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Psp playbook for indian product startups

This Playbook is focused on guiding entrepreneurs in fund-raising and M&A conversations and sharing key learnings and directional insights about the process.

This Playbook is not intended to be a comprehensive guide on running, funding or selling a business or constitute any form of legal advice. Please consult a lawyer for formal advice relevant to your specific situation while raising funds or going through an acquisitio

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Psp playbook for indian product startups

  1. 1. 1 India Startup Playbook A Guide to Potential Strategic Partnership Leading to Investments & M&A Jan 2017
  2. 2. Disclaimer This Playbook is focused on guiding entrepreneurs in fund-raising and M&A conversations and sharing key learnings and directional insights about the process. This Playbook is not intended to be a comprehensive guide on running, funding or selling a business or constitute any form of legal advice. Please consult a lawyer for formal advice relevant to your specific situation while raising funds or going through an acquisition
  3. 3. 1. Structuring a Company
  4. 4. In case of conflict, ● Mediation (mediator is a known party and an unknown 3rd party) ● Recapitalization of the cap table Early on, have a CA / secretary to keep track of all docs Ignorance of law is no excuse for non-compliance Keep house in order Compliance starts from day 1 of company’s incorporation, so don’t incorporate unless needed Shutting down a company extremely tough Incorporate a Co. only when necessary Building & selling product (core) Fundraising Building partnerships (leads to M&A) Run multiple aspects of Co. in parallel Try various conflict resolution methods KEY DOCUMENTS Minutes of board meetings ● Avoid backdating as far as possible ● Instead have another meeting where you cover minutes of previous meeting Share certificates ● Refer to Co. Standard ● Usually perforated (Co. needs one copy and owner keeps one copy) ● Register of Members / Cap table imp when raise family & friends round Key hard copies of all docs ● Compliances, contracts, registers, licenses Key tips Fundamentals for running a business
  5. 5. Memorandum of Association ● Provides the characteristics (name, division of shares etc) and objects (activities) of the Company; the company cannot engage in business that falls outside the scope of these objects ● Must be filed with the Registrar of Companies Articles of Association ● Provides for the manner in which the Company is managed Register of Members ● “Captable” ● Lists the current shareholders of the Company Register of loans, guarantee, security ● Shows the debt owed by a Company Register of related parties contracts ● List the contracts with related parties and entities in which directors are interested Register of directors & key managerial personnel ● Provides a list of the persons in charge of the overall operation of the company Key documents Will be examined for any transaction AMENDMENTS MEMORANDUM requires a prior approval from either the Govt. or Company Law Board depending upon which clause requires alteration ARTICLES may be altered by a special resolution passed by the members of the company WATCHOUT Stringent compliance requirements particularly in relation to registers, record keeping and filings including penal sanctions for some non-compliances
  6. 6. Structuring a Company Impacts process of fund raising, customers, IP valuation etc ● Recommended - US Holding Company (Delaware C Corp) ● IP and revenue are held in the US ● Indian entity can be a fully owned subsidiary of the US company OR 2 different cos. with same ownership structure ● Optimizes for valuation and makes acquisitions by US companies easier and quicker B2CB2B ● Recommended to register in Singapore ● Optimizes for fund-raising, tax purposes TIP: Significant cost and time benefits if entity is a US (Delaware-C Corp) or Singaporean entity. However, must be able to justify structure chosen vs
