IB-Ps Ch. 10 Private Placement of Equity - PTR

The SEBI Regulations, 1996 stipulate that venture investments shall be only in unlisted companies either privately or through the prospectus when they go for IPO.

Venture capital is meant for young companies that evolve from a start-up stage. The term start-up typically refers to the early stage in the life cycle of a company that has been formed to set up a technology backed business venture with an intent to commercialize the same.


Conceptualizing the business idea.
Validation of business idea.
Forming the core team.
Appointment of outside agencies.
Floating the business entity.
Formulation of the business plan.
Seed Financing/Angel Round Financing
Proof of concept/Product Validation
Making key statutory filings.
Early stage/First round Financing.
Commercial launch and market validation.


First equity fund raised through Institutional investors (VCs) who generally accept high risk

Attributes that a VC look forward before investing:

An Industry that is currently a sunrise sector
An exciting concept that has the potential for uninhibited growth
An idea with significant possibilities in future
A business that could become an attractive proposition for strategic acquisition by a market leader
A business with cutting edge technology
A business with first mover advantage
A business with significant entry & easy exit options


Key Elements in Business structuring of a start-up

Formulation of a business strategy & corporate structure
Key commercial contracts
Composition of board
Management structure
Key employment contracts
IPR protection & Management
Corporate governance

Composition of board

Customary for a start up to have a non executive external chairman such as industry/corporate personality.
Political personalities should not be appointed
Chairman should be a person of good business acumen & sound character
Other members may be drawn from promoters, nominees of VCs or lenders
A board with 6 members is ideal for an start up- 2 promoter Directors, 1 non executive chairman & 3 professional independent Directors

Management structure

Can be either pyramidical or flat
Should be chosen on the basis of the type of prevalent industry work culture & business dynamics
Key executive positions should be identified– CEO, COO, CFO etc

Key employment contracts

Defines the commitment of the core team members
These contracts should take care of employees as well
Contracts should cement a long lasting relationship between the company & the core team
Can be done in 2 ways, issuing either:
Sweat Equity
ESOPs

IPR protection & Management

IPRs – Technological, process know hows, copyrights, licences, brand names, trade marks etc
A start up needs to legally safegaurd these rights through appropriate registrations under the relevant IPR laws
These IPRs should not get diluted in key commercial contracts that the company may enter
IP management should be done for the most knowledge intensive businesses
IPs should remain with the company if it seeks to create value in the long run

Key Elements in the Financial structuring of Start ups


Estimation of fund requirements

First & foremost exercise is the Forecast of the financial requirements, in terms of:
Capital Cost of fixed assets & intangible assets
Deferred revenue expenses to be incurred upfront such as product development costs etc
Pre operative expenses to meet the cash burn till the project starts generating revenues
Working capital requirements etc



Capital structuring for equity financing


For capital intensive companies, equity financing is a must
Such start ups are funded through equity & convertibles or hybrids raised through private resources
Once the company is financed through the equity route later on debt can be taken
Promoters subscribe to the equity at par, while VCs at a premium

Knowledge intensive companies (Like IT, media) are not capital intensive, so they may be financed by debt also at inception

Capital structuring for debt financing

In case of manufacturing companies, About half the total project cost & margin money for working capital is taken through Debt component
The balance project cost is contributed through equity
Companies are also required to raise financing for meeting Working Capital requirements.
Banks usually finance these.