Agreement. Convening a Board meeting for authorizing the execution of shareholder agreement
- Execution of shareholder agreement
- Issuing form PAS-4 (offer letter ) to the investors along with share application forms serially numbered
- Filling of Form PAS-4 (offer letter) with the ROC within 30 days from the circulation of Form PAS 4
- Completion of all Conditions Precedent (if any in the shareholders agreement)
- Investors shall notify their approval, on which the Investors shall subscribe to shares
- Convening a Board Meeting for issue and allotment of shares to the investors, alteration of the articles of association
- Appointment of nominee director (if mentioned as part of the agreement) on the board
- Receiving the nominee director’s consent in Form DIR-2
- Filling of Form PAS 3 with the RoC (within 30 days from the date of the allotment of shares)
- Filling of Form MGT 14 (declaration of key resolutions) with the RoC, after enclosing the closing board resolution and the shareholders’ resolution
- Filling of Form DIR -12 (after attaching Form DIR – 2, providing for consent to hold the office of a director) with the RoC for appointment of nominee director (if mentioned as part of agreement)