3 Investor Rights You Must Know Before Putting Your Money in a Startup

“You Can’t Fight for Your Rights If You Don’t Know What They Are”

Investment in a startup is an opportunity to enter a new industry, a new market and develop a long partnership with your investees. Though, sometimes it can be a little scary to fully comprehend the terms and conditions entailed in the deal documents. A typical deal agreement covers five key areas – deal economics, investor rights, governance, management and control, and exit. We have worked closely with thousands of businesses, business buyers and investors over the last 5 years, and in this article, we will share with you the key rights that are available to an investor in a startup.

Rights Against a Down-round: This right is called Anti-Dilution Right, and it protects the investor from devaluation of his stocks against any future investment into the startup at a lower price or valuation. If there is a down-round, i.e., the business raises the next investment at a lower valuation, then the prices of shares of the earlier investors are also reduced to the current price with retrospective effect. The adjustment is reflected by a proportionate increase in their shareholding percentage. Need a refresher on business valuation? The following article tells you in a nutshell everything you need to know about business valuation.

Rights Against Investor Overriding: This provision is collectively referred to as ‘Control Rights,’ and it makes the business owner liable to communicate and take approval of the investors for any material changes in ownership, business model, strategy, any material transaction, contracts, and so on. Control Rights are usually negotiated between the investor and the business before finalizing the agreement, however, at the end of the day, the stronger your partnership with the investee, the more you can stay involved in the startup. Here are some additional tips you should remember when investing in a small business.  

The right of First Refusal (ROFR): What if a business owner or promoter decides to sell a part or all of his shareholding? ROFR gives the investors precedence over any third party when it comes to purchasing the owner’s / promoter’s shareholding. It is only when there is a written refusal from investors to buy the promoter’s stocks that a third-party sale can be initiated. How does this protect the investor? Note that as an investor you not only bet your money on the startup but also on the people running it – i.e., the owners or the promoters. You can avoid onboarding an unknown third-party by exercising ROFR.

While we have tried to explore the key investor rights briefly in this article, a professional deal consultant can help you understand the full plethora of rights available to an investor, and help you negotiate the same. Indiabizforsale.com is India’s most preferred business opportunity platform that is trusted by over 25,000 business owners, investors, buyers, consultants and investment bankers. To know more about what we do and how we can help you, explore us.

Why Deals Fall Apart?

If it is important to you, you will find a way. If not, you will find an excuse.

Whether you are a business buyer, investor or a business owner, you must be wondering, what are the conditions that can make or break a deal. We have worked closely with thousands of users over the last few years in buying, selling, growing and fund-raising for businesses, and one of the most common questions we get asked is: What can make or break a deal? In this article, we bring to you our exclusive insights on keeping a deal smooth and hassle-free. Over the last few years, we have helped thousands of users on our platform to discover the best deals to buy, sell, grow and fund businesses, and this is a common question we get asked. While there are no hard-and-fast rules about stopping a deal from collapsing, there are, however, a few important principles that both parties in a deal can follow which can make or break a deal.

  1. Transparency and Honesty: This is a no-brainer. Would you ever like to enter into any transaction with someone whose ethics, integrity and morals are in question? Most likely not, and the same holds for the other party. The best deals are those in which expectation settings are clear right from the beginning. This is not to say that you must lay bare all the sensitive information about your business on the very first day. You can take your time and qualify buyers as per their seriousness and interest in your business before giving out critical information. However, do not lie, misrepresent or miscommunicate, and encourage the other party to do the same.
  2. Trust and Confidence: Sometimes, it is not enough to be just honest yourself. You have to give a chance to the other party to demonstrate honesty and commitment to you. We have seen a number of deals fall apart where either one or both the parties refused to walk the last mile with each other despite long discussions and no visible breach of honesty. There are a number of legal tools available to enforce understanding between two parties even before the deal actually takes place. But, in the end, these are just tools – you will have to cultivate the trust by yourself. Seasoned deal moderators and mediators often come handy in developing rapport between parties and getting the deal through.
  3. Realistic Negotiations: An important thing to remember is that, negotiations on aspects like valuation, payment terms, rights and obligations, etc. are meant to bring out a fair deal structure, and not to solely serve the interests of any one party. For example, a common mistake that business owners make is to overvalue their business. Get your business valued by an independent valuation expert to avoid unnecessary conflict. Have a seasoned negotiator on-board to help you get the best out of the deal without undercutting the other party.
  4. Seamless Communication: A deal is never just a piece of paper. It happens between two people, or two parties, and to bring the deal to closure through a long journey, it is important that communication between them is regular, well-timed, and two-way. Take out time to listen to the other party and voice your own concerns. Rope in your consultant when needed, but stay connected to the deal at its core by getting regular updates. Technology has made life easier today, but it won’t harm to meet each other once in a while and iron the kinks out. It is also important that you talk about things outside the deal such as your work experience and professional background, future plans, and so on.

So, what are you waiting for? Discover the perfect business opportunity that matches your preferences and get the deal of your dreams with Indiabizforsale.com, the most preferred network to buy, sell, fund and grow businesses in India. To know more about who we are and how we can help you, write to us at [email protected].

Connecting Businesses with Opportunities

Newsletter Issue 34

February 2016

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Connecting Businesses with Opportunities
The idea of looking to buy a business starts by finding and connecting with the right opportunity at the right time. Most aspiring investors put a lot of effort into choosing the right business they are looking to acquire. In our experience, it stands true that an organised approach will help you find the right business.