  7. 7. US-India Holding Structure US - INDIA HOLDING STRUCTURE Founder Stock • Smells like, and walks like Google, Facebook, Apple, etc. from Day 1. • IP: Owned by the U.S. Company so that it can get better traction from global customers • OPERATIONS: It’s very easy to set up, manage and operate the Business; easier to scale globally • INVESTMENTS: Much easier and faster to raise initial and subsequent financings, and at much higher valuations. • M&A: In the event of an Exit, much easier to sell the Business to a U.S. technology company, and at much higher valuations. Most times, U.S based buyers will insist on buying shares of a U.S. Company. • TAXATION: India – U.S. have a comprehensive tax treaty pursuant to which there should not be any “double taxation” if structured properly. Global Option Plan Advisors / Employees US Delaware ‘C’ Corporation IP India Pvt. Ltd Customers BENEFITS OF US HOLDING STRUCTURE Investors including India employees Via Service Agreement, IP assigned to US Co. Owns 100% stock Via Service Agreement, India Co. gets paid Employed by India Pvt. Ltd; their IP assigned to Pvt. Ltd. India Employees StockPay- ment
  8. 8. SETTING UP a company with US-India operations Step 1: Incorporate Delaware “C” Corporation ● File Certificate of Incorporation ○ Can hire law firms to incorporate, pay initial filing fees ~$340 ● Elect Board and Officers ○ India based directors can be on the board; however, needs to be structured carefully due to Indian tax regulation ○ India based individuals can be Officers; however, subject to personal counseling due to immigration, other employment and Indian tax regulatory issues ● Apply for an Employer Identification Number (EIN) ● Open a U.S. Company Bank Account (with Certificate of Incorporation & EIN) ● Discuss India regulations, Place Of Effective Management [POEM] (Need to structure properly.) Step 2: Issue Founder Stock ● Assign all IP created by Founders to U.S. Co. as part of initial formation. ● If Founders resident in India, then: ○ Need to structure founder stock purchase carefully around RBI restrictions and India’s FEMA ○ Need to assign IP to India Subsidiary ○ Consider filing 83(b) tax elections Step 3: Set Up Global Option/Incentive Plan ● Issue options to employees, consultants and advisors, including to India Employees, as part of Global Option Plan. ● Indian residents need to be employees of the India Subsidiary in order to get options in the U.S. parent company. Step 1: Incorporate an India Pvt. Ltd Company ● Incorporate as a direct Subsidiary of U.S. Company from Day 1; or ● Incorporate the India entity with Indian residents and subsequently transfer shares to the U.S. Company. Step 2: 100% share ownership to be held by U.S. Parent 1 nominee share to be held by Indian resident to comply with Indian Companies Act requirement of having at least 2 shareholders Step 3: Structure Transfer Pricing Agreement between U.S. & India Subsidiary ● U.S. and Indian Pvt. Ltd. to enter into a Service Agreement whereby: ○ U.S. Company hires the Indian company to provide services in exchange for service fees ○ Indian Pvt. Ltd. assigns all IP to the U.S. Company. ● Note: It is important to structure the Service Agreement and the service fees properly in order to comply with the transfer pricing regulations in India and the U.S. Step 4: Enter into employment contracts Employment contracts with India employees, including Founders Step 5: Structure a license of IP from U.S. Company to India Subsidiary for sales in the India market (where needed) SET UP US OPERATIONS SET UP INDIA OPERATIONS
  9. 9. FLIPPING an Indian company to US structure SET UP US OPERATIONS INDIA OPERATIONS Step 1: Incorporate Delaware “C” Corporation Step 2: Issue Founder Stock Step 3: Set Up Global Option Plan Step 4: Issue Seed Stock replicating current India capital structure ● Plan for nominal investment amount by Seed Investors Step 5: Close Next Round of Financing directly in the U.S Company ● Highly recommended to flip your company at a financing round Step 6: Incorporate new India Subsidiary ● Form a Subsidiary Relationship with a Pvt. Ltd. ○ Option 1: Newly created Pvt. Ltd. ○ Option 2: Existing Pvt. Ltd. ● India employees to be employed by the Pvt. Ltd. and assign their IP to the Pvt. Ltd. ● Set up Services Agreement Step 7: New India Subsidiary ● Transfer Employees to the New India Subsidiary. ● Consider whether contracts need to be transferred over to the New India entity; preferably, enter into new contracts directly with the U.S. Company ● Consider whether any pre-existing intangible assets like software, copyrights, trademarks, patents need to be assigned to the Business. ● Need to structure assignment of assets from Old India Company to the US Company or New India Subsidiary very carefully in order to comply with India regulations. Similar to Steps 1-3 in setting up US Operations (prev. slide) Explanation on both options on next slide TIP: Sooner you flip, the less complicated the process are! Recommended to flip at a financing round.
