FINANCING OPTIONS AVAILABLE FOR STARTUP COMPANIES (START-UP FUNDING COMPLIANCES)
The startup company you founded is the brainchild of your ideas and you have successfully completed your private limited company registration, Finance is the lifeblood of any business and understanding Fundraising options for startup companies is critical for the success of the company In case the venture is self-funded there can be no better option than that, in this article we will learn about START-UP FUNDING OPTIONS AND COMPLIANCES
What is Seed Capital?
- The funding done at the nascent stage is called seed funding and the capital is known as a seed capital.
- Seed capital is the initial capital used at the time of starting the business
Seed capital can come from the founders, families or friends
Seed funding permits exploration of the business idea and converting it into a viable product or service that further attracts venture capitalists
Seed funding is a risky investment option, as most funding agencies would like to adopt a wait and watch approach to see whether the idea has a business potential
Types of Financing for Start-Up Fund Raising
There are two types of Funding options available
(a) equity financing;
Equity Financing for Start-Up Fund Raising
Startups are usually equity financed/funded by way of a
- venture capital/ private equity investors
2) Angel investors
What is venture capital/ private equity investment in Start-Up Fund Raising
- This would basically be the first round of funding for any company
- Investors prefer convertible instruments route
- Convertable Instruments means instruments which can be converted into equity capital at a specified date
- Convertable instruments include Compulsory Convertible Preference Shares ( CCPS) and Compulsory Convertible Debentures ( CCD)
The investor and startup will normally enter into a non-binding offer based on the preliminary valuation of the startup usually followed with a financial, legal and technical due diligence on the startup as required by the investors
2. Who are Angel Investors and what are restrictions placed on Angel Investors?
Angel investors are usually individuals or a group of industry professionals who are willing to fund the venture in return for an equity stake. Under the SEBI (Alternative Investment Funds) Regulations, 2012 which was subsequently amended in 2013, SEBI has made the following restrictions apply to angel funds investing in an Indian company:
a. An investee company has to be within 3 years of its incorporation, not listed on the floor of a stock exchange, and should have a turnover of less than INR 250 million and not be promoted by or related to an industrial group (with group turnover exceeding INR 3 billion).
b. The deal size is required to be between INR 5 million and INR 50 million. Separately, it is required that an investment shall be held for a period of at least 3 years.
What is meant by Term Sheet in fundraising exercise? (Start-Up Funding Compliance)
Term Sheet also referred to as Letter of Intent /Memorandum of understanding which is entered into between the investors and the company represented by its promoters
Term Sheet setting out the basic commercial understanding between the VC and the startup;
Funding Procedure (Start-Up Funding Compliance)
a) A Term Sheet / Letter of Intent /Memorandum of understanding is entered into,
(b) The contracting parties will enter into a Share Subscription Agreement/ Debenture Subscription Agreement. It usually captures the following:
▪ the issuance of shares in the share capital or debentures at subscription amount determined based on the valuation of the startup;
▪ condition precedents to completion of transaction or conditions subsequent to be completed within the agreed time frame after the completion date;
(c) The contracting parties may enter into a Shareholders’ Agreement providing for the following:
▪ Nomination/representation rights on the board of investee;
▪ Information and reporting right and disclosure obligation of investee to the investors;
▪ Redemption rights on debenture or preference shares;
▪ Pre-emption rights, Right of First Refusal or Right of First Offer, Tag Along Right, Drag Along Rights, Lock-in-period for the investor or promoter’s holding, put and call options, affirmative vote rights on certain reserved matters, anti-dilution provisions;
▪ Exit options to investors after the lock-in-period; etc.
(d) Issuance of Securities through Private Placement process;
(e) Filing of necessary eForms with ROC for completing the process of issuance and allotment of securities.
(f) Amendment of AOA as per Shareholders’ Agreement;
3: Bridge Round
Bridge Round financing normally comes from an investment bank or venture capital firm in the form of a loan or equity investment. This type of financing only occurs when a company’s runway is shorter than its future financing options, and it needs to remain solvent in order to obtain such long-term financing.
4: Series Funding
Series Funding, After Seed Funding Round or Angel Funding Round and Bridge Funding Round, Series Funding Round will start like Series A to Z. Series preferred stock is the first round of stock offered during the seed or early stageround by a portfolio company to the venture capital investor.
Series preferred stock ( that is the CCPS or CCDS )is often convertible into common stock in certain cases such as an Initial public offering (IPO) or the sale of the company.
Series rounds are traditionally a critical stage in the funding of new companies. A typical series A round is in the range of $2 million to $10 million, purchasing 10% to 30% of the company. The capital raised during a series round is usually intended to capitalize the company for 6 months to 2 years as it develops its products, performs initial marketing and branding, hires its initial employees and otherwise undertakes early stage business operation
It very critical for entrepreneurs who are promoters to understand the basis of fundraising along with an understanding of (i) what is a share certificate (ii) How does Loan to Directors work under companies Act (iii) Why its important to file Anual returns
For any help on startup fundraising and compliance, contact virtual auditor support team at [email protected] or contact us at 99622 60 333 / 99622 30333