The Indian startup landscape thrives on innovation and agility. However, securing funding, especially at the pre-seed or seed stage, can often be a time-consuming process. This comprehensive guide empowers founders, investors, and their advisors to navigate the funding journey efficiently, aiming for deal closure within 30 days.
Understanding the Landscape:
Early-Stage Focus: This guide is specifically designed for early-stage startups seeking pre-seed or seed funding, typically at the idea stage or pre-revenue stage.
Collaborative Approach: Effective deal closure hinges on collaboration between founders, investors, and their professional advisors, including lawyers, accountants, and financial consultants.
The 4 Cornerstones of a Speedy Close:
While legal intricacies are crucial, adopting a strategic approach can significantly expedite the process. This guide outlines four essential stages, each with specific focus areas, to expedite the funding process while ensuring adherence to legal and regulatory requirements:
Term Sheet (4 days):
Laying the Groundwork: The term sheet establishes the key fundamental terms of the investment agreement (while each sub-head highlights crucial elements, legal complexities or specific circumstances may necessitate additional considerations). Aim to finalize this stage within 4 days through effective communication and a focus on key fundamental terms:
Preemptive Rights: Grants the investor the first chance to buy additional shares if the company decides to raise further capital.
Right of First Refusal (ROFR)/ Right of First Offer (ROFO): Gives the investor the first opportunity to purchase the shares in the event any existing shareholder wishes to sell their shares.
Tag Along Rights: Allow existing shareholders to participate proportionately in any future share sales by the investor.
Drag Along Rights: Enable the investor to force other shareholders to sell their shares along with them in a specific scenario, such as an acquisition.
Reserve Matters: Certain actions requiring investor approval, like issuing new shares or selling significant assets.
Board Rights: Define investor representation and voting rights on the company's board of directors.
Investment Structuring: Determine the type of instrument, amount of investment, including equity, debt, or convertible notes.
Hack for faster execution – Focus on Impact: Prioritize negotiating clauses with the most significant impact on the business, ensuring alignment between founders and investors.
Due Diligence (4 days):
Verification and Transparency: Since it’s a pre-revenue stage company, the due diligence will be limited and may only involve examining the basic key company's documents and financial health. Aim to complete this stage within 4 days by gathering and verifying the following key documents:
Incorporation Certificates: Proof of the company's legal existence.
Articles of Association (AOA) and Memorandum of Association (MOA): Outline the company's objectives, share capital structure, and governance rules.
PAN card and GST Registration: Essential tax identification documents.
Bank Account Statements: Provide financial transparency and assist in evaluating the company's financial standing.
Legal Documentation (18 -21days):
Crafting the Framework: This stage involves finalizing key legal agreements, typically taking around 18-21 days. Prioritize focusing on the core clauses within each agreement to expedite the process:
Shareholder Agreements (SHA): Govern the rights and responsibilities of shareholders, including dispute resolution mechanisms and transfer restrictions.
Subscription Agreements (SSA): Detail the terms under which investors acquire shares in the company.
Employment Agreements: Outline the terms of employment for founders and key personnel, critical for protecting intellectual property and ensuring continuity.
Hack for faster execution - Handshake Before Signatures: Foster an agreement-oriented approach, aiming to reach a fundamental agreement on key terms before finalizing legal documents; Clear Communication, Efficient Execution: Strive for clear and concise communication during negotiations and focus on efficient execution over complex legal language; In-Person Meeting: A Collaborative War Room: Consider scheduling an in-person meeting where all key stakeholders can come together. This focused environment, akin to a war room, can facilitate efficient negotiation and closure of essential deal terms and rights, potentially expediting the overall process.
Closing Actions (7 days):
Putting it all together: The final stage involves completing critical tasks necessary to finalize the investment, below are some of the crucial ones. Allocate 7 days to ensure all steps are completed accurately:
Amending the AOA and MOA: Required to reflect changes in share capital and investor rights as outlined in the agreements.
Allotment Forms: Prepare and file various ROC forms for the issuance of new shares to the investor.
Board/EGM Meetings and Resolutions: Convene a board /EGM meetings to approve the investment and pass necessary resolutions.
Opening Separate Bank Account: Dedicate a specific account, in accordance with the applicable laws, to manage the investment funds.
Valuation Report: Preparing valuation report of the company, in compliance with the applicable laws.
Hack for faster execution – Time is of the Essence: While due diligence is essential, prioritize effective time management to expedite the closing process during the legal documentation stage itself.
NOTE: This guide serves as a general framework, and legal complexities may arise depending on specific circumstances.
This article has been co-authored by Karan Dhingra, Corporate Team - Technology Product Coordinator, and Varun Rajda, Partner, Constellation Blu.