  10. 10. Creating a subsidiary in India OPTION 1: NEWLY CREATED PVT. LTD. OPTION 2: EXISTING INDIAN PVT. LTD. Step 1: Company to approve creation of the Indian subsidiary Board of Directors of the Company will authorize the incorporation of a new Pvt. Ltd. Co. in India, as a wholly owned subsidiary of the US Co. The Company will work with a Chartered Accountant or legal counsel in India to complete the formalities in India; name registration with the Registrar of Companies and preparation of the incorporation documents for the Pvt. Ltd. as per Indian regulations. Under the Indian Companies Act, 2 shareholders are required. The Company will be 1st shareholder and 2nd shareholder can be an affiliate of the Company & hold nominal shares in the Indian subsid. Step 2: Apostille Certification After completion of the name registration of the Pvt. Ltd., the Company will receive the prepared incorporation documents from the Chartered Accountant or legal counsel in India that are required to be notarized and then sent to the Secretary of State for apostille certification State to where the documents are sent for apostille certification vary depending on where notarization takes place or type of document Step 1: Obtain a Valuation Certificate The Pvt. Ltd. company will work with an Chartered Accountant in India to obtain a valuation certificate that will determine the price per share for the purchase of the shares of the India Pvt. Ltd. by the Company. Step 2: India Subsidiary Acquisition Board of Directors of the Company will authorize the India Pvt. Ltd. acquisition through purchase of stock equivalent to not less than 99.99% of the capital stock of the Pvt. Ltd and enter into a Stock Purchase Agreement with the Pvt. Ltd. Under the Indian Companies Act, 2 shareholders are required. The Company will be the first shareholder and the second shareholder can be an affiliate of the Company and hold nominal shares in the Indian subsidiary. Step 3: Service Agreement ● Should have “arms length” relationship between the Company and Indian subsidiary, including a cost-plus arrangement between the two entities. ● IP developed by Indian subsidiary should be properly assigned to the Company. Step 4: License Agreement (if applicable) ● A License Agreement granting a license to the Pvt. Ltd. may be necessary where the Pvt. Ltd. is also selling the product or service in India and that product or service is based on IP owned by the Company
  11. 11. 2. Mechanics of Investments
  12. 12. Choosing your investors Be strategic with your investors - taking money from one restricts capital from competitors Stages of raising capital Incu bators Angel & Seed Series A Series B+ Investments upto $100K Invest in ideas / biz plans Investments $100k - $1M Beta version of product Mentorship, guidance Investments $2-10M with follow-on participation Investments $15M+ with follow-on participation Most VCs are foreign investors (usually incorporated in Mauritius) Raising funds from FOREIGN vs. DOMESTIC entities Foreign investors can’t ‘lend’ to Indian companies i.e. debt funding is RBI regulated (restrictions on interest rates, end use etc)** Having a foreign investor AND Indian investor complicates things; try and avoid that as much as possible ** EQUITY: Anything compulsorily convertible to equity is equity, not a loan; equity funding (FDI) ok; CCPS, CCDS, pure equity shares, preferential shares DEBT: Non-convertible preference shares, optionally convertible preference shares, etc TIP: Don’t get too many investors on your cap-table – work is multiplier effect. Instead, think about investing through a fund/LLC
  13. 13. 2-3% Friends & family, Angels Understanding equity and dilution Dilution of Stake* WATCHOUT: Raising at too high a valuation in early stages may create funding issues in future rounds and may result in a ‘down-round’ (pre-money valuation in future funding round lower than previous round), a big red flag Conversion Rights: Right to convert Preferred Stock into Common Stock Pre- seed Seed Series A Series B+ ESOP Pool 12-20% Angels, Funds 25-30% VC/Strategic investors 20-25% (B) VC/PE/Strategic investors 10% 15% (C+) VC/PE/Hedge funds *Directional only Common stock, ESOPs Owners, employees Up until recently founders can’t dip into the ESOP pool, recent changes make it is possible. Convertible notes Angels, Seed Loan now, can convert to stock at slight discount to Series A valuation ● Inherently, no valuation of the company; just deferring valuation analysis to next round ● discount - at next liquidity event (eg Series A), will get a 15% discount on the valuation ● cap - beyond the cap, the discount doesn't apply; protection for the startup Preferred Stock Series A+ Get priority over all other stock for payouts, Last in first out because most expensive valuation Warrants Debt equity
