The Great Metamorphosis: Private Market Investing Outlook, Insights & Projections 2023-24

A qualitative report on the private market ecosystem with key trends, data, and insights that point to a maturing startup ecosystem

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Investor rights

Here are the rights LetsVenture can get for you

1) Appointment of Board Representative / Observer

What does it mean?

Generally, the investors appoint a representative on the board of the company to keep an eye on business and strategic development as well as the management of the startup.

What are the challenges?

Board representation is given by founders to substantial shareholders who holds more than 10% shareholding.  LV’s investment in most of the startups is less than 2%.

For the investor on the platform, here’s what LV can do:

When our investments in a startup is more than 10%, we will negotiate for a board representative/observer. We can ask the lead investors or any other interested investor to take this opportunity to be on the board of the startup as an observer.

In such a situation, LV shall approach the investors of that particular scheme to take their willingness to be appointed as board observer. In case of receiving multiple interest from investors, LV will choose the investors with the highest capital contribution.

2) Quorum of Board Meeting

What does it mean?

When an investor has a board representative, that board member becomes a mandatory member to form a quorum for all or certain business matters.

What are the challenges?

Founders consider this as a hurdle to continue business and delay in decision making.

As an investor on the platform, here’s what LV can do:

When LV’s participation is more than 10% in the cap table and we have a board representation, this right may be negotiated.

3) Voting right

What does it mean?

Shareholders normally get voting right in all special business activities. The company will call out EGM/AGM to discuss these items. Voting rights provided to the investors (in their capacity as shareholders) shall be in proportion to their shareholding.

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

LV gets this right. LV receives EGM and AGM notices and invites to participate in the shareholder meeting. The agenda list in the Notices are reviewed by LV and appropriate actions are taken based on discussion with founders, leads, and investors.

4) Reserved Items / Veto Right

What does it mean?

Reserved matters are the actions that the company, its directors and shareholders shall not do without the explicit approval by the investor or at least a certain proportion of specific persons. The decision is 'reserved' for certain people.

What are the challenges?

Founders consider this as a hurdle to conduct business and agree to give only for substantial shareholders.

As an investor on the platform, here’s what LV can do:

With the change in the startup ecosystem, this right is now being offered only to the lead investor of the round or investors with big ticket size. Founders feel that it is a business hurdle to manage too many investors for taking business decisions. 

When LV’s investment is more than 3%, we negotiate to have this right. When founders deny to offer this right, LV negotiates to receive notice and allow the company to proceed with the majority consent. Thereby LV gets an opportunity to know the major happenings in the company.

5) Information Rights

What does it mean?

Shareholders will get information pertaining to financial data /business update /statutory notices received /litigation info etc., /management change/major events etc., about the company on a periodical basis through this right. Shareholders also get visitation and inspection right through information right.

What are the challenges?

Founders consider this as an administrative inconvenience to share periodical financial update and business updates with every investor. They agree to share with substantial shareholders.

As an investor on the platform, here’s what LV can do:

Founders deny this right for small-ticket investors. 

Whatever be LV’s investment percentage, we try to get this right because we need financial information about the company to update our investors and to prepare the NAV as per SEBI mandate.

When we don't get financials of the company, LV downloads the same from the MCA website by paying the nominal fee to assess and prepare a valuation report.

6) Participation in Future Fund Raise (Anti-dilution)

What does it mean?

Anti-dilution protection is triggered when new shares are issued by the company at a price which is lower than the price at which the shares were purchased by the existing investor. Essentially, it protects the investor from the dilution of equity stake due to down-round financing.

What are the challenges?

They agree to share with substantial shareholders, not with every investor.

As an investor on the platform, here’s what LV can do:

This right is now being offered only to the lead investor of the round or investors with big-ticket size. 

A 3% shareholding is the threshold to get this right in the industry. Since this protects our investment if the company raises down round, we give away certain other rights in negotiations to get this right.

7) Pre-emptive right

What does it mean?

Pre-emptive rights allow the shareholders to buy additional shares in any future issue of the company's common stock before the shares are offered to any other person.

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

This right is available to each existing shareholder as per the Companies Act and hence there is no challenge in getting it.

8) Right to tag or drag along

What does it mean?