Let us help you in connecting with the right Business Opportunities for Investment in India.

Continue reading “Connecting Businesses with Opportunities”

Deal Closed in 3 weeks : IndiaBizForSale.com Newsletter October – November 2015

NEWSLETTER ISSUE 31

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Small Business in Delhi Sold in 3 weeks !!!
Last month, at IndiaBizForSale.com, a running business from Delhi got sold in three weeks.  This franchise restaurant business was started less than a year ago in a busy residential area. We studied the reasons why this business found a serious buyer through IndiaBizForSale.com very quickly.

Continue reading “Deal Closed in 3 weeks : IndiaBizForSale.com Newsletter October – November 2015”

New Outlook: More Business Opportunities : IndiaBizForSale.com Newsletter – September 2015

NEWSLETTER ISSUE 30

Indiabizforsale

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Greetings from IndiaBizForSale.com!

Surprise! Surprise! We are so pleased to bring you a new web version of www.IndiaBizForSale.com, look forward to hear your feedback.

We have made this version more user-friendly from design perspective. Also, we have changed our general theme including colour, text size, icons and fonts to make it easy to navigate. Few pages are still being optimised for mobile version, rest assured we are working on these and will be ready for you in coming days. Continue reading “New Outlook: More Business Opportunities : IndiaBizForSale.com Newsletter – September 2015”

Startup Partnership Opportunities: IndiaBizForSale.com Newsletter – August 2015

NEWSLETTER ISSUE 29

Indiabizforsale

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Greetings from IndiaBizForSale.com!

This month we have seen number of startup opportunities finding the match. We had an online food business being acquired; an augmented reality service startup got connected with an angel group; a speciality travel startup got connected with an established online travel company and a safety device firm got engaged and now at a negotiation stage with an investor.

Currently, we see many startups connecting with established companies to associate/ partner to grow faster and achieve traction. Established companies also get access to the technology and IP created by startup to further leverage their existing set up.

Continue reading “Startup Partnership Opportunities: IndiaBizForSale.com Newsletter – August 2015”

Reasons Why Entrepreneurs do not Sell their Inactive Startups

Entrepreneurship was something people were averse to pursue some 15 years back in India. But now the scenario has completely changed and it has become the order of the day. After completing graduation, some students prefer to work on their own startups to lucrative corporate jobs. At the same time, a section of people working in MNCs are also starting their own ventures, leaving high paid corporate jobs. But not all of them ace the test of entrepreneurship.

Statistics say that in India 80% of the startups do not succeed and they become inactive over time. These startups could be at different stages, with some of them hardly completed 1 year and some with 3-4 years running. Some entrepreneurs usually want to sell off their startup and others do not do anything about it. But the products/services they have developed might be of use to some other startup/ company (these may even include website, mobile app, customer database etc.). Even if they are sure of getting some return on their investment, many entrepreneurs do not sell their startups (that are almost at the verge of failure) due to several reasons.

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Growing Investment Interest in Indian Education Sector

Education is considered the most crucial and the vital key for modernisation and development. The importance of education can be evaluated from the fact that every advanced society and culture is promoting universalisation of education as a parameter for long term economic development. There is a huge demand for advancement and modernisation of education system in India, as the country is estimated to have an excess of 47 million resources in the working age group by 2020. As per the prediction of the consumption trends urban India is investing 9% of earning on education whereas the rural consumer is limited to 6%.

Ecosystem of Education in India
Of late education sector in India has witnessed a chain of changes, resulting in a significant rise in the market share of the education sector. With economic development and evolving technology, Indian education sector has reasons to celebrate. The Government of India has also initiated many plans to attract investments from non-resident Indians for the development of education infrastructure.

Continue reading “Growing Investment Interest in Indian Education Sector”

Expanding Horizon – A New Partnership: IndiaBizForSale.com Newsletter – July 2015

NEWSLETTER ISSUE 28

Indiabizforsale

BizNews: Your Monthly Refresher for Buying and Selling of Business in India

Greetings from IndiaBizForSale.com!

In the last few weeks we have been amazed (can’t complain) with the number of inquiries we have received, our office mobile lines died number of times (with drained battery) in the first week of July. We have been covered by Economic Times, IndiaToday, PC Tech, MoneyBhaskar.com in last few weeks, receiving compliments from across India for our team’s activities. Whilst the media has been loving our story, we have been busy developing new version of the website (coming soon).

Continue reading “Expanding Horizon – A New Partnership: IndiaBizForSale.com Newsletter – July 2015”

Entry in India through Business Opportunities in India

Invest in India is the mantra for lot of multinationals since India’s GDP size to cross $3 trillion in five years in 2019. This year India is set to become a $2 trillion economy. Currently India is the tenth largest economy in the world. Improving GDP will make India seventh largest economy in 2019 as per IMF’s latest world economic outlook.

A sharp increase in M&A activity in India since the new government assumed office in May 2014. 19% increase in value and 12% in volume over 2013, it is a positive trend this year, the activity of M&A has jumped 16.5%. As per a recent study by Thomson Reuters, the value of announced M&A deals involving India businesses reached $26.1 billion during the same period.

Continue reading “Entry in India through Business Opportunities in India”