Private Equity/Venture Capital Funding Of Business: Fuel For Healthy Start-Ups And Its Challenges

 Private Equity/Venture Capital Funding Of Business: Fuel For Healthy Start-Ups And Its Challenges

 

While an idea may be the genesis of an entrepreneurial venture, it’s the economic viability that defines its success. Drawing an analogy from the above statement, it is fair to state that while starting up a venture may be convenient to achieve, expansion of the business requires certain funding requirements apart from the initial seed switzerland tours capital. One of the common methods of infusing additional capital into the business is seeking external third party’s investment through private placement. Being less compliance-oriented from a regulatory standpoint, such investments in the equity share capital of the company are commonly preferred through private equity funds or venture capital funds. The entity making such investments may be referred to as the “Investor” for purposes of further discussions.

Third Party Investments:

Seeking third party’s investment in the business is a viable option for the industry and there are several professionally managed private equity funds and venture capital funds that are willing to fund the business through investments in the company (“Company”). Investments are typically structured through subscription in the equity or preference share capital of the Company and shares are usually issued at a premium. The Investor prefers to have a representation in the Board of Directors of the Company through its nominee director(s) having certain affirmative voting rights on critical financial and management issues related to the Company.

Investment Terms:

The issues related to the share holding pattern, issue price of the shares issued to the Investor, control and management of the Company, reserved matters requiring affirmative voting rights of the Investor (or its representatives), representation on Board of Directors, etc., are addressed in detail in the Joint Venture and Shareholders’ Agreement (“Investment Documents”) that are executed in relation to the investment. While the funding provides the necessary fuel for growth and expansion of the Company, there are some important terms that should be careful in negotiating while seeking investment including:

  • Affirmative Voting Rights.

The Company should carefully administer the affirmative voting rights exercised by the Investor. Investors generally require a catalogue of reserved matters where no action or decision can be taken either at the shareholders meeting or the board meeting unless it has received the affirmative vote of the Investor (or its representatives). It is important to carefully review the list of reserved matters so that it does not impede the day-to-day operations and flexibility of the promoter group to take decisions with regard to management and operation of the Company. Ideally, only those actions such as approval of the annual audited financial statements; issue and transfer of shares; alteration of the Memorandum of Association or the Articles of Association or change in the Company’s objectives; transfer of substantial assets, etc., should require affirmative vote of the Investor.

  • Lock-in for Promoter Group.

Investors usually require the promoter group of the Company to not transfer in any manner (be it by way of sale, pledge, mortgage, etc.) part or whole of their respective shareholdings in the Company. Such restriction may be either until dilution of Investor’s share holding to a specific % in the issued, subscribed and paid-up share capital of the Company, or for a pre-agreed time period (“Lock-In Period”). Compliance with this provision is made a condition precedent to the registration of any transfer of any shares of the promoter group by the Company. Post expiry of the Lock-In Period, any transfer of shares to a strategic buyer requires a notice for right of first refusal to the Investor. Usually Investors impose this obligation only on the promoter group and not on themselves and may also retain a right of co-sale of their (Investor’s) own shares to strategic buyer on similar terms and conditions. The obligation on the promoter group not to sell its own shares to a strategic buyer in absence of sale of the Investor’s rights, becomes an onerous obligation and sometimes difficult to implement.

  • Exit Options.

Also discussed under the Investment Documents, are issues related to exit to the Investor from the Company. All the above terms and conditions are subject to mutually negotiated and agreed terms and conditions. Usually an Investor would negotiate for combination of more than one alternative option to exit the Company, typically being any one of the following options:

  • Public Offering.

 

 

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