Tag-along or co-sale rights are essentially the opposite of drag-along rights. Where tag-along rights give minority shareholders negotiating rights in the event of a sale, drag-along rights force the minority shareholders to accept whatever deal is negotiated by majority shareholders" This is an exit mechanism wherein , investors will be given Tag Along and Drag Along rights in the event that they are not provided a satisfactory exit by the founders and the startup."

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

A 2% and above is the threshold to have this right. We can negotiate to get these exit rights.

9) IPO participation

What does it mean?

This is part of the Exit right. Shareholders get the IPO participation full/partially during the IPO.

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

We get this right.

10) Liquidation Preference

What does it mean?

Liquidation Preference (LP) is the order in which the proceeds of the assets of a company are divided among its shareholders, and it is contingent on the happening of a pre-determined liquidation event. Investors may ask for participatory LP with a certain multiple to their investment (for example: 2X participatory LP). Founders normally negotiate for 1X non-participatory LPs.

What are the challenges?

Founders agree to share with substantial shareholders, not with every investor.

As an investor on the platform, here’s what LV can do:

With the change in the startup ecosystem this right is now being offered only to the lead investor of the round or investors with big-ticket size.

We structure in such a way that we subscribe for CCPS securities which will have preference over the equity shares. While we participate in CCD and Safe notes, we negotiate hard to get this right by giving away certain rights.

11) Exit Rights

What does it mean?

Every investor, while making an investment in a company, is also keen to devise an Exit strategy that will provide the investor with an assured Exit from the company and a return on the made investment. Furthermore, from an investor’s perspective pre-deciding an Exit policy is important to provide for a smooth Exit from an unprofitable or non-performing investment. Usually, an Exit can be structured by following any one or more of the following options: 

Initial Public Offering 

Third-Party Sale 

Buyback of Securities 

Call Option 

Put Option

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

Founders don’t offer Exit rights when the shareholding is less than 1 %. However, we negotiate to get this right.

12) Founder Lock-in (restriction on transfer of shares)

What does it mean?

Normally, the investors would insist on a lock-in period for a certain number of years (normally 3 years) on the shareholding of the founders. During this period, the founders will not be allowed to transfer or sell their shares to any third party.

What are the challenges?

Founders agree to share with substantial shareholders and but with every investor

As an investor on the platform, here’s what LV can do:

In recent times, we see the founders reducing the lock in period to 1 year or negotiating for a waiver. We give away this right to get anti-dilution and liquidation preference rights.

13) Right of First Refusal (ROFR) / Right of First Offer (ROFO)

What does it mean?

Right of First Offer (ROFO) or the Right of First Refusal (ROFR) allow the continuing shareholders an option to purchase the shares from the exiting investor/founder in order to consolidate their control over the company. Inclusion of either of these rights in the SHA serves dual benefits – first, it allows the continuing shareholder to maintain control over the entry of a new shareholder, and second, it addresses the liquidity concerns of the exiting investor.

What are the challenges?

There are no challenges in getting this right.

As an investor on the platform, here’s what LV can do:

Founders don’t offer Exit rights when the shareholding is less than 1 %. However, we negotiate to get this right.

14) Personal Liability

What does it mean?

Shareholders may ask for founders or promoters’ personal liability in SHA. The parties can opt for a suitable insurance scheme like the Directors and Officers (D&O) Liability Insurance.

What are the challenges?

Founders agree to share with substantial shareholders, not with every investor.

As an investor on the platform, here’s what LV can do:

Founder’s personal liability is offered only to substantial shareholders of 10% and above. LV insists on companies taking D&O insurances. However, startups taking D&O insurance are yet to happen in India.

15) Non-Solicitation / Non-Compete

What does it mean?

Shareholders may ask the promoters or founders not to start a similar business along with the startup or after their exit from the start up for certain period.

What are the challenges?

Founders agree to share with substantial shareholders, not with every investor.

As an investor on the platform, here’s what LV can do:

Generally, the SHA does not capture this. We put this as part of the reserved rights to have a check.

16) Indemnity

What does it mean?

Shareholders may ask for Indemnity (security or protection against a loss or other financial burden) on breach of reps and warrants made by the company/founder and willful misconduct and fraud.

What are the challenges?

Founders agree to share with substantial shareholders, not with every investor.

As an investor on the platform, here’s what LV can do:

Most of the companies agree to it. However, certain founders negotiate on the percentage of indemnity.