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Venture Capital, Private Equity Investments, Startup Funding and Indian Laws - The Ultimate Guide

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Dev Academy

on 4 August 2013

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Transcript of Venture Capital, Private Equity Investments, Startup Funding and Indian Laws - The Ultimate Guide

The Ultimate Guide
for
Entrepreneurs

Venture Capital, Private Equity Investments
&
Indian Laws
Startup Funding: Deal Structure, Legal & Tax Issues

The Idea Phase to Co-founder Phase
Angel Investment Round
Venture Capital Funding
Series A, B, C Rounds
1. Founder's Original Ownership - 100%

2. Company Incorporation not mandatory

3. Co-founder required to convert idea into prototype

4. Equity offered to co-founder ~ 50%

5. Business Incorporation highly advisable

Avoid misunderstandings between founders

IP (Intellectual Property) should be owned by Company
Friends & Family Investment Round
For example, assume investment by friend: $30000
Equity given to friend: 10%
Option pool created for future employees: 20%
Founder's share after dilution: 35%
Value of Company: $500,000
Angel Investment: $100,000
Equity given to investor: 16.67%
Calculation:
Post-investment Valuation: $500,000 + $100,000
= $600,000
Equity given = $100,000/$600,000 = 1/6 = 16.67%

Everyone's share diluted by 1/6 or 16.67%
First version of product ready & initial traction exists
Value of Company: $2 million
VC Investment: $500,000, Equity given to VC: 20%
Everyone's share diluted by 1/5 or 20%
Employees now own small % of Option Stock
50%
50%
35%
35%
10%
20%
16.7%
16.7%
8.3%
29.2%
29.2%
23.4%
23.4%
20%
6.7%
12%
13.4%
1.45%
Venture Capital Laws in India
Term Sheet / Letter of Intent
Memorandum of Understanding
Legal & Financial Due Diligence
Accounting & Taxation
Capital Structuring - Guidelines
FDI (Foreign Direct Investment) governed by DIPP (Department of Industrial Policy & Promotion)

Exchange control governed by FEMA (Foreign Exchange Management Act, 1999)

FEMA confers power on RBI (Reserve Bank of India) to frame regulations

Life-cycle of a Deal: Legal + Tax Issues
Commercial Terms agreed upon after Negotiations

Term Sheet, LOI & MOU generally non-binding

Except for specific provisions: Confidentiality, Expenses etc.

Required to be substantiated by incorporating specific language
Valuation of Company

Status of Regulatory Compliance

Representations & Indemnities to be taken from company & founders

Consideration of corporate, exchange, securities & taxation laws
Capital Structure = Debt Level : Equity

More Debt = More Risk

Factors to be considered while finalizing capital structure:
Funds Required for Assets (fixed + working)
Fund Raising ability (internal + external)
Fund Raising Costs
Inflow of Funds
Type of Ownership
Account Books to Manage Business

Evidence to substantiate financial figures to VC's and PE's

Taxation = Direct + Indirect

Direct Taxes
Income, Wealth, Security Transaction etc.

Indirect Taxes
Customs, Service Tax, Excise,
Sales, VAT etc.
Full transcript