Funding a buzz word these days and it gives lot of confidence to founders to execute their dream, vision quite fast. At times start-ups do not get funding at right time and sometime they take advantage of borrowing from friends and family, taking loan from banks and NBFCs and mezzanine funding from angel funds, VCs etc. In addition, founders do raise money in the form of capital by way of equity or preference shares.
While raising funds for business in whatever forms its very critical that founders clearly understand and read fine lines of agreement terms they are signing. Ideally founders should take help of competent professionals to be their advisors instead of depending on someone who is not capable of handling such cases.
Problem: At ConsultLane.com in last 30 days we have approached by three start-ups already raised funding by way of debts (loan, promissory notes, debentures) and preference share capital, however, did not do any compliances in line with terms of agreement, requirement as per law (Companies Act, RBI, Income Tax and FEMA). The larger issue was that all the founders were not even aware of non-compliances and they all had qualified professional but may not be competent professional as their retainer. The issue came to light in all these cases when these start-ups went for series A round and at the time of due diligence the issue cropped up about non-compliances. In addition, in one of the case the founder had signed on issuance of compulsory convertible debentures at very low valuation. In this situation, though the amount was small, however it resulted in lot of dilution to founder. This made founder very furious since the founder did show the legal agreement to someone who did not give right advice.
Solution: We got call from one of these three start-up asking for immediate help to do good with the compliances lapses and as they say when you do excellent job to client satisfaction that’s the best marketing. So when we were able to complete compliances for first client and were able to convince the due diligence firm, we got two references from first highly satisfied client. Both these reference clients also had similar issues including issue of dilution. Though the dilution issue we could not resolved since the agreement was signed, however, we were able to protect founder from further dilution by guiding him through paying the debt and cancelling the agreement. With this the founder was so happy that he took away from existing professional and gave us assignment to handle all is Accounting, Tax, Legal and Secretarial compliances. He also availed our services on drafting and reviewing series A funding and we advised him on the terms of agreement which may not be favourable to him and cost of compliance the Company has to bear upon completion of fund raising.
Take away for start-ups: Please do not follow short-cuts and do proper homework while going through fund raising round. Also ensure that you take advise of competent professional for complex services of CA, CS and Lawyers. In today`s world its not only qualification but practical knowledge of business intricacies and understanding start-up ecosystem is very critical. Please do give us a call at 808080 9301 in case you need free diagnostic of your legal documents used for fund raising to give you real picture if your Company is in compliance or not. We assure you we will not chase you for business