  14. 14. Venture financing Main items of a termsheet (1/2) MANAGEMENT / CONTROLS Voting / Board Rights*: Board gets to make decisions for the Co. VCs like nominee director on board, but don’t always use the seat; can push for observer seat (not able to vote) Protective Provisions*: Veto rights over certain material actions / events Covenants LIQUIDITY RIGHTS Co-Sale/Right of First Refusal*: OK, but understand how it works Registration Rights & Information Rights*: Standard registration rights OK, nothing to fight over. Limit to “Major Investors”. Draft-Along Rights Redemption Rights*: Watch out, not a good sign; right should be at least 5 years out PRICING / VALUATION Percent of Company to be Sold: Pre and Post Money Valuation Liquidation Prefs*: ● Terms to decide who gets paid first, and what amount ● ‘Liquidation’ – dissolution/winding up, M&A, IPO, strategic sale, trade sale, buy back, ‘put’ option on promoters ● 1x non-participating is OK; anything else needs to be reviewed carefully (eg. 1.5x → investor gets 1.5x money out before other shareholders dip into the pool) ● If nothing written - first tax man, then salaries, then liq. prefs, then remaining distributed EQUALLY among shareholders Dividends*: Should be structured as non-cumulative Anti-Dilution Protections*: ● Right to adjust price in event of a subsequent lower price financing ● Full Ratchet is bad, Broad-based weighted average is standard. *Rights of Preferred Stock
  15. 15. Venture financing Main items of a termsheet (2/2) TIME, PROCESS & EXPENSE Time: 2-3 months from start to finish Process: IP diligence, Legal diligence, Schedule of Exceptions; Financing Documents Expenses: Legal fees (both sides), Investor expenses OTHER KEY TERMS Double-dipping / Participatory preference: Clause that allows investor to participate again in the remaining amount, after liquidation preferences are exercised In multiple funding rounds, explicitly state priority of liq. prefs. (eg. last in first out or equally distributed in ratio of shares) Lock-in provisions: Lock in founder team until investor exits; if want to exit, right of first refusal to investor etc Founder Indemnification: Very important issue. Need to be careful! Right of First Offer: Maintain their pro rata ownership, right to “gobble up”; limit to “Major Investors” Board Observer Rights: OK, but need to be careful as VCs don’t like the distraction of too many observers
  16. 16. LEGAL Help in structuring fundraise, terms of deals etc Will point out red flags ESCROW If upfront deal, don’t need escrow; else common at 15-20% Good agents: HSBC, Deutsche Bank (India) ADVISORY (I-BANKS) Highly recommended for large deals (investments $10M+, M&A $50M+) ‘Interview’ iBankers to gauge quality ● Tell me deals you have done in my space in the past few years ● How many offers did you bring to the table for each of the companies? ● Can I chat with your customers? AUDIT/ACCOUNTING/TAX Financial diligence and tax diligence (withholding, assessments etc) Good audit firms: PWC, E&Y, KPMG Key transaction enablers and fees TIP: Get all parties, including investors/acquirers to sign an NDA till the buy-out is complete ESTIMATE: 0.5-1% of the deal value in transaction-enabler fees; can negotiate for buyer to pick up the fees
  17. 17. 2. Mechanics of M&A
  18. 18. Corp. Dev. team plans joint integration plan BU/Product teams outline product integrations, value creation Corp. Dev. team goes through: ● Deal structuring & negotiations ● Due diligence Corp. Dev. team conducts a discovery and selection process from list of partners, suppliers, competitors Business Unit (BU)/Product teams think through ● BU strategy ● Gap analysis / Competitive overview ● Make vs. Partner vs. Buy analysis How the buy-side approaches M&A KEEP BUSINESS ON TRACK If the deal fall through at the last minute, your business should not have been put on hold, else raising funds will be difficult! Discovery Implementation Diligence Analysis PARTNERSHIPS ARE CRITICAL Without a BU / Product sponsor, M&A probability lower ● Salesforce has never acquired a company not on force.com (which takes 8 months to get onto) ● Whatspp - Facebook relationship started in Feb 2012; eventual acquisition 2 years later
