Investment is the lifeblood of any start-up or business that needs money to operate in exchange for an interest in its shares or equity. We don’t say it’s important just to say it. A group of people that have an excellent, viable idea may miss their opportunity to conquer the market due to a lack of resources in the beginning and run. Each start-up has a need to fill, a strategy to take the lead, or a desire to transform the world.
The following are the key actions that must be taken when a start-up is considering an investment:
1. Conduct research and prepare a business model.
An investor would want to know more about the “features” of your firm and is usually unlikely to invest in it unless you have special abilities. Even though many people will tell you that developing a marketable approach at the outset of your business is crucial, it’s possible that you only recently started trading without spending months perfecting your strategy. However, a business plan and other documentation are crucial for promoting your company as an investment opportunity investors shouldn’t pass up, especially given that they will be overwhelmed with requests for funding.
2. AOA, MOA, and registration, incorporation
A firm should be registered and incorporated in order to be able to take investment, while doing so is not required. The articles of organisation and memorandum of association, along with the list of investors and board members, serve as legal documentation in the event that any controversy or liability should occur during the course of operation. If a new investor is approved, the relevant official company records, including those held by government agencies, must be changed to reflect the new investor’s identity, his ownership stake in the company, and any duties he may have.
3. Nondisclosure Arrangement
In this situation, a non-disclosure agreement (NDA) is necessary to safeguard the company’s or start-up’s interests. An NDA is the best option to shield a firm from information released in the event that a contract may not work out (which is most likely). A company would often present their idea/product to numerous investors to secure the best bargain. This type of agreement requires both the investor and the start-up to agree to and sign a non-disclosure agreement, which ensures that the rights and exclusivity of the meeting and pitch are maintained between the two parties and reduces the likelihood of idea theft and misuse under any circumstances.
4. Source and Method Of Payment
Where you acquire your funding from is implied by the term “source of funding.” This could be an angel investor, institutional investors, venture capitalists (VC), credit sharks, bank loans, private loans, borrowing from friends and family, etc. Understanding the stage, the business is in and the type of capital it needs is crucial. The method by which the organisation will obtain funding in terms of deposits, assets, innovation, IP rights, and other factors is referred to as the funding instrument. Depending on the financing source and instrument used, the criteria for paying taxes are decided and are extremely contingent.
5. Business valuation by a CA
In order to go to the next phase of investing in the business, one must make sure that the company’s valuation has been assessed by a certified Chartered Accountant. Following the estimation of the company’s value, the price per share for the company will either be issued at par, a discount, or a premium. A tax exemption on the amount of investment received is available to registered start-up’s under Income Tax Act of 1961 Section 56(2)(viib).
6. Due diligence
With regard to its operations and business, the corporation must make sure that it complies with all applicable rules and regulations. The reality of due diligences might be intimidating for entrepreneurs looking for funding. They could seem obtrusive, yet they are necessary for any investment.
7. Investment Terms & Negotiations in Term sheets
The term sheet outlines the conditions under which your investor will provide you with capital, whether that comes in the form of ownership in your company, a convertible note, or another strategy. It will also outline any requirements you must complete in order to successfully receive subsidies. Additionally, decisions regarding the weakening of offers and dynamic rights will be included. The term sheet is not actually a binding contract. Either you or the investor can prepare the term sheet, but in both situations it’s crucial to get legal counsel so that you can make sure you understand every clause and so that your attorney can negotiate the best terms on your behalf.
Here are the important Investment Terms & Negotiations in Term sheets: –
- Liquidation Preferences
- Warrants Coverage
- Conversion Rights
- Automatic Conversion
- Anti-Dilution Rights
- Redemption Rights
- Voting Rights
- Board Participation
- D&O Insurance
- Pre-emptive/pro-rata rights
- Information Rights
- Expiration of Letter
8. The final agreement
A final agreement should be drafted between the company and the investing party specifying the amount of investment in exchange for stock or shares. This agreement certifies that the investor is an organisation shareholder, and that the transaction has been officially reported. When the contract is signed, money is transferred from an escrow account to the organization’s official bank account so that it can use the money as needed. To standardise the terms and conditions between the parties and come to an agreement on the unique agreement, the parties have come to this agreement. This agreement will be legally binding, formal, and the last and final one. The articles of incorporation of the company must make reference of the new stock ownership.
9. Dissolution and Exit Plan
There should always be a backup plan in place for unforeseen circumstances. Nobody wants their company to fail, but if it does, creditors and shareholders or investors must be paid out of the assets and obligations. What would happen in the event of the company’s dissolution, merger, sale, etc. should be specified in a clause. According to the terms of the agreement, each party must receive their fair share and shoulder their proportionate amount of the debt. It is preferable to have this as a clause than to become involved in a legal dispute that will consume time and resources, whether they be time or money.
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