  19. 19. Tech Due Diligence Valuation/ Termsheet Legal / Financial DD SPA 1-8 Weeks Tech & Talent deals popular Show M&A interest Clearly state you are open to M&A but also expect strong growth, so open to investments as well 1-2 Weeks Common to have 45-60 days of exclusivity/ no-show in the termsheet ~2 months Visible time benefits when target is US (Delaware C Corp) or Singapore entity Increasingly common 1-2 months Indian law requires ALL owners on the cap-table to physically sign the SPA agreement Common for team to move to US on an L1 visa (company should have been around for min. 1 year) 1-2 Months Team pedigree important factor Be cautious about what docs you share with the potential acquirer; have NDA in place Key stages in M&A process “Best time to sell is when you don’t need to” Discovery
  20. 20. Discovery Deals for TECH and TALENT very popular; process well understood Talent (Acqui-hire) Relatively early-stage startups with limited revenue traction Acquired team is first integrated into Indian arm of US company, and moves to the US (if necessary) at a later stage Hot areas: iOS, Android, Machine learning & Data Science Market/Customer Acquisition of the startup’s customers Interesting for companies with sizeable market penetration Technology Acquisition of the product and code built; lot of open-source code will be treated as a red flag UI/UX/design is important Growing area of interest Process for team to move to the US on a visa is well understood iSPIRT M&A Connect Program is a good resource to help with M&A
  21. 21. Engage with convos only with companies that are a cultural fit The deal will implode if there's a misfire on cultural alignment Bring your team on board before the deal Keep communication lines open and honest with your team. Figure out early-on what kind of contract terms, opportunities they’d like and keep that in mind while negotiating the terms Understand the structure of the deal Negotiate titles, reporting hierarchy, roles and responsibilities, decision-making hierarchy, compensation/exit packages etc. upfront, for everyone, including employees included and not included in the deal. Ensure ROI for your early investors, advisors It is your responsibility to return money you take (if you make money). Burning bridges with your investors will make it much harder to raise money for your next venture REMEMBER: It’s all a relationship game - with employees, with investors, with the acquirer. Don’t be penny-wise pound-foolish. Discovery Key TIPS while entering a deal
  22. 22. Tech Due Diligence FLIGHT COSTS FOR INTERVIEWS Some acquirers request the startup to buy tickets to fly out and reimburse them later. This is a huge upfront financial commitment that the startup should be prepared to make. SHARING INFORMATION DOCUMENTS: High level docs ok Make sure to have an NDA in place. CUSTOMERS: Acquirers can’t talk to your customers without your explicit approval. OTHER INFO: If a competitor shows inbound interest, ask to speak to someone higher up (to show actual M&A interest vs. information phishing). Be ready for the deal to fall through if you don’t want to share the information. Initial formal gauge on M&A interest; Corp Dev officially gets involved Initial screen via phone/telecon Many deals die at Tech DD: ● too much open-source code ● teams not strong enough IN-PERSON INTERVIEWSOVERVIEW Be prepared to fly out / be physically present on short notice TECH INTERVIEW Code should be well documented Be prepared to discuss it in detail with acquiring tech team Prepare for coding interview ques CORP DEV INTERVIEW Acknowledge upfront that there is competition in your space BUT articulate local differentiation very clearly
  23. 23. REMEMBER: Have clear conversations about job titles and hierarchy/relevance in the new company. Valuation Multiple components to valuing the acquisition Structure the deal to ensure entrepreneur, investor, acquirer interests are optimized (cash vs equity) Cash Investor payout + Founder Payout + Employee bonus [Paid out on Day 0] Retention Pkg (cash & stock) Usually vested over 3-4 years Same as regular options/RSUs but not based on Cap Table Often structured with an empharsis here to retain employees Salary Stock Usually mirrors vesting schedule in Silicon Valley companies Industry Startup Entry level $10K $6-8K Experienced $20-30K $12-15K I. Acquisition II. Employee Salary & Stock Payouts when team hits milestones Common in larger rev./customer acquisitions Earnouts (optional)
  24. 24. Valuation Valuing your company EARLY STAGE COMPANIES ● Comps/multiples - recent investments/acquisitions on similar deals in industry; valuation +/- 40% (buy vs. sell side) ● User Traction - Customers, MAUs, DAUs etc LATE STAGE COMPANIES ● Market Comparables / Multiples: Multiples of Revenues/Sales, Earnings ● Revenue Traction Triangulate based on multiple criteria ALL COMPANIES ● Negotiating power - no. of buyers on the table; getting multiple term-sheets drives up value ● Other factors - Pedigree of team, Market size, Patent strategy, Competition, Company status (distress vs. growth) etc DON’T ANCHOR ON A VALUATION TOO EARLY When acquirer asks 'What number do you have in mind?", don’t give an answer immediately; ask for time; when you give an answer, give a range ENSURE ALL STAKEHOLDERS SATISFIED Bring shareholders, investors into discussion; make sure they are comfortable with the valuation proposed
  25. 25. Termsheet ● Roadmap to transaction ahead; also called non-binding letter of intent, MoU, letter of intent: provisions ● Must always have a valuation amount and timeline for payout ● In case of an acquihire, important to have team member names in the Termsheet Share Purchase Agreements ● Can be stock purchase (entire buyout) or asset purchase (shell company remains) ● Traditional asset purchase difficult, because it is hard to shutdown a company in India Holdbacks, Escrows, Indemnity ● Acquirer can hold 15-20% of valuation for 2 years as indemnity against the company’s potential liabilities ● Amount and duration is negotiable; usually higher for companies with contracts Representatio ns and Warranties ● Usual for Investors/Acquirers to seek extensive representations and warranties from the target co. and promoters ● Breach of representations and warranties can be treated as a ground for rescission of contract ESOPs (Employee stock option scheme) ● ESOPs must be approved by shareholders by passing a special resolution (i.e. <75% consent) ● ESOPs are not transferable and must have a min. vesting period of 1 year. Unvested ESOPs must compulsorily vest upon death or permanent incapacitation of employee. ● Prohibited Recipients: (i) promoters (ii) independent directors (iii) directors with more than 10% shareholding Termsheet Key provisions Key pieces to negotiate FINANCIAL TERMS ● Payout + retention (& duration) ● Salaries of employees ● Names and titles of all employees being hired ● Compensation package for employees not being hired OTHER TERMS ● Directors / Board seats ● Lock-in provisions: lock in founder team for certain duration
  26. 26. Do your research and take your time ● Research what the acquirer has done in previous deals (usually disclosed in 10Qs, 10Ks filed with SEC) ● Don’t be eager to sign a termsheet without understanding the implications. Until you sign, everything is verbal Respect the potential acquirers in the process ● Don’t shop the offer around too much; acquirers often don’t like this and may rescind their offer ● Once you get a termsheet, tell other bidding companies about the deals on the table; some acquirers may not want to bid on the offer Engage professionals as needed in the process ● Consult a lawyer early on in the process to make sure your interests are covered, help negotiate terms ● Hire a banker for larger transactions to help negotiate on valuations, bring connections; advantages having a US banker ● Don’t let investors negotiate for you. CEO-investor relationship should be more of an ‘informing rather than advising relationship during negotiations Termsheet Key tips GETTING SIGNATURES: Multiple documents at various stages will need to be physically signed by potentially geographically- dispersed investors. Ensure shares are dematerialized (not in physical format) or have them converted and allow for time to get the signatures RED FLAG TERMS Some termsheets carry clauses that say if any of the founders quit before a year, no one gets any payout. Watchout for red-flag terms and always consult a lawyer before you sign.
  27. 27. Legal & Fin. DD Documents & signatures Secure documents: Secure all imp documents (eg. original employee hiring certificate, bonuses) Maintain hard copies of docs, if available with at least 1 signed Ensure employment contracts in place (employees for at least a year for processing of L1 visas / move team to US) Signatures needed (if US entity): ● Founders / preferred stock holders to sign ● e-signature ok ● Drag Along rights Counsels (cross- border M&A) Cross-border M&A can have 2 counsels (Indian/ US) on each side Language differences, legal nuances can result in miscommunication Identify lead counsel for entire process early on Match the lead counsel with the buyer i.e. if it’s a US buyer, the lead counsel should be US for both buyer and seller Overview Once termsheet has been signed, 45-60 day ‘no-show’ - can’t shop company around ● Allows potential acquirer time for legal & fin. DD on target ● Can be outsourced or done in-house ● Target company must be proactive with providing all needed info Other Escrow 15-20% of deal value (for contingencies) Valuing IP If IP is held by Indian entity, value IP from a merchant banker (eg. Morgan Stanley, E&Y), sell IP to the US entity, pay relevant taxes on the sale and then use the IP wherever
  28. 28. Specific assets of company (eg. Tech/IP, team etc) Acquihire: common to acquire team, license IP perpetually, & shut down product Share Purchase Agreement Share Purchase Asset Purchase All shares of startup Shell company remains which owns non-acquired assets Eventually shuts down Ceases to exist Need to analyze the tax efficiency of transferring assets piecemeal v. slump sale Min. 2 members/ stockholders required WATCHOUT: Shutting down a company in India is time consuming and slow; hence, most startups prefer a full stock purchase IT - Income Tax; CA - Chartered Accountants; HNWI - High Net Worth Individuals Acquirer buys Differences from US Startups of Startup Transfer of Funds ● India first has to receive funds and only then are shares transferred to the acquirer ● Multiple investor banks takes more time; minimize no. of recipient bank accounts to reduce time and complexity ● Funds will come in trenches but in India can’t pay partial shares – have to buy in one shot shareholder’s bank to RBI; only then transfer shares Relocation of team ● L1 visas are commonly used to ‘move’ a team to the US post acquisition ● Employees need to meet the “One year in last 3 years” rule for eligibility ● Asset purchases reset the L1 visa clock: ie employee will need to be at the acquirer for 1 year post-acquisition for L1 eligibility. hence, share purchase is strongly recommended
  29. 29. IMP (but not show stoppers) Show Stoppers Keep in mind potential make-or-break issues SHOW STOPPERS Allotments on cap-table, ownership of shares to be clean with relevant stamps on original documents etc. Ownership on IP clean, limited open source Compliances (labor, employment) Hire good company secretary/attorney early on to ensure compliance is clean Ownership of shares Compliances Ownership of IP As long as funds are through 100% FDI route, RBI good about getting all filed. May pay fine later on, but want to regularize transaction Categories of RoC filings (eg. Audit report filed late, board meeting minutes not reflected) can be rectified Don’t need to compound even if lawyers say you must Usually done for property deals in India, not share deals, but increasingly common by overseas buyers to avoid liability on/risk of ownership of shares Takes 2-3 weeks RBI/FDI Tax Clearance Certificate RoC Fiings
  30. 30. This document has been prepared by iSPIRT in consultation with several partners including Inventus Law for discussion purposes only. The information contained in this document is intended for information purposes only. They are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation cannot be warranted as to their accuracy, completeness or correctness. This information does not in any manner constitute, and should not be construed to be, legal advice or a legal opinion. Note that any information you provide during the course of this presentation will not be subject to legal privilege. This information is supplied on the condition that iSPIRT, Inventus Law and any partner, employee or affiliate are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such a supply. iSPIRT, Inventus Law and its affiliates are also not liable for any loss or damage howsoever caused by relying on the information provided in this document. For any legal advice you require, please seek advice from a qualified lawyer in the relevant jurisdiction. M. Thiyagarajan (Rajan) Fellow, M&A Connect, iSPIRT rajan@ispirt.in For Questions Please Contact Thank You iSPIRT Foundation is an industry think-tank founded by key participants and proponents of the Indian software product industry. iSPIRT enables a strong ecosystem, connects and guides software product entrepreneurs and helps catalyse business growth. It encourages buyers to improve performance by leveraging software products effectively. iSPIRT advises policymakers on interventions that can set the industry on a higher growth trajectory. Inventus Law is a Silicon Valley based premier Global Technology law firm representing high growth startup companies of all stages, investors and entrepreneurs from across the globe. With a client base of over 1,600 and growing, Inventus Law offers Silicon Valley expertise, vast cross-border experience, quick response times for setting up operations in the U.S., setting up subsidiaries, a network of strategic partners, and flexible and customizable fee structures. To learn more about their Corporate, Intellectual Property, and Commercial Law Practice, please visit inventuslaw.